See below for important information on the Paycheck Protection Program (PPP) from Fox Rothschild LLP
Stimulus Package Expands PPP, Simplifies Loan Forgiveness and Adds Disaster Grants
In its massive new pandemic relief and stimulus package, Congress has significantly modified the Paycheck Protection Program (PPP) to allow for second draws from the program, to simplify the loan forgiveness process, to provide restaurants access to greater relief and to extend the program through March 2021.
The proposed law also includes economic disaster grants and debt relief provisions, as well as bolstering the Small Business Administration’s existing Microloan Program.
The Coronavirus Response and Relief Supplemental Appropriations Act is massive. This alert highlights some of the basic provisions related to Second Draw PPP Loans and gives an overview of funding and policy changes that aim to help small businesses, including minority-owned businesses and nonprofits recover from the pandemic.
PPP Second Draw Loans
The law earmarks $325 billion to small businesses, including $284 billion for PPP expansion.
It provides long-awaited changes to the PPP:
- Eligible borrowers may receive a second PPP forgivable loan for the hardest-hit small businesses and nonprofits with 300 or fewer employees. Condition for loan: demonstration of 25% loss of gross receipts in any quarter during 2020 when compared to the same quarter in 2019;
- A dedicated $15 billion set-aside for lending through community financial institutions, including Community Development Financial Institutions and Minority Depository Institutions to increase access for minority-owned and other underserved small businesses and nonprofits;
- A set-aside for very small businesses – those with 10 or fewer employees – with an emphasis on small businesses located in distressed areas;
- Expands PPP eligibility for more critical access hospitals, local newspapers and TV and radio broadcasters, housing cooperatives, and 501(c)(6) nonprofits, including tourism promotion organizations and local chambers of commerce;
- Allows for small businesses in the restaurant and hospitality industries to receive larger awards of 3.5 times average total monthly payroll, rather than 2.5 times;
- Adds PPE expenses associated with outdoor dining, and supplier costs as eligible and forgivable expenses;
- Simplifies the forgiveness process for loans of $150,000 and less;
- Repeals the requirement of deducting an EIDL grant from the PPP forgiveness amount;
- Allows for tax deductibility of PPP expenditures.
PPP Loan Amount
Subject to the exceptions noted below, the amount of new PPP loans, called “Second Draw PPP Loans”, are calculated by multiplying 2.5 x the average total monthly payroll cost expenditures incurred or paid during, at the Borrower’s option, either the one-year period before the date in which the loan is made, or the calendar year 2019. The maximum loan amount is $2 million. For seasonal employers, the Borrower should use the average total monthly payroll cost expenditures for any 12-week period between February 15, 2019 and February 15, 2020. If you are in the hospitality industry (NAICS Code 72), your multiplier is increased to 3.5% with the same $2 million cap.
Second Draw Eligibility
Second Draw PPP Loans are available through March 31, 2021. Only companies with no more than 300 employees (rather than the 500 employee cap under the CARES Act) are eligible for Second Draw PPP Loans. Applicants must meet the “25% reduction in gross receipts” test discussed below. An eligible applicant is entitled to only one Second Draw PPP Loan.
To be eligible, the applicant must demonstrate that it had gross receipts during the first, second, third or fourth quarter of 2020 that were at least 25% lower than the gross receipts of the applicant during the same quarter in 2019. As written, the law appears to allow the applicant to choose the relevant quarter so that, if it only suffered this reduction in one quarter during 2020 compared to the comparable quarter in 2019, it would qualify. The term “gross receipts” is not defined in the Act. If the applicant was not in business during any quarter in 2019, the Act provides for alternative measurement periods for those companies. There is a special rule for applicants for loans of not more than $150,000. They need only certify that they meet the 25% reduction in gross revenues test, but must submit documentation to back that up on or before submitting an application for loan forgiveness.
Entities that are ineligible include:
- Publicly traded companies;
- Companies that were not in operation on February 15, 2020;
- Recipients of “shuttered venue operator grants”;
- Any entity for which a Chinese or Hong Kong entity holds 20% or more direct or indirect interest, including those formed under PRC or Hong Kong law or with significant operations in those jurisdictions;
- Entities that have a China resident on its board of directors;
- Anyone registered under the Foreign Agents Registration Act; and
- Certain other grant recipients under the Act.
