The President has signed the Consolidated Appropriations Act of 2021 (H.R. 133), which, among other things, authorizes a new round of Paycheck Protection Program (PPP) loans called second draw loans. This allows some borrowers to request supplemental funding on their original PPP loans.
Second draw loans
Second draw loans are only available to businesses that employ 300 or fewer employees (part-time and seasonal count), and have at least a 25% reduction in gross receipts.
It is unclear whether applicants must have already received a loan under the first round of available PPP loans in order to qualify for the new second draw loans (we are awaiting guidance from the SBA on this). However, it is clear that if they have received a prior PPP loan they must have used, or will use, the first loan prior to the disbursement of a second draw loan.
Borrowers can also submit supplemental PPP loan requests in all cases where their original PPP loan amount would have changed due to new rules that have been released. This applies to partnerships where the original loan did not include the self-employment earnings of the partners. But it also applies to borrowers who returned their original loans, or took reduced loans to qualify for other benefits that are no longer limited for PPP recipients, such as the Employee Retention Credit.
Borrowers must request this additional funding before forgiveness is granted on their original PPP loan.
H.R. 133 also clarifies that borrowers who have loans forgiven may claim deductions for expenses even if expense were paid with loan amounts that were forgiven. This applies to all PPP loans.
California does not conform to this federal law, which is amended as part of the stimulus package. Taxpayers will still be required to reduce their deductions on the California return because California enacted AB 1577 (Ch. 20-39), which specifically prohibits taxpayers from claiming any deductions or credits for expenses that are paid with forgiven PPP loan amounts.
For a detailed discussion of the tax provisions contained in this act, attend Spidell’s 2020/2021 Federal and California Tax Update webinar. Customers who have already attended the webinar will receive a detailed analysis of the bill along with a video explaining the most important provisions.
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