Paycheck Protection Program - Part Two
On December 27, 2020, after much debate, Congress agreed to approve a $900 billion COVID-19 relief package as part of the Consolidated Appropriations Act, 2021. As part of that package, the Economic Aid Act authorizes the U.S. Small Business Administration (SBA) to guarantee $284 billion for a second round of the Paycheck Protection Program (PPP)—loans designed to provide a direct incentive for small businesses to keep their workers on the payroll. The first round of payments was authorized under the CARES Act, passed in early 2020.
On January 8, 2021, the SBA released Form 2483, the Application for First Draw Loans (for borrowers who did not take advantage of last year’s PPP loan program) and Form 2484, the Application for Second Draw Loans. The application form includes detailed instructions. The SBA also issued an Interim Final Rule on the terms of the Second Draw PPP. According to that Rule, loans are generally subject to the same terms, conditions, and requirements as First Draw PPP Loans. These include, but are not limited to, the following terms:
- The guarantee percentage is 100 percent.
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis.
- The maturity is five years.
- All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.
While similar to the first round of PPP funding under the CARES Act, the second round of PPP also has some key differences, which are described below.
Second Draw PPE Eligibility
Importantly, Congress made Second Draw PPP funding available to businesses that had already received the First Draw PPP loan. Borrowers are eligible for a Second Draw PPP loan of up to $2 million if they meet the following conditions:
- The borrower has 300 or fewer employees.
- The borrower used or will use the full amount of their first PPP loan for eligible expenses on or before the expected date that the second PPP loan is to be disbursed to the borrower.
- The borrower experienced a revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019. This is calculated by comparing gross receipts in any 2020 quarter with an applicable quarter in 2019, or, as the SBA clarified, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019.
The SBA’s Rule defines gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Importantly, forgiven first-draw PPP loans are not included in the 2020 gross receipts.
Congress deemed ineligible certain classifications of workers (such as hedge funds, household employers, and businesses in bankruptcy) from receiving the First Draw PPP. The Second Draw PPP added to the enumerated list of per se ineligible persons:
- Persons or entities primarily engaged in political activities or lobbying activities;
- Entities with significant investors organized in the People’s Republic of China “(PRC”) or the Special Administrative Region of Hong Kong or with significant operations in such jurisdictions;
- Entities with a board member who is a resident of the PRC;
- Persons or entities registered under the Foreign Agents Registration Act of 1938;
- Shuttered venue operations that receive grants under another section of the Economic Aid Act;
- Entities with significant investors who are senior members of the government or their spouses;
- Public companies (which are now also per se ineligible for First Draw PPP loans);
- Those that have previously received a Second Draw PPP loan; and
- Entities that have permanently closed.
In addition, Section 312 of the Economic Aid Act allows borrowers who have not yet received forgiveness to request an increase in their loan amount if they returned all or part of a PPP loan or did not take the full amount of a PPP loan to which they were entitled.
First Draw PPP Loans Are Still Available
For businesses that did not take advantage of the CARE Act’s First Draw PPP loan in 2020, the Economic Aid Act makes First Draw PPP loans available to borrowers that were in operation on Feb. 15, 2020, and come from one of the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (those NAICS codes starting with 72) with fewer than 500 employees per physical location.
- Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” that have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more
- News organizations that are majority-owned or controlled by an NAICS code 511110 or 5151 business or not-for-profit public broadcasting entities with a trade or business under NAICS code 511110 or 5151. The size limit for this category is no more than 500 employees per location.
The maximum loan amount for First Draw PPP loans remains the lesser of:
- $10,000,000 or
- 2.5 times the average monthly payroll costs (generally prior 12 months or 2020 / 2019 calendar year), plus any refinanced Economic Injury Disaster loans received after January 31, 2020, through April 3, 2020 (not including an Advance).
In a change from the original PPP, publicly-traded companies and businesses controlled, either directly or indirectly, by the president, vice president, head of executive departments, and members of Congress (or their spouses as defined by applicable common law) are not eligible for PPP loans.
In order to establish eligibility, loan applicants must submit documentation, which may include payroll records; payroll tax filings; Form 1099-MISC, Miscellaneous Income; Form 1040, Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming; income and expenses from a sole proprietorship; or bank records.
Key Differences In The Second Draw PPP
Loan Amount: The maximum amount available for borrowers has been reduced from $10 million in the first round to $2 million. It is important to note that the $2 million cap does not apply to first-time borrowers; those taking advantage of PPP for the first time may borrow up to $10 million.
Second Draw PPP loan gives the borrower the option to calculate the maximum loan amount by multiplying the borrower’s average total monthly payroll in (a) the one-year period prior to the date on which the loan is made, or (b) calendar year 2019, by 2.5.