A “shuttered venue operator” consists of live venue operators or promoters, theatrical producers, live performing arts organization operators, relevant museum operators, motion picture theatre operators, and talent representatives that meet certain requirements of the Act and experience a reduction in gross earnings
Borrowers have the same option as currently available to select between an eight-week or a 24-week covered period. The period begins on the date of the loan.
The Act adds several new categories for authorized uses of loan proceeds. They include:
- Payments for business software and cloud computing services that facilitate certain business operations;
- Uninsured costs related to property damage and vandalism or looting due to public disturbances during 2020;
- Supply chain expenditures for goods that are essential to the operation of the applicant’s business and which are made pursuant to a contractual commitment; and
- Operating and capital expenditures to facilitate the applicant’s business to comply with certain Covid 19 governmental requirements or guidances.
Now included in payroll costs are group life, disability, vision and dental benefit payments. This change applies to all existing loans that are not already forgiven.
Loan Forgiveness Application
The Act introduces a new simplified process for loan forgiveness applications for loans of $150,000 or less. Borrowers with loans of $150,000 or less only need to execute a one-page certification as to the number of employees the company was able to retain, the estimated amount of the covered payroll costs and the total loan value. There are recordkeeping requirements, and the SBA reserves the right to audit the certification. But this should simplify the loan forgiveness process for smaller loans. It should also be noted that this provision applies to existing PPP loans for which forgiveness has not yet been applied. Once the SBA publishes the new forgiveness application, existing PPP borrowers of these small loans can quickly and easily apply for forgiveness.
Deductibility of PPP Expenses
Another notable and important provision is the reversal of the current IRS position on deductibility of PPP authorized expenses, such as payroll, rent and utilities. In IRS Revenue Ruling 2020-27 issued earlier this fall, the IRS indicated that those expenses typically would not be deductible. The Act overrides that Revenue Ruling and provides that the expenses are deductible, despite the fact that the loan proceeds are not includable in income.
EIDL Grant Program – $20 Billion
Small businesses and nonprofits in low-income communities that suffered an economic loss are eligible to receive a $10,000 EIDL grant. Any small businesses and nonprofits in low-income communities that received an EIDL grant previously are also eligible to receive the full $10,000 if their award was less in the first round of grants.
EIDL grants are not taxable and businesses will not forgo a tax deduction for qualified expenses paid for with EIDL Funds. In addition, the Act repeals the prior requirement that an EIDL grant would reduce the amount of PPP forgiveness.
Grants for Venue Operators – $15 Billion
The bill provides $15 billion for SBA grants up to $10 million to live venues, independent movie theaters, and cultural institutions to address the economic effects of the pandemic. Grants can be used to cover expenses such as payroll costs, rent, utilities, and personal protective equipment. A set-aside of $2 billion is also reserved for entities with 50 or fewer employees.
SBA Debt Relief Payments – $3.5 Billion
This bill provides $3.5 billion to resume debt relief payments of principal and interest (P&I) on small business loans guaranteed by the SBA under the 7(a), 504 and Microloan Programs. All borrowers with qualifying loans approved by the SBA prior to the CARES Act will receive an additional three months of P&I, starting in February 2021. Going forward, those payments will be capped at $9,000 per borrower per month. After the three-month period described above, borrowers considered to be underserved—specifically those hardest-hit by the pandemic— will receive an additional five months of P&I payments, also capped at $9,000 per borrower per month. SBA payments of P&I on the first 6 months of newly approved loans will resume for all loans approved between February 1 and September 30, 2021, also capped at $9,000 per month.
Enhancements of SBA Lending Programs – $2 Billion
This bill provides $2 billion to enhance SBA’s core programs, including 7(a), Community Advantage, 504, and the Microloan Program, by making them more affordable and useful to small businesses. It also provides $57 million for the SBA Microloan Program to provide technical assistance and leverage about $64 million in microloans for minority-owned and other underserved small businesses.
