More Paycheck Protection Program Funds Available

In December, Congress convened to discuss the federal government’s 2021 operating budget, resulting in the passage of the Consolidated Appropriations Act, 2021 (the “Act”) on December 27th. Nestled within its nearly 6,000 pages was a second COVID-19 stimulus package providing approximately $900B in pandemic aid, including a renewal of the Paycheck Protection Program (PPP) that was originally established under the CARES Act last Spring.

As you may recall, the PPP is managed by the Small Business Administration and enables certain lenders to make loans to small businesses impacted by the pandemic. Under the Act, $284 billion is now available for new PPP borrowers, as well as for some previous PPP borrowers who meet certain requirements (the so-called “second draw” loans). The Act also extends the program through March 31, 2021.

The Act makes extensive changes to the PPP in an effort to address programmatic flaws which prevented many businesses from previously accessing much-needed funds. For example, the Act continues to set aside a portion of new PPP funds for distribution by specific institutions (community financial institutions, minority depository institutions, and small business depository institutions) in order to reach borrowers in low-income areas.

Below is a summary of other key changes to the PPP:

1. Expanded Eligible Expenses
The Act expands the types of expenses eligible for forgiveness for which PPP funds may be used, including:

– Operations expenditures such as payments for software, cloud computing, and other human resources and accounting needs;

– Property damage costs, (i.e., costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance);

– Supplier costs, including expenditures to a supplier that are essential to the recipient’s operations; and

– Covered worker protection expenditures for items such as personal protective equipment and other investments to help a recipient comply with health and safety guidelines related to COVID-19.

2. Choice of Covered Period for Forgiveness
The borrower can now elect a covered period of time that is between 8 and 24 weeks after loan origination.

3. Simplified Forgiveness Application
For loans under $150,000, borrowers will be allowed to complete a simplified, one-page forgiveness application. In addition to the standard certification requirements regarding the need for the loan and compliance with all loan requirements, this application will require borrowers to certify to: (a) the number of employees retained due to the PPP loan, (b) the amount of the loan spent on payroll costs, and (c) the total loan amount. Borrowers must maintain adequate records to substantiate the application, which are subject to audit by the government.

4. New Eligibility Limitations
Although the Act expands eligibility for a PPP loan, there are new eligibility limits based on whether the borrower is a first-time or second draw applicant. For instance, publicly traded companies, business that were not in operation on February 15, 2020, lobbyists, and entities that receive a grant under the Shuttered Venue Operator Grants program are not eligible as new borrowers under the Act. Likewise, second draw borrowers may not include entities that are involved in political and lobbying activities or affiliated with entities in the People’s Republic of China; registrants under the Foreign Agents Registration Act; and entities that receive a grant under the Shuttered Venue Operator Grant program.

5. Second Draw Loans
Smaller and harder-hit businesses can receive a second PPP loan (on a one-time basis) of an amount up to 2.5X the average monthly payroll costs in the one year prior to the loan or the calendar year, with a maximum amount of $2 million, if they meet certain requirements, including that they:

– employ no more than 300 employees;

– have used or will use the full amount of their first PPP loan; and

– can demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. (The program does provide applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019). Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Finally, borrowers of a PPP second draw loan will be eligible for loan forgiveness equal to the sum of their payroll costs; covered mortgage, rent, and utility payments; covered operations expenditures; covered property damage costs; covered supplier costs; and covered worker protection expenditures incurred during the covered period. However, the existing 60/40 cost allocation between payroll and non-payroll costs which is required in order to receive full forgiveness will continue to apply.

6. Group Insurance Included in Payroll Costs
Employer-provided group insurance benefits are included in the definition of payroll costs (used to calculate loan proceeds), including group life, disability, vision and dental insurance.

7. Repeal of EIDL Advance Deduction
Prior and existing PPP borrowers are no longer required to deduct the amount of any Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount. (The EIDL is a separate SBA loan program, which includes advances of up to $10,000) per borrower.

8. Tax Treatment of PPP Loans
The Act clarifies that a borrower’s gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven.

9. Special Provisions for Certain Industries
The Act contains special provisions (too extensive to describe here) for farmers and ranchers, housing cooperatives, news organizations, destination marketing organizations, and so-called “shuttered venue operators” (live venues, theatrical producers, performing arts organizations, museum operators, motion picture theaters, etc., who demonstrate a 25% reduction in revenues).

10. Clarification of Existing Provisions
Many current PPP provisions were confirmed or clarified under the Act, including those relating to the continued waiver of fees and personal guarantees. Also, the interest rate on PPP loans is non-compounding and non-adjustable, and the affiliation rules of the PPP program will continue to apply.

For additional details, please consult the Act or contact Mike Cashton at [email protected] to discuss your company’s specific needs.

 

Michael Cashton is a member of our New England-based team and brings over 20 years of experience representing emerging businesses, major corporations, and individual entrepreneurs across a range of industries, including consumer goods, SaaS/PaaS, ad-tech, digital gaming, e-commerce, retail, food service, and arts/entertainment. Before joining Outside GC, Michael served as VP of Legal for Hasbro, Inc., an international consumer products and branded entertainment company. He can be reached at [email protected] or 401-744-9647