Economic Aid Act: The Relaunch of the Paycheck Protection Program
On December 27, 2020, President Trump signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which reauthorizes lending by the U.S. Small Business Administration (SBA) under the Paycheck Protection Program (PPP) to eligible first-time borrowers (First Draw PPP Loans) and borrowers that have previously received First Draw PPP Loans (Second Draw PPP Loans). It also amends certain PPP requirements, such as borrower eligibility criteria, permitted loan uses and loan forgiveness.
The SBA issued two separate interim final rules (IFRs) on January 7, 2021 implementing the Economic Aid Act: the first addresses PPP generally, as amended by the Economic Aid Act (First IFR), and the second imposes additional rules related to Second Draw PPP Loans (Second IFR). Subsequently, the SBA issued an IFR on PPP loan forgiveness, which is intended to update and consolidate the regulations on PPP loan forgiveness and review.The SBA began accepting applications on January 11, 2021, for First Draw PPP Loans, and January 13, 2021, for Second Draw PPP Loans. The SBA has the authority to make PPP loans until March 31, 2021.
Some of the major changes to the PPP are the following:
- PPP loans are now available to certain eligible borrowers who have already received and used First Draw PPP Loans, but these borrowers must employ not more than 300 employees and have experienced a 25% reduction in revenue in 2020 as compared with 2019.
- Eligible housing cooperatives, qualified 501(c)(6) organizations, destination marketing organizations and news organizations may apply for PPP loans.
- Public companies, permanently closed businesses and other specified entities are expressly prohibited from receiving PPP loans.
- New borrowers may use either 2019 or 2020 payroll costs to calculate their maximum loan amount.
- Economic Injury Disaster Loan (EIDL) advances will no longer be deducted from forgiveness amounts.
- PPP loan proceeds may be used for certain new types of nonpayroll costs.
- Borrowers may select a loan forgiveness covered period between eight to 24 weeks.
- Borrowers of smaller loans are subject to a simplified forgiveness process.
- Business expenses paid with PPP funds may be claimed as normal tax deductions, reversing a prior position of the Internal Revenue Service (IRS) that such expenses were nondeductible.
These rules are discussed in more detail below:
PPP as Amended by Economic Aid Act
The First IFR generally addresses the Economic Aid Act’s amendments to the PPP and governs all new PPP loans, both First Draw PPP Loans and Second Draw PPP Loans, under the Economic Aid Act, as well as loan forgiveness applications for existing PPP loans that had not been forgiven by December 27, 2020, the date of the Economic Aid Act’s enactment (collectively, all such loans are referred to as the New PPP Loans). The First IFR consolidates and restates all prior interim final rules and guidance relating to the original PPP, which was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), with revisions to conform these prior rules to the changes prescribed by the Economic Aid Act. It is not intended to substantively modify any PPP rules not amended by the Economic Aid Act.
Further, the First IFR must be interpreted consistently with the SBA’s and U.S. Department of the Treasury’s FAQs (FAQs) regarding the PPP, which the SBA intends to revise and reissue to conform to the Economic Aid Act, and the separate interim final rules governing Second Draw PPP Loans and PPP loan forgiveness and review procedures. In any event, the Economic Aid Act trumps any conflicting guidance in the FAQs.
The following are some of the key changes to the PPP prescribed by the Economic Aid Act:
- Eligibility Criteria. The Economic Aid Act expands the types of organizations that are eligible to receive a PPP loan to include:
- Housing cooperatives, certain qualified 501(c)(6) organizations (excluding professional sports leagues or an organization whose purpose is promoting and/or participating in political campaigns) and certain qualified destination marketing organizations that employ no more than 300 employees; and
- Nonprofit and tax-exempt news organizations, which are majority owned or controlled by a business with NAICS code 511110 (newspaper publishers) or 5151 (radio networks, radio stations and television broadcasting), or nonprofit public broadcasting entities with a trade or business under NAICS 511110 or 5151 that employ no more than 500 employees (or any applicable size standard for borrower’s industry) per physical location.
- Affiliation Rules. The Economic Aid Act extends the affiliation waiver to certain news organizations (as described in the paragraph above) seeking a First Draw PPP Loan if they employ not more than 500 employees per physical location. Detailed guidance on the SBA affiliation rules applicable to the PPP can be found here.
- Ineligible Businesses. The Economic Aid Act modifies the list of businesses ineligible to receive New PPP Loans to include the following:
- Those that received or will receive a grant under the Shuttered Venue Operators Grant program established by the Economic Aid Act;
- Public companies;
- Businesses in which a direct or indirect controlling interest is held by the President, Vice President, a member of Congress, an Executive Department head or a spouse of any these individuals; and
- Those that have permanently closed or have no intention of reopening, except businesses that have temporarily closed or temporarily suspended their business but intend to reopen remain eligible for a PPP loan.
