On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) was signed into law. This new law changes the rules for the Paycheck Protection Program (PPP), including allowing for a second loan to eligible borrowers, increasing the types of business expenses that can be forgiven, and easing some of the requirements of forgiveness for loans under $150,000.
Second Draw PPP Loans
Previous PPP borrowers may apply for a second PPP loan, with many of the requirements for the second loan being the same as the original PPP loan. Except for certain industries, the maximum loan is the lesser of $2 million or:
- The average total month payment for payroll costs incurred or paid during the one-year period before the date on which the loan is made; or
- Calendar year 2019; multiplied by 2.5
- For accommodation and food service businesses categorized under NAICS Sector 72, the payroll multiplier is 3.5
- There are additional adjusts for seasonal employers and businesses that didn’t exist for a full year prior to February 1, 2020.
Eligible borrowers must have 300 or fewer employees (with the exception of certain news organizations, which have a limit of 500 employees) and, together with its affiliates, will not have received between an original PPP loan and the second PPP loan more than $10 million in any 90-day period. Any entity that has permanently closed isn’t permitted to apply for a Second Draw PPP loan. Other requirements include:
- Used or will use on or before the expected date of disbursement of the Second Draw PPP loan, the amount of the original PPP loan
- For loans of $150,000 or more, demonstrate at least a 25% reduction in gross receipts in a quarter in 2020, as compared to the same quarter in 2019
In a subsequently released Interim Final Rule on Second Draw PPP Loans, the U.S. Small Business Administration (SBA) provided additional guidance on how a borrower can demonstrate the reduction of revenue. The borrower must calculate this revenue by comparing its quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter in 2019. However, the interim rule provides that if a borrower was in business for all four quarters in 2019, it’s deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020, as compared to 2019, and submit copies of its annual tax forms. The definition of gross receipts is consistent with the definition of gross receipts in other SBA regulations and includes the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” as these terms are defined and reported in Internal Revenue Service (IRS) forms.
The borrower must certify that ongoing economic uncertainty makes the loan necessary to support ongoing operations.
Changes for All PPP Loans
Whether the borrower is taking out a first-time PPP loan or a second, the new law makes changes to some of its key provisions.
The new legislation includes appropriations for new loans and advances to be administered by the SBA, including $284 million for PPP loans and $20 million for Economic Injury Disaster Loans (EIDL), and are available through March 31, 2021. As with the second appropriation of PPP loans during the summer, certain amounts are set aside for community lenders and small depository lenders, loans to borrowers with 10 or fewer employees, and loans of no more than $250,000 to borrowers in designated low-income or moderate-income neighborhoods.
Covered Period for Loan Forgiveness
The duration of the covered period used by the borrower impacts the measure of expenses that can be included in the forgiveness calculation, but also the measure of the period that may reduce loan forgiveness based on changes to full time employee (FTE) equivalents or salary/hourly wage reductions. Borrowers who received their loans had to use the longer 24-week covered period even though they could apply prior to the end of the covered period. Now, the borrower can choose a time period between 8-24 weeks. Due to the change, the SBA eliminated the alternative covered period.
Expanded Eligibility and Exclusions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act limited the type of entities eligible for PPP loans. Under the Economic Aid Act, local chambers of commerce, housing cooperatives, and certain news stations, along with churches and religious organizations are now eligible to apply for a PPP.
The legislation also provides for a new relief program for shuttered venues (i.e. theaters). If an entity received relief under the Shuttered Venue Operator Grant Program, it isn’t eligible for a PPP loan.
Other entities prohibited from obtaining PPP loans (in addition to entities excluded in the CARES Act and subsequent guidance) include those:
- Primarily engaged in political activities or lobbying
- Organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong or with specified ties thereto
- Persons required to register under section 2 of the Foreign Agents Registration Act of 1938
- In which the President, Vice President, head of an Executive Department, or Member of Congress, or the spouse of such a person, owns, controls, or holds at least 20% of any class equity
- Publicly traded companies, defined as an issuer, the secured of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934
Expanded Covered Expenses Eligible for Loan Forgiveness
The CARES Act and subsequent guidance limited the use of PPP loans to covering payroll costs, payment of interest on any mortgage obligation (excluding prepayment), rent, utilities, and interest on any other debt obligations that were incurred before the applicable covered period. The new law expands the scope of expenses to include the following covered items:
- Operations expenditures – Business software or cloud computing expenses for business operations
- Property damage costs – Costs related to damage and vandalism or looting due to public disturbances in 2020 that weren’t covered by insurance or other compensation
- Supplier costs – Supplier payments that are essential to the borrower’s operations and were made pursuant to a contract, order, or purchase order prior to the covered period; or for perishable goods, before or during the covered period
- Worker protection expenditures – Operating costs or capital expenditures incurred by a borrower during the period beginning on March 1, 2020 and ending on the expiration of the presidential national emergency declaration with respect to COVID-19; This includes improvements on a drive-through, ventilation or filtration systems, or physical barriers, health screening requirements, and other assets determined by the SBA in consultation with United States Department of Health and Human Services (HHS) and Secretary of Labor, along with personal protective equipment (PPE)
- Group life, disability, vision and/or dental insurance can be included in payroll costs
60% of the PPP loan must still be used for payroll costs, with the remaining 40% used for nonpayroll costs.
Repeal of EIDL Advance Deduction
The provision that allowed for the deduction of the EIDL Advance amount from the amount of PPP loan forgiveness is repealed, including for those who already obtain forgiveness without the amount of the EIDL Advance. The EIDL Advance program was a grant program offered with the EIDL program. An entity could for an emergency grant up to $10,000. The EIDL Advance program is no longer available, though an entity may still apply for an EIDL loan.
Simplified Loan Forgiveness for Loans Under $150,000
The streamlined loan forgiveness program for loans under $150,000 is included in the Economic Aid Act. Based on SBA data, over 85% of PPP loans are for amounts less than $150,000. There will be automatic forgiveness of the loan if the borrower:
- Signs and submits a certification issued by the SBA to the SBA lender
- A description of the number of retained employees
- An estimate of the amount of the covered loan spend on eligible payroll costs
- The total loan value
- A certification as to compliance with PPP loan requirements
- Retains records for four years proving compliance in regard to employment records, and three years for all other records
The borrower won’t need to submit supporting documentation to validate claims for forgiveness. The application hasn’t been released at the time of this article’s publishing, but is expected shortly.
The next round of PPP loans is expected to be open the week of January 11. However, as with the CARES Act, there are still questions needing clarification and additional guidance is expected, including the streamlined loan forgiveness application. Wolf continues to monitor developments with the programs and will publish updates as needed. Wolf is available to assist any lender or borrower navigating the PPP process.
- SBA Overview of Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act
- First Draw PPP Loan Application
- First Draw Lender Guaranty Application
- Second Draw PPP Loan Application
- Second Draw Lender Guaranty Application
- IFR Amending PPP rule
- IFR on Second-Draw Loans
- Guidance on PPP Loan Access for Minority, Underserviced Veteran and Women-Owned Businesses