A Small Business Guide to the Second COVID Relief Package

President Donald Trump signed the federal government’s second life preserver to small businesses on Dec. 27. Here’s how it can help your small business weather the COVID-19 storm.

More federal funding is on its way to small businesses reeling from a lagging economy caused by the COVID-19 pandemic.

The more than 5,000-page bill, which President Donald Trump signed into law Dec. 27, revives federal COVID-19 relief programs for small businesses, including the Paycheck Protection Program (PPP). The package also targets small businesses in low-income areas and the culture and entertainment industries.

This latest economic relief package comes nine months after the government’s first attempt to buoy the economy with the $2.2-trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. More than 100,000 small businesses have shuttered since March.

Totaling $900 billion, the second stimulus package is coupled with a resolution to fund the government through September 2021. President Trump initially rejected the bill, siding with Democrats for $2,000 direct payments to taxpayers instead of the $600 written into the legislation. However, he signed the unaltered relief and government spending bill with hours to spare, narrowly avoiding a government shutdown.

There’s a lot in this second stimulus package for small businesses, so let’s take a look.

A second round of PPP loans

This latest stimulus package reopens the Paycheck Protection Program (PPP) with more than $284 billion and allows some small businesses to take out a second forgivable loan.

The CARES Act established the PPP to provide small businesses with forgivable loans of up to $10 million to cover essential expenses, particularly payroll. The first round of PPP closed in August.

The new PPP loans, now known as PPP2, work similarly. PPP2 provides loans of 2.5 times an eligible small business’s monthly payroll costs -- but only up to $2 million this time. Eligible hotels and restaurants can receive a PPP2 of 3.5 times their monthly payroll costs, also up to $2 million.

The new law sets aside PPP funding for small businesses with 10 or fewer employees, making it more likely that small businesses receive funding before it runs out.

Businesses that received a PPP loan the first time qualify for another, called a “second draw,” when they have:

• 300 or fewer employees
• Exhausted, or will exhaust, their first PPP loan
• Seen a 25% or more decline in gross revenue in any 2020 quarter compared to the same quarter in 2019

You can expect to start applying for PPP2 loans through a local or national lender in early 2021, and the deadline is March 31, 2021. Before taking a first or second PPP loan, though, talk to a tax professional to determine your loan and forgiveness eligibility.

PPP forgiveness rules

PPP2 loosens a few forgiveness restrictions for small business owners. Like last time, a business qualifies for forgiveness when it spends at least 60% of the loan on payroll costs and keeps the same number of employees on its payroll, among other restrictions. Before the December relief package, up to 40% could go toward just rent, utilities, and mortgage interest.

Here’s the main difference in the new law. PPP2 expands the list of forgivable costs in that 40% tranche to include:

• Personal protective equipment and other expenses for facility modification to comply with COVID-19 federal health and safety guidelines
• Operating expenses, including software, cloud computing services, and accounting
• Payments to suppliers that are essential to your business’s operations

Businesses may also elect an eight- or 24-week loan period, where before only those who received loans before June 5 had that choice. The change could potentially increase your forgiveness amount if you had to lay off workers after eight weeks on PPP.

Never count on PPP forgiveness until you’ve spoken to a tax professional.

Simplified PPP forgiveness application for loans of $150,000 or less

Business owners seeking forgiveness for PPP loans of $150,000 or less no longer need to stress about mountains of paperwork.

The U.S. Small Business Administration (SBA), which manages the PPP, has yet to release details, but the new relief package gives the agency a 24-day deadline to create a one-page forgiveness form for smaller loans.

To fill out the simplified PPP loan application, you’ll need your:

• Loan amount
• Number of employees retained because of the loan
• Estimated amount spent on payroll costs

Although it’s easier to file for forgiveness, you’re still required to meet all the original forgiveness criteria. Work with a professional on your forgiveness application, whether it’s one page or novel-length.