- Maximum Loan Amount. The First IFR clarifies that most borrowers seeking New PPP Loans may use either calendar year 2019 or 2020 to calculate payroll costs for purposes of calculating their maximum loan amount, instead of the one-year period before the date on which the loan is made. The First IFR sets forth a separate methodology for seasonal employers to use to calculate payroll costs.
- EIDL Advances. EIDL advances received by a borrower will no longer be deducted from PPP loan forgiveness amounts. Any previously deducted EIDL advances will be remitted by the SBA to the borrower’s PPP lender. Further, when calculating the maximum amount of a New PPP Loan that will be used to refinance an EIDL made between January 31, 2020, and April 3, 2020, borrowers should not include the amount of any EIDL advance because it does not need to be repaid.
- Eligible Expenses. In addition to the expenses already authorized for use under the prior PPP rules, the proceeds of New PPP Loans may be used to pay for certain additional nonpayroll costs, such as payments for any business software or cloud computing service that facilitates business operations, property damage costs related to vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation, certain goods that are essential to the borrower’s operations, and operating or a capital expenditures to comply with federal, state or local guidance and requirements related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
- Covered Period. All New PPP Loan borrowers may select a loan forgiveness covered period between eight and 24 weeks. Previously, the covered period was either an eight- or 24-week period. The covered periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap.
- Forgiveness. Although New PPP Loan borrowers must still use at least 60% of PPP loan proceeds on payroll costs and not more than 40% on nonpayroll costs, the Economic Aid Act simplifies and modifies certain aspects of the forgiveness process.
- New PPP Loan borrowers will not have to begin paying principal or interest before the date on which the SBA remits the loan forgiveness amount or notifies the lender that the loan is not forgiven so long as the borrower submits its forgiveness application within 10 months after the maximum covered period of 24 weeks. If the borrower does not submit a forgiveness application within 10 months after the maximum covered period of 24 weeks or the SBA determines that part or all of a loan is not forgiven, the PPP loan deferment period ends and the borrower must begin paying principal and interest on the last day of such period. Interest continues to accrue during the deferment period.
- SBA will forgive New PPP Loans of $150,000 or less if the borrower signs and submits to the PPP lender a simple certification (SBA Form 3508S) that will require the borrower to provide the number of employees retained as a result of the loan, the estimated loan amount spent on payroll costs and the total loan value. No other application or documentation will be required.
- Loan Increases. The Economic Aid Act provides existing PPP borrowers that did not receive forgiveness by December 27, 2020, the following options:
- If a borrower returned the full amount of a PPP loan, the borrower may reapply for a PPP loan in an amount the borrower is eligible for under the new PPP rules;
- If a borrower returned part of a PPP loan, the borrower may apply to receive a PPP loan in an amount equal to the difference between the loan amount retained and the amount previously approved; and
- If a borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.
- Expense Deductibility. The Economic Aid Act codifies past IRS guidance confirming that PPP loans are not includible in a borrower’s gross income. More importantly, the new law also changes the tax treatment of eligible PPP expenses. The IRS’ prior guidance stated that payments for eligible PPP expenses, which would ordinarily be tax deductible as business expenses, were not tax deductible if forgiven PPP funds were used to pay those business expenses. The new law permits borrowers with expenses incurred and paid for by PPP loans that would otherwise qualify as tax-deductible business expenses to deduct those business expenses even if the loan is forgiven.
Second Draw PPP Loans
For the most part, Second Draw PPP Loans are subject to the same terms and conditions as First Draw PPP Loans:
- The SBA guarantees the loans 100%;
- The loans may be forgiven up to the full principal loan amount;
- If the loan is forgiven, the proceeds will not be treated as income;
- No collateral or personal guarantee is required;
- The interest rate is 100 basis points or 1%, calculated on a non-compounding, nonadjustable basis;
- Maturity is five years; and
- All loans will be processed by all lenders under delegated authority and lenders may rely on borrower certifications to determine the borrower’s eligibility and use of loan proceeds.
Accordingly, Second Draw PPP Loans are subject to the First IFR, FAQs and other guidance on the PPP, except as specified in the Second IFR.
