On January 6, 2021, the Small Business Administration (SBA) and the Department of the Treasury issued interim final rules and revised the borrower application forms for the Paycheck Protection Program (PPP). These documents were published per the mandate in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which was enacted in the last days of the 116th Congress as part of a massive, 5,500-page bill that included the Fiscal Year 2021 Appropriations bill and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (Pub. L. 116-260). Major highlights from the Economic Aid Act include:
- Extending the original PPP (First Draw) from August 8, 2020 to March 31, 2021;
- Providing for the full deductibility of ordinary and necessary business expenses that were paid with a forgiven or forgivable PPP loan, thus reversing the IRS's early guidance;
- Allowing entities to receive a PPP loan and claim the employee retention credit, although a credit cannot be claimed for wages paid with the proceeds of a PPP loan that have been forgiven;
- Establishing PPP Second Draw loans, which allows certain entities to receive a second PPP loan; and
- Appropriating $284.5 billion for both the PPP First Draw and Second Draw loans.
The following summarizes major points from the two interim final rules implementing the Economic Aid Act: one incorporating changes to the PPP from the new law, and one establishing the PPP Second Draw.
Interim Final Rule: PPP as Amended by the Economic Aid Act
The interim final rule for "Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act" incorporates the Economic Aid Act amendments to the PPP and consolidates the SBA and Treasury Department's prior rules and guidance regarding borrower eligibility, lender eligibility, and PPP application and origination requirements for new PPP loans. While all the changes can be found here in the interim final rule, the following are highlights:
- Maximum Loan Calculation. New PPP borrowers may use either 2019 or 2020 for purposes of calculating their maximum loan amount.
- Eligibility. The Economic Aid Act expanded PPP eligibility to include housing cooperatives, certain nonprofit news organizations, section 501(c)(6) organizations (excluding sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity), and destination marketing organizations. Housing cooperatives, qualifying 501(c)(6) nonprofits, and destination marketing organizations must have no more than 300 employees to be eligible (calculated using either (i) the average employment over the previous 12 months or from calendar year 2019, (ii) the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application, or (iii) the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months). Certain businesses and organizations are not eligible for PPP loans, including those not in operation on February 15, 2020, those that received or will receive a grant under the Shuttered Venue Operator Grant program, and those that are permanently closed.
- EIDL Advance. Borrowers no longer need to deduct the amount of an economic injury disaster loan (EIDL) advance from the PPP forgiveness amount. The EIDL Advance will not reduce the amount of forgiveness to which the borrower is entitled. In addition, any EIDL Advances previously deducted from a borrower's forgiveness amount will be remitted to the lender, together with interest to the remittance date.
- Forgivable Expenses. The Economic Aid Act expands the list of forgivable expenses to include certain operations expenditures, uninsured property damage costs resulting from public disturbances, supplier costs, and coronavirus-related worker protection expenditures. Except for PPP loans for which the SBA has already remitted a loan forgiveness payment to the lender before December 27, 2020, these additional eligible expenses apply to any PPP loan made before, on, or after December 27, 2020.
- Covered Period. A borrower's "loan forgiveness covered period" begins on the date the lender disburses the PPP loan. The Economic Aid Act amends program requirements to allow a borrower to choose an end date that occurs during the period beginning eight weeks after the date of disbursement and ending on the date that is 24 weeks after the date of disbursement.
- Simplified Forgiveness Application for Smaller Loans. When applying for loan forgiveness, a borrower who received a PPP loan of $150,000 or less is not required to submit any application or documentation other than a certification including a description of the number of employees the recipient was able to retain because of the PPP loan, the estimated amount of the loan spent on payroll costs, and the total loan value. In addition, the certification must attest the recipient accurately provided the required certification and complied with PPP requirements. The borrower must retain employment records relevant to the form for the four-year period following submission of the loan forgiveness application. The borrower must retain all other relevant records for three years following submission of the loan forgiveness application.
- Seasonal Employer. The Economic Aid Act defines a seasonal employer as one who does not operate for more than seven months in any calendar year or, during the preceding calendar year, had gross receipts for any six months of that year that were not more than 33.33% of the gross receipts for the other six months of that year. A seasonal employer must determine its maximum PPP loan amount by calculating the average total monthly payments for payroll during any consecutive 12-week period between February 15, 2019 and February 15, 2020.