For Existing PPP Borrowers, Stimulus Bill Expands Forgivable Uses and Eases Tax Consequences
The $900 billion Consolidated Appropriations Act of 2021 (the Act) modifies the Paycheck Protection Program (PPP) in a variety of business-friendly ways likely to benefit both existing PPP borrowers and businesses that receive a second PPP Loan.
Specifically, the Act includes the following noteworthy changes:
Uses Eligible for Forgiveness
The Act expands on the types of expenses that PPP borrowers may use their proceeds to pay and later seek forgiveness. Notably, these changes apply to existing borrowers that have not received loan forgiveness.
Originally, PPP borrowers were eligible to seek forgiveness only for amounts spent on payroll costs, covered mortgage interest payments, rent and certain utility payments. In addition to the original permitted uses, the Act now permits PPP borrowers to seek forgiveness for the following:
- Covered Operations Expenditures: payments for any business software or cloud computing service that facilities business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
- Covered Property Damage Costs: costs related to property damage 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 made to a supplier for goods that are essential to the operation of the PPP borrower at the time at which the expenditure is made, and is made pursuant to a contract, or order in effect any time before the applicable covered period or with respect to perishable goods, in effect before or at any time during the covered period.
- Covered Worker Protection Expenditures: operating or capital expenditure to facilitate the adaptation of business activities to comply with requirements established or guidance issued by the DHS, CDC, OSHA, or equivalent state or local guidance. Examples of eligible expenses include amounts spent to purchase, maintain, or renovate indoor, outdoor, and drive-through business space, as well as personal protective equipment.
The inclusion of such additional covered costs is likely to benefit existing PPP borrowers who have not yet received forgiveness and who were previously unable to use 100% of their loan proceeds on forgivable expenses. In such an instance, existing PPP borrowers may now be able to increase the amount of loan forgiveness sought by including proceeds spent on the newly added covered expenses.
The Act does not modify the requirement that 60% of the forgiven amount be spent on eligible payroll costs.
The Act introduces a simplified forgiveness application for PPP borrowers with loans of $150,000 or less. Such borrowers now only need to execute a one-page certification as to the number of employees the company was able to retain, the estimated amount spent on covered payroll costs and the total loan amount. Unlike previous applications, the forgiveness certification for loans of $150,000 or less will not require that PPP borrowers document how responses to certain questions were determined. Rather, PPP borrowers will only be required to self-certify as to PPP eligibility and how loan proceeds were used. PPP borrowers will remain obligated to comply with certain record-keeping requirements including the need to retain employment and payroll records for four years. PPP borrowers should be aware that the SBA reserves the right to audit the forgiveness certification. Congress has instructed the SBA to release the forgiveness certification within seven days of the Act becoming law.
The Act does not alter the Loan Necessity Questionnaire (form 3509) required to be submitted by each PPP borrower that, together with its affiliates, received a PPP loan in the original principal amount of $2 million or more.
Reversing prior IRS rulings, the Act confirms that: (1) the amount of loan forgiveness will not be considered taxable income and (2) deductible expenses paid with forgiven PPP proceeds will remain tax-deductible.
In IRS Revenue Ruling 2020-27 issued earlier this fall, the IRS stated that expenses paid with forgiven PPP proceeds typically would not be deductible. The Act overrides that Revenue Ruling and provides that the expenses are deductible, despite the fact that the loan proceeds are not includable in income. This change is retroactive and applies to all PPP borrowers, whether forgiveness has or has not been granted.
The Act makes clear that EIDL grants are not taxable income and businesses will not forgo a tax deduction for qualified expenses paid for with EIDL funds. In addition, the Act repeals the prior requirement that an EIDL grant would reduce the amount of PPP forgiveness. The SBA is expected to issue guidance as it relates to borrowers that have already received loan forgiveness and whose forgivable amount was reduced by the amount of its EIDL grant.
Due to the historically changing nature of the PPP, we encourage all existing PPP borrowers, and businesses interest in borrowing under the PPP Second Draw, to continue to monitor Fox Rothschild’s Coronavirus Response Resource Center for future updates.