On January 6, 2021 the Small Business Administration (“SBA”) issued two interim final rules (“IFR”) related to the Paycheck Protection Program (“PPP”) and the changes to the program made under the Economic Aid Act (“the Act”).  The Act makes an additional round of PPP funding available through March 31, 2021.  Businesses and self-employed individuals who had not previously taken a PPP loan may be eligible for a loan under the “first draw” program that was reinstated in the Act, while those who had already taken a PPP loan in 2020 may be eligible for a second round of funding under the “second draw” program.  The IFRs address details on both the first draw and second draw programs, while also addressing a number of changes to the existing PPP rules relating to forgiveness and eligibility.

General Items

All first draw and second draw loans are 100% guaranteed by the SBA and do not require any collateral or personal guarantees.  Loans will be eligible for forgiveness, subject to a number of requirements and limitations as outlined in previously issued PPP guidance.  Loan balances that are not forgiven will have a maturity of 5 years and will be subject to interest at 1%.  To be eligible for any PPP loans, the borrower’s business must have been in operation as of February 15, 2020, the borrower must certify that due to current economic uncertainty the loan is necessary to support the business’s ongoing operations, and the loan proceeds must be spent on eligible expenses.

First Draw Loans

First draw loans are dictated by the original PPP rules and requirements, except as outlined below in the “Changes Applicable to First Draw & Second Draw Loans” section.  The items immediately below are shown to highlight the differences between the first draw and second draw loan programs:

• Maximum loan amount of $10 million (single corporate group limited to $20 million total)
  • Based on 2.5 months of average monthly payroll costs (and/or self-employment income) for all businesses regardless of industry
• Eligible businesses – same requirements as original PPP
  • Small business concerns (generally 500 or fewer employees but depends on industry, NAICS code starting with 72 or franchises with 500 or fewer employees per location), independent contractors, self-employed individuals, sole proprietors, certain tax-exempt entities

Second Draw Loans

Second draw loans are largely subject to the same general eligibility and forgiveness requirements as first draw and original PPP loans (subject to the “Changes Applicable to First Draw & Second Draw Loans” outlined below).  The key items that differentiate the second draw loans are listed below.

• Maximum loan amount of $2 million (single corporate group limited to $4 million total)
  • Based on 2.5 months of average monthly payroll costs (and/or self-employment income)
  • Hospitality, Restaurants, and other businesses with a NAICS code starting with 72 – can use 5 months of average monthly payroll
• Eligible businesses – same requirements as original PPP, and:
  • Must have previously received a PPP loan that has been or will be fully used (including any increase, see “Increasing an Existing PPP Loan” below) for authorized purposes on or before the disbursement date of the Second Draw Loan
  • Must have 300 or fewer employees (NAICS code starting with 72 or franchise – can have up to 300 employees per location)
  • Must have experienced a quarter-over-quarter revenue (gross receipts) reduction in 2020 versus 2019 of at least 25%
    • For simplicity, an annual reduction of at least 25% in 2020 versus 2019 is also acceptable if the business was in operation for all four quarters of 2019
    • Special rules apply for applicants not in business for all four quarters of 2019
    • First draw PPP loan proceeds are not included in calculating 2020 gross receipts
  • Cannot be primarily engaged in political or lobbying activities
  • Entities that have certain ties to the People’s Republic of China or the Special Administrative Region of Hong Kong are not eligible
• Loan Application Requirements
  • SBA Form 2483-SD or the lender’s equivalent
  • If the borrower is using 2019 expenses that were used in applying for their first draw loan they do not have to resubmit information to the lender
  • If loan is over $150,000 must submit documentation to establish reduction in revenue (I.e. tax forms, quarterly financials, bank statements); if loan is under $150,000 this documentation will be required prior to submitting a forgiveness application
  • If borrower’s first draw PPP loan is under review by the SBA will not be issued a second draw loan until any issues are resolved