The interim final rule makes clear that, while it should be read consistently with the previously issued Frequently Asked Questions (FAQs) regarding the PPP, the Economic Aid Act overrides any conflicting guidance in the FAQs. In addition, the SBA and Treasury Department will revise the FAQs to fully conform with the Economic Aid Act in the near future.
Interim Final Rule: PPP Second Draw Loans
The Economic Aid Act establishes the PPP Second Draw Loans, which allows entities to receive an additional PPP loan. In general, according to the interim final rule, Second Draw loans are subject to the same terms, conditions, and requirements as First Draw loans, minus a few exceptions. For example, the following terms apply to Second Draw loans:
- The guarantee percentage is 100%;
- No collateral or personal guarantee is 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; and
- The same affiliation rules that apply to First Draw loans apply to Second Draw loans, except as provided in the interim final rule.
The following are some of the major differences between the First Draw and Second Draw loans:
- Eligibility. Eligibility for the Second Draw loans is narrower than for the First Draw loans. To be eligible, a borrower must have 300 or fewer employees (calculated using either (i) the average employment over the previous 12 months or from calendar year 2019, (ii) the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application, or (iii) the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months) and experienced a revenue reduction in 2020 relative to 2019, as described below. The borrower must also have received a First Draw PPP loan and spent all of its first PPP loan on eligible PPP expenses on or before the expected date on which the Second Draw loan is disbursed. (The SBA will allow borrowers to apply for a Second Draw loan before the First Draw PPP loan proceeds are used, but the Second Draw loan will not be distributed until the First Draw PPP loan has been fully expended.)
- Revenue Reduction Requirement. To be eligible for a Second Draw loan, the borrower must have experienced at least a 25% revenue reduction in 2020 relative to 2019. This revenue reduction should be calculated by comparing the borrower's quarterly gross receipts for one quarter in 2020 with the corresponding quarter in 2019. A borrower can provide annual tax return forms to substantiate its revenue reduction.
- Gross Receipts. The interim final rule defines gross receipts, generally, to include all revenue in whatever form received or accrued (in accordance with a borrowers' accounting method) from whatever source, including from the sales of products or services, interest, dividends, etc. Any forgiveness amount of a First Draw loan that a borrower received in 2020 is excluded from a borrower's gross receipts.
- Maximum Loan Amount. In general, the maximum loan amount for a Second Draw loan is equal to the lesser of two and a half months of the borrower's average monthly payroll costs or $2 million. To calculate the borrower's payroll costs, the interim final rule specifies a borrower can refer either to calendar year 2020, calendar year 2019, or the one-year period before the date on which the loan is made. The interim final rule specifies calculation methodologies for seasonal businesses, entities that did not exist during the one-year period preceding February 15, 2020 (but was in operation on February 15, 2020), and borrowers assigned a NAICS code beginning with 72. Entities that are part of a single corporate group shall not receive more than $4 million of Second Draw loans in the aggregate.
In addition to the two interim final rules, the SBA and Treasury Department released the following for borrowers:
- Revised PPP First Draw Borrower Application Form (revised January 8, 2021);
- PPP Second Draw Borrower Application Form (released January 8, 2021); and
- SBA Guidance on Accessing Capital for Minority, Underserved, Veteran, and Women-Owned Business Concerns (released January 6, 2021).
The SBA also updated its PPP lender forms, including:
- PPP Lender Application Form First Draw Loan Guaranty (updated January 8, 2021);
- PPP Lender Application Form Second Draw Loan Guaranty (released January 8, 2021);
- Lender Agreement (Federally Insured Depository Institutions, Federally Insured Credit Unions, Farm Credit System Institutions) (updated January 8, 2021); and
- Lender Agreement (Non-Bank and Non-Insured Depository Institution Lenders (updated January 8, 2021).
Borrowers may begin applying for the PPP First Draw and Second Draw loans during the week of January 11, 2021. Specifically, PPP-eligible lenders with $1 billion or less in assets will be able to make First and Second Draw loans starting Friday, January 15. The PPP will open to all participating lenders Tuesday, January 19. We will continue to monitor as the SBA and Treasury Department update existing guidance and release new guidance related to the PPP First Draw and Second Draw loans.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.