Here are the main differences between the First Draw PPP Loans and the Second Draw PPP Loans as set forth in the Second IFR:
- Narrower Eligibility Criteria. A borrower is eligible to receive a Second Draw PPP Loan if it is a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit eligible for a First Draw PPP Loan, veterans organization, tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization that: (1) previously received a First Draw PPP Loan and will or has used the full amount of its First Draw PPP Loan, including any loan increases made pursuant to the Economic Aid Act, on eligible expenses as set forth in the First IFR on or before the expected disbursement date of the Second Draw PPP Loan; (2) together with any affiliates, employs no more than 300 employees (compared with the 500-employee size standard for First Draw PPP Loans), except for hotels and restaurants with a NAICS code beginning with 72 and certain news organizations that employ no more than 300 employees per physical location; and (3) experienced at least a 25% reduction in gross receipts (as defined in the paragraph below) between comparable quarters in 2019 and 2020.
- Unresolved Borrowers. If the SBA is still reviewing a First Draw PPP Loan at the time a borrower applies for a Second Draw PPP Loan, the SBA will notify the lender that the applicant is an “unresolved borrower” and will not issue an additional loan until the outstanding issues are resolved.
- Revenue Reduction Requirement.
- The Second IFR adopts the definition of receipts used by SBA’s size regulations to define “gross receipts” for purposes of the revenue reduction requirement: “all revenue in whatever form received or accrued (in accordance with the [PPP borrower’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.”
- Gross receipts do not include: taxes if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between the borrower and its domestic or foreign affiliates; amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customers broker; any forgiveness amount of a First Draw PPP Loan received in 2020; and net capital gains or losses as defined by IRS tax return forms.
- Borrowers may use either annual tax returns or quarterly statements to demonstrate a 25% reduction in gross receipts. If the borrower was not in business in 2019, but was in operation on February 15, 2020, then the borrower can compare gross receipts from the second, third or fourth quarter of 2020 with gross receipts from the first quarter of 2020.
- For loans exceeding $150,000, the borrower must provide documentation to the lender substantiating the reduction in gross receipts.
- For loans of $150,000 or less, the borrower only needs to provide documentation to the lender substantiating the reduction in gross receipts upon or before seeking loan forgiveness or upon the SBA’s request.
- Affiliation Rules. The affiliation rules that apply to First Draw PPP Loans also apply to Second Draw PPP Loans, except the Economic Aid Act reduces the employee size standard to a maximum of 300 employees (from 500 employees) for purposes of determining affiliation of borrowers seeking Second Draw PPP Loans.
- Ineligible Businesses. Businesses that are ineligible to receive a First Draw PPP Loan are also ineligible to receive a Second Draw PPP Loan. The Economic Aid Act additionally excludes the following types of businesses from receiving Second Draw PPP Loans:
- Business concerns primarily engaged in political activities or lobbying activities, including research or engagement in advocacy in public policy or political strategy or otherwise describes itself as a think tank in public documents;
- Business concerns created in, organized under or with significant operations in China or Hong Kong that own, directly or indirectly, not less than 20% of the economic interest of the borrower;
- Business concerns with board members who reside in China; or
- A person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938.
- Maximum Loan Amount.
- The maximum loan amount for a Second Draw PPP Loan is the lesser of 2.5 times the average total monthly payroll costs paid or incurred in 2019 or 2020 or $2 million (compared with the $10 million cap for First Draw PPP Loans). Further, businesses that are part of a single corporate group are subject to an aggregate cap of $4 million of Second Draw PPP Loans, which the SBA considers to be proportional to the $20 million aggregate limit for corporate groups with respect to First Draw PPP Loans.
- The Second IFR sets forth separate calculation methodologies for hotels and restaurants with NAICS code beginning with 72 and borrowers that did not exist during the one-year period preceding February 15, 2020, but were in operation on February 15, 2020.
- Borrower of a Second Draw PPP Loan does not need to submit any other documentation to substantiate payroll cost calculations if the applicant used calendar year 2019 figures to determine its First Draw PPP Loan amount and its Second Draw PPP Loan amount, and the lender for the borrower’s Second Draw PPP Loan is the same lender for its First Draw PPP Loan. Otherwise, borrowers should consult the Second IFR for payroll documentation that must be submitted with the borrower’s application.
- Forgiveness. Borrowers will be eligible for forgiveness on the same terms and conditions as First Draw PPP Loans, except that:
- Borrowers with Second Draw PPP Loans of $150,000 or less must provide to the lender documentation substantiating a reduction in gross receipts upon or prior to seeking loan forgiveness.
- Borrowers with Second Draw PPP Loans in excess of $150,000 must submit the loan forgiveness application for a First Draw PPP Loan before or simultaneously with the loan forgiveness application for the Second Draw PPP Loan, even if the calculated amount of forgiveness on the First Draw PPP Loan is zero.
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