Changes Applicable to First Draw & Second Draw Loans

• Calculation of Loan Amount
  • Payroll costs used in calculating loan amount can be based on prior 12 months, 2019 calendar year, or 2020 calendar year
  • Payroll costs include employer contributions to employee group life, disability, vision and dental insurance
  • Sole proprietors – based on 2.5 months of 2019 or 2020 schedule C net income
    • If have employees, must use same year when calculating Schedule C net income and employee payroll
  • Partnerships – based on 2.5 months of payroll for employees plus 2.5 months’ worth of 2019 or 2020 self-employment income for active general partners (less adjustments)
    • Must use same year when calculating employee payroll and partners’ self-employment income
    • Partners do not file for PPP loans at personal level
  • Seasonal Employers – based on 2.5 months of average monthly payroll for any 12-week period between February 15, 2019 and February 15, 2020
• Eligibility
  • Recipients of a grant under the Shuttered Venue Operator Grant program are not eligible
  • Not eligible if business is permanently closed or business or owner is in bankruptcy
  • Publicly traded companies listed on an exchange are not eligible
  • Not eligible if the President, Vice President, head of an Executive department, or member of Congress (or spouse of any such person) controls or holds a 20% or more interest
  • Eligibility of 501(c)(6) organizations and other specific non-profit entities was expanded
• Covered Period– applies to new loans and existing loans if haven’t yet applied for forgiveness
  • Begins on date loan proceeds are disbursed and ends on any date between 8 and 24 weeks after loan disbursement
  • Alternative covered period is eliminated
• Eligible Expenses– applies to new loans and existing loans if haven’t yet applied for forgiveness
  • New eligible expenses (non-payroll)
    • Covered operations expenses: business software or cloud computing services to facilitate various aspects of business operations
    • Covered property damage expenses: property damage or vandalism related expenses due to 2020 public disturbances if not covered by insurance or otherwise reimbursed
    • Covered supplier expenses: payments to suppliers for goods that are essential to operations and made pursuant to a contract in place before the covered period (or in place during the covered period for perishable goods)
    • Covered worker protection expenses: adaptation of business activities to comply with Department of Health, CDC, and/or OSHA requirements related to sanitation, social distancing, or worker/customer safety
  • Self-employed individuals can only use proceeds on mortgage interest, rent, or utility expenses if they claimed or were entitled to claim a deduction for those expenses in 2019 or 2020 (whichever year was used in calculating loan proceeds)
• Forgiveness– applies to new loans and existing loans if haven’t yet applied for forgiveness
  • Forgivable Payroll Costs
    • Include employer contributions to employee group life, disability, vision and dental insurance
    • Does not include any wages used in claiming an Employee Retention Credit
  • Streamlined forgiveness for loans under $150,000 – one page form
  • EIDL Advances (grants) issued under the CARES Act will not reduce PPP forgiveness
  • CARES Act reductions to forgiveness still exist, as well as safe harbors for restoring FTEs/salaries, business activity exception, and inability to rehire
    • Appears safe harbor date to restore FTEs/salaries is the last date of the covered period for new loans

Increasing an Existing PPP Loan

A borrower who has not yet received forgiveness may request an increase to the balance of their existing PPP loan if any of the above changes, or any changes previously issued, would result in a higher loan amount than the loan they originally received or accepted.  The request for an increase must be submitted by the lender by March 31, 2021 and is subject to the availability of PPP funding. Examples of borrowers who may want to consider requesting an increase are:

• A partnership that did not include active general partners’ self-employment income in the calculation of payroll costs
• A borrower that did not include employer contributions to employee group life, disability, vision and dental insurance in payroll costs
• A seasonal employer who calculated proceeds on a 12-week period between May 1, 2019 and September 15, 2019 but would have calculated higher average payroll costs based on a different 12-week period between February 15, 2019 and February 15, 2020
• A borrower who returned all or a part of the funds, or did not accept the full loan for which it was approved

Note: The above outlines the key provisions that will have widespread applicability.  There are a number of additional provisions that may apply to certain businesses.  Please consult your tax advisor.