Round Two: What is New With PPP
After much drama, will it pass or will it not, on December 27, 2020, President Trump signed an additional economic relief package entitled the “Consolidated Appropriations Act, 2021” (the “Act”) right after unemployment benefits expired for most Americans. The Act contains extensive government stimulus including additional funds for the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan Program and allows for the tax deductibility for existing and new PPP loans. It also increases federal unemployment benefits to $300 and provided direct payments to individuals of $600. Unfortunately, however, it does not include liability and employment law protections for employers or funding for state and local governments.
What is Different about This PPP Round?
The Act permits businesses that meet certain criteria and that have used (or will use) all of the proceeds from their first PPP loan to obtain a second round of PPP financing (a “Second Draw”). It also permits businesses that did not participate in the prior round to receive a PPP loan. New PPP loans will be available until the earlier of March 31, 2021 or until all funds allocated to the program are exhausted.
The rules governing this iteration of the PPP, however, are different from the first round that was enacted this past March. For example, to obtain a Second Draw, a business must, with certain exceptions and exclusions:
- Employ no more than 300 employees (this is lower than the 500 employee limit under the first round of the PPP); and
- Demonstrate at least a 25% reduction in gross receipts in at least one full quarter of 2020 relative to the same quarter of 2019.
In addition, the maximum loan amount that most types of businesses can obtain through a Second Draw has been reduced to the lesser of (a) 2.5 times the borrower’s average monthly payroll costs in either the last 12 months or 2019 and (b) $2 million (compared to the $10 million limit in the first round). Borrowers that are restaurants, bars, caterers, hotels and those with NAICS code 72 may receive loans up to 3.5 times the borrower’s average monthly payroll costs, subject to the same $2 million cap.
Permitted Uses of Loan Proceeds
Under the rules governing the first round of the PPP loans, at least 60% of the proceeds of the loan were required to be spent on payroll costs (including compensation, health, retirement and state and local payroll taxes) over a covered period of either eight or 24 weeks. The remaining 40% could be spent on payroll costs, rent or mortgage payments, utilities and qualified interest payments.
The Act also provides that at least 60% of the proceeds of Second Draws must be spent on payroll costs. However, the Act expanded the types of items that businesses may use the remaining 40% of their loan proceeds. This expansion applies to both the Second Draw and to existing first round PPP loans that have not yet received forgiveness. These additional items that borrowers may use up to 40% of their first round or Second Draw loans to pay are:
- Payments for business software, cloud computing and other human resources and accounting needs.
- Cost related to property damage, vandalism or looting because of public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Purchase of personal protective equipment and other operating or capital expenditures to facilitate the adaption of business activities to assist a borrower to comply with COVID-19 related federal, state or local health and safety guidelines from the period beginning March 1, 2020 until the end of the national emergency declaration.
- Expenditures to suppliers of goods that are essential to the operation of the borrower’s business pursuant to a contract, order or purchase order in effect prior to taking out the loan.
Simplified Forgiveness Certification for Small Borrowers
Borrowers who obtain Second Draw loans (and likely first round PPP loans) totaling $150,000 or less may apply for forgiveness using a simplified loan forgiveness certification that includes (a) description of the number of employees retained because of the loan, (b) the estimated amount of the loan spent on qualifying payroll costs and (c) the total loan value.
Tax and Other Benefits to Borrowers
The Act also provides two important tax benefits to businesses that obtain PPP loans that are ultimately forgiven. First, the amount of forgiven PPP loans will not be included in borrowers’ taxable income. Second, borrowers may claim a tax deduction for business expenses paid from the proceeds of PPP loans that were later forgiven.
The Act also repealed the requirement that borrowers reduce the amounts of PPP loan forgiveness by the amount of any Economic Injury Disaster Loan advances.
FFCRA Leave Requirements Not Extended
The Families First Coronavirus Response Act (FFCRA) will expire on December 31, 2020 ending the requirement that employers with 500 or fewer employees provide sick and family leave benefits for certain COVID-19 related reasons. Beginning on January 1, 2021, employers are no longer required to provide FFCRA leave but may voluntarily provide these benefits to their employees. However, the Act does extend the FFCRA tax credit, which reimburses employers for the cost of providing these leave benefits until March 31, 2021. Therefore, for those employers that voluntarily provide emergency paid sick leave or emergency paid Family and Medical Act Leave under the FFCRA after January 1, 2021, they may utilize the payroll tax credits to cover the cost of benefits paid to their employees until March 31, 2021.
What Businesses Should Do Now
Businesses that are contemplating applying for a new PPP loan under the Act should start gathering financial data to support their position that they have suffered a significant revenue reduction (i.e., at least a 25% reduction in gross receipts in at least one full quarter of 2020 relative to the same quarter of 2019), and to quantify their number of employees (which must be 300 or fewer), and the exhaustion (or anticipated exhaustion) of their initial PPP proceeds. This information should be compiled before the application process begins.
Once lenders begin accepting loan applications, businesses should ensure that their applications are submitted early. During the initial PPP round, the appropriation of funds were exhausted before all applications were processed. As a result, Congress had to appropriate further funds. There is no guarantee that Congress will appropriate any further funds if this second round of PPP funding is exhausted once again before all applications are processed.
As with the first round of PPP, borrowers must apply for these loans through private lenders that the U.S. Small Business Administration (SBA) has authorized. These lenders will have their own policies and procedures governing the borrowers from which they will accept loan applications. In the first PPP round, many lenders accepted loan applications only from their own customers, leaving borrowers without a stable banking relationship scrambling to find a lender. If you do not have a current banking relationship, or if your existing bank refused to accept your PPP application during the first round, you should begin looking for a lender now.
The SBA has 17 days after the enactment of the Act (i.e., until January 6, 2021) to issue guidance. Borrowers should read the guidance once it is issued.
If you have any questions about the Act or the PPP, contact Jason Rimland, Alexa Zelmanowicz, Valerie Ben-Or, Michael Riela or your usual THSH attorney.
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