Usage of PPP Funds: The First Draw PPP was limited in what the loan could be used for. In the Economic Aid Act, Congress expanded the types of expenses for which all PPP loans can be used, which retroactively applies to existing (unforgiven) PPP loans as well as Second Draw loans. In addition to payroll, rent, covered mortgage interest, and utilities, the PPP may now also be used for:
- Covered Operations Expenditures: payments for business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, HR and billing functions, or account or tracking of supplies, inventory, records and expenses
- Covered Property Damage Costs: costs related to property damaged and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation
- Covered Supplier Costs: expenditures to a supplier of goods that are essential to the operations of the entity at the time at which the expenditure was made and is made pursuant to a contract or order in effect at any time before the covered period or, with respect to perishable goods, in effect at any time during the covered period
- Covered Worker Protection Expenditures: operating or capital expenditures that allow a business to comply with requirements or guidance issued by the CDC, HHS, OSHA, or any state or local government during the period beginning March 1, 2020 and ending on the date which the national emergency declared by the president expires related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19. This includes expenditure on PPE, physical barriers that were put in place, expansion of indoor/outdoor space, ventilation or filtration systems, and drive-through windows.
Choose Your Own Covered Period: Under the SBA’s original guidance, the borrower had a covered period (the time in which a borrower must use the funds to qualify for forgiveness) of eight-weeks beginning on the date the borrower received the loan. In subsequent amendments, the covered period was expanded to 24 weeks. Under the SBA’s most recent Rule, however, borrowers are now able to choose the length of their covered period so long as it is at least eight weeks and is not longer than 24 weeks. This gives borrowers more control in handling potential workforce reductions once the PPP funds are exhausted.
Tax Treatment: PPP loans will not be included as taxable income. Expenses paid with the proceeds of a PPP loan that is forgiven are now tax-deductible. The SBA has also updated its rules and reversed previous rules so that this deductibility covers not only new loans but also existing and prior PPP loans. In addition, any income tax basis increase that results from the borrower's PPP loan will remain even if the PPP loan is forgiven. Note that the state tax implications vary from state to state.
Another significant addition to keep in mind and consider contacting professional advisors about is the retroactive expansion of the Employee Retention Tax Credit for PPP borrowers, originally provided under the 2020 CARES Act. Qualified borrowers can now claim the credit against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020. The IRS provides further information here, however, these FAQs have not yet been updated to reflect changes implemented in the Consolidated Appropriations Act, 2021 and only apply to the credit from the CARES Act, 2020.
EIDL Advances Do Not Reduce Forgiveness: Originally, PPP borrowers that received an Economic Injury Disaster Loan (EIDL) Advance between $1,000 and $10,000 had that amount subtracted from their total forgiveness, which had the effect of repaying the EIDL Advance. The Economic Aid Act changes this and provides that EIDL Advances will not reduce PPP loan forgiveness. The SBA has indicated that borrowers that already received forgiveness and had their EIDL Advance deducted from such forgiveness may be able to amend their forgiveness applications.
Forgiveness Applications for Loans Under $150,000: The Economic Aid Act provides that a PPP loan of $150,000 or less will be forgiven if the eligible recipient:
- Signs and submits to the lender a certification, including
- A description of the number of employees the eligible recipient was able to retain because of the PPP
- The estimated amount of the covered loan amount spent by the eligible recipient on payroll costs the total loan value
Importantly, the eligible recipient of these loans is not required to submit any documentation in addition to the certification and information required to substantiate forgiveness. However, despite the simple process, a false certification to the SBA will expose one to liability, and thus borrowers should undergo this process with care.
As under the First Draw, the Second Draw forgiveness form requires that any applicant for PPP forgiveness retain all employment records relevant to the forgiveness application for a period of four years following the date of submission, and all other records relating to PPP and the forgiveness application for a period of three years following submission of the forgiveness application.
PPP Loans In Bankruptcy: Another key change under the Economic Aid Act is that it amends the Bankruptcy Code, allowing borrowers in bankruptcy to be eligible to apply for PPP loans. These new loans will be treated in the borrower's bankruptcy case as administrative claims. Anything not forgiven must be paid in full in any Chapter 11 cases.
Eligibility for Section 501(c)(6) Not-for-Profit Organizations: For the first time, Section 501(c)(6) not-for-profit organizations will be eligible to apply for and receive PPP loans.These organizations generally consist of business leagues, chambers of commerce, real estate boards, boards of trade, and professional sports leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. To be eligible, these organizations must meet the following requirements:
- the organization does not employ more than 300 employees;
- they do not receive more than 15 percent of their receipts from lobbying activities;
- lobbying activities do not comprise more than 15 percent of the organization's total activities; and
- the cost of lobbying activities did not exceed $1 million during the tax year ending February 15, 2020.
The Economic Aid Act provides welcome news to businesses across the United States that are continuing to struggle with the economic effects of the COVID-19 pandemic. Borrowers should seek professional assistance in order to review their eligibility with care and assess the intended use of proceeds to ensure that Second Draw PPP loans are properly obtained and used, as well as to ensure forgiveness once the loan proceeds are used up.
If you have any questions regarding Second Draw PPP loans, please contact Matt Jameson or Gerard Hornby.