The SBA reserves the right to investigate your forgiveness eligibility. Although you don’t need to submit them, you must hold onto PPP-related employment records for four years and other documents for three years.

Tax deductibility of PPP funds

The new relief law clarifies that you can deduct the business expenses covered by PPP funds, a significant win for small businesses.

Say you used your PPP loan to cover payroll costs. Before the December package, the U.S. Internal Revenue Service (IRS) and Department of the Treasury insisted that you couldn’t take a tax deduction for those wages. Now you can deduct your payroll costs as if you’d used business profits to cover them.

The American Institute of Certified Public Accountants co-wrote a Dec. 3 letter with 53 state and territorial CPA societies (and one in Washington, D.C.) asking House and Senate leadership to clarify Congress’s intention on the deductibility of PPP funds. The first relief package didn’t specify deductibility rules, although legislators implied that business owners could deduct business expenses covered by the loan.

More EIDL grant funding

The new stimulus package funnels another $20 billion to the SBA to provide $10,000 grants to small businesses in low-income communities.

Funded through the Economic Injury Disaster Loan (EIDL) Advance program, the $10,000 grants are earmarked for small businesses that:

• Have 300 or fewer employees
• Are in a low-income community as defined by the IRS
• Suffered more than a 30% drop in business in any eight-week period from March 2, 2020, to Dec. 31, 2021, compared to 2019 or early 2020

The CARES Act provided the SBA with $20 billion in March to fund EIDL Advance, but it closed in July when the money dried up. The first time around, businesses could receive $1,000 per employee, up to $10,000.

Under the new stimulus package, every business eligible for an EIDL grant will receive a flat $10,000, regardless of employee headcount. Companies that received less than $10,000 in the first round can apply to receive the difference.

EIDL Advance grants differ from EIDL loans, which are not forgivable. EIDL Advance grants are technically loans but are entirely forgivable when you meet the eligibility criteria.

The bill also reverses a rule that made PPP borrowers deduct their EIDL grant from the PPP forgiveness amount. Business owners who have already applied for PPP forgiveness are still waiting to hear how they’ll be reimbursed for loan payments brought on by the EIDL grant.

Before signing up for an EIDL Advance, talk to a tax professional.

100% business meal deduction in 2021 and 2022

I don’t know about you, but all this talk about loan paperwork is making me thirsty. The December relief package introduces what’s known as the “three-martini lunch” tax deduction, letting businesses deduct 100% of business meal expenses for the next two years.

In recent memory, businesses could only deduct 50% of an eligible business meal. The rule discouraged wealthy business owners from enjoying tax deductions for luxurious, drawn-out meals and entertainment that probably weren’t even work-related.

Proponents of the 100% deduction look at it as an incentive to patronize restaurants that have been hit especially hard by the pandemic. Detractors see it as a gift to corporate executives who get to take a deduction for excessive wining and dining. As a CPA, I see it as one less difference between your tax and book income.

Grants for live venues, independent movie theaters

The federal government is sending $15 billion in grants to live venues, movie theaters, museums, and cultural institutions. The SBA’s Office of Disaster Assistance will disburse the grants.

Grants are for 45% of an eligible business’s 2019 revenue, up to $10 million. If there’s money left later in 2021, you could qualify for a second grant at half the first grant amount.

To qualify for a grant, your eligible business must have:

• Been in business as of Feb. 29, 2020
• Seen at least a 25% decline in revenue

The SBA will spend the first 14 days disbursing grants to businesses with a 90% or more revenue reduction due to the pandemic. The next 14 days are reserved for companies with 70% losses.

Also, $2 billion will be set aside for grant-eligible businesses with 50 or fewer employees, but the special treatment expires 60 days after grants start rolling out.

Don’t PPP-anic, and talk to a tax professional

Without the PPP and EIDL programs, even more small businesses wouldn’t be around today. While these programs exist to help you, there are nuances to these laws that you might not notice before signing a promissory note. Consult a tax professional before taking COVID relief money.