January 26, 2021 – On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The economy continues to struggle from the effects of the coronavirus pandemic. This new law provides additional support to many small businesses.
So far in the month of January alone, the Treasury Department (the “Treasury”) and the Small Business Administration (SBA) have issued over 200 pages of new interim final rules (the “Interim Rules”) and other written guidance related to modifications of the Paycheck Protection Program (PPP) by the Economic Aid Act. Except to the extent revised by the new Interim Rules, all previously announced Interim Rules and Frequently Asked Questions (FAQs) regarding the PPP continue to apply.
In particular, the Economic Aid Act reopens and expands the PPP, the forgivable loan program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, effective March 27, 2020. See the resource links at the end of this alert for quick access to Ulmer’s prior client alerts and webinars on the PPP.
As of last week, Treasury has now reopened the PPP portal for all eligible borrowers. Important PPP changes include the ability of new borrowers to apply for a PPP loan under the original PPP (a “First Draw Loan”), and the creation of an additional PPP loan for eligible borrowers (a “Second Draw Loan”). Just as before, all PPP loans are potentially forgivable.
First Draw Loan Program Reopened
Eligible businesses that previously did not obtain a First Draw Loan may now apply for a PPP loan through March 31, 2021, or until the appropriations are exhausted. The original PPP loan eligibility requirements, affiliation rules, and limits continue to apply to all First Draw Loans. For the loans to be forgivable, all PPP loans must continue to be used 60% for eligible payroll costs and not more than 40% for eligible non-payroll costs (see below for the expanded eligible expenses).
First Draw Loans are available in amounts up to $10 million, with an aggregate cap of $20 million for a corporate group. Under the January Interim Rules, businesses are part of a corporate group if they are majority owned, directly or indirectly, by a common parent.
Particular attention must be drawn to the certification on the PPP loan application every borrower must make, in good faith, that “the current economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant” as of the date the PPP loan application is submitted (the “Necessity Certification”). Under FAQ 46, any business with a PPP loan under $2 million is presumed to have made that Necessity Certification in good faith. The SBA has repeatedly announced it will audit all PPP loans in excess of $2 million. SBA’s new Questionnaire Form 3509, sent to every borrower that applies for forgiveness of a PPP loan in excess of $2 million, makes it clear the SBA is gathering information to review each businesses’ Necessity Certification.
Be as accurate and truthful as possible on all PPP loan applications. As described in the Certifications section of every application, false or fraudulent information can result in heavy fines and even jail time.
First Draw Loan Potential Increases
Businesses may only receive one First Draw Loan. However, a business now may be eligible to seek an increase of its First Draw Loan, if it:
Second Draw Loan Eligibility
Second Draw Loans are available to those who previously received a First Draw Loan. To be eligible, a business:
Notably, the employee count eligibility requirement for the Second Draw Loan was reduced from 500 to 300 employees. This was clearly designed to help smaller businesses and reduce the chance that larger businesses would dominate the Second Draw Loan program.
A new interpretive paper by Treasury defines for-profit business “gross receipts” as:
“…all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.”
Nonprofit businesses have a separate definition of “gross receipts” consistent with Internal Revenue Code Section 6033.
A business must meet the other eligibility requirements for a First Draw Loan (except as modified above). The business must also make the Necessity Certification in good faith.
Calculating Second Draw Loan Amounts
Only one Second Draw Loan may be taken, so consider applying for the maximum amount available. To calculate the Second Draw Loan amount, the borrower must multiply 2.5 by (the borrower’s choice of) the average monthly payroll costs for either 2019, 2020, or the 12-month period prior to the application. For businesses with a NAICS Code beginning with 72, the multiplier is 3.5 times the average monthly payroll costs during the selected measurement period.
Payroll costs are capped at $100,000 (on a proportionate basis) per employee for calculating the loan amount. The Second Draw Loans may be for a maximum of up to $2 million, with an aggregate cap of $4 million for a corporate group.
Similar to the First Draw Loans, there are special rules for seasonal employers, self-employed persons, sole proprietors, partnerships, farmers, and ranchers.
Covered Period Flexibility
New for all PPP loans, a borrower may select a covered period anywhere between eight weeks and 24 weeks after the loan is first advanced (the “Covered Period”). The Covered Period is the time within which the borrower must use the PPP loan proceeds for expenses that are eligible for loan forgiveness.
Previously, the Covered Period specifically had to be either eight weeks or 24 weeks. As a result of this change, the former “Alternative Covered Period” was eliminated.
Eligible Expenses Expanded
For any PPP loan to be forgivable, a borrower must use at least 60% of the loan for payroll costs (as previously defined in the CARES Act and the Interim Rules). Payroll costs for all PPP loans now also expressly include group life, disability, vision, or dental benefits or insurance premiums.
Eligible non-payroll costs continue to include obligations existing prior to February 15, 2020, for:
The costs still include refinancing SBA Economic Injury Disaster Loans made between January 31, 2020, and April 3, 2020.
New for any PPP loan not already forgiven prior to December 27, 2020, the eligible non-payroll costs now also include:
If you have not already applied for loan forgiveness for your First Draw Loan (no matter when taken), you can include the new non-payroll expenses above as part of your loan calculations for use of that PPP loan.
Simplified Forgiveness Application for PPP Loans Under $150,000
For borrowers with PPP loans of $150,000 or less, a simplified one-page loan forgiveness application Form 3508S was just released by Treasury. Eligible borrowers may apply for loan forgiveness by simply providing (1) the number of employees the borrower was able to retain because of the covered loan, (2) the estimated amount of the covered loan spent on payroll, and (3) the total loan amount. Because the SBA may still audit these smaller loans at any time, to prove compliance borrowers must still retain (a) employment records for four years after the date the loan forgiveness application was submitted, and (b) all other records for three years after the date the loan forgiveness application was submitted.
Please contact your lender to see if it will use the paper or online version of the Form 3508S, or if it has any additional timing or other requirements.
No Reductions for EIDL Advance Amounts
The CARES Act provided that any Economic Injury Disaster Loan (EIDL) emergency grant (up to $10,000) issued to a borrower would reduce PPP loan forgiveness. The Economic Aid Act eliminated that requirement. If a business previously applied for PPP loan forgiveness and its EIDL emergency grant was deducted, that sum (plus interest) will be remitted to the PPP lender for credit against any PPP loan or disbursement to the borrower.
Not only is the forgiven portion of a PPP loan exempt from taxation, as described in a recent Client Alert, the Economic Aid Act makes it clear that businesses may also deduct the expenses paid with proceeds of a PPP loan that is forgiven. This new provision overrides the contrary position previously taken by the IRS.
Ineligible Business Types Expanded
The Economic Aid Act expanded the list of businesses ineligible to borrow a PPP loan. Ineligible business now include those:
Applications may be submitted now until March 31, 2021, unless the funding is exhausted earlier. If you previously were shut out or are simply concerned by the ever-changing PPP rules, now may be the time to reconsider applying.
Please gather and keep all your supporting eligibility and qualification documentation as you complete your application for your First Draw Loan and your Second Draw Loan. The SBA may take longer to review and approve loan applications in this new round since the SBA is attempting to reduce the fraud that occurred during the first round of PPP loans last spring and early summer. Then stay on top of new Treasury Interim Rules and other PPP changes so you use your PPP loan for purposes that are eligible for loan forgiveness.
Be particularly conscientious about the good faith Necessity Certification. Before submitting your PPP application, carefully analyze the necessity of the PPP loan to support your ongoing operations in light of the economic uncertainty of the pandemic. To support your conclusions, retain in your records any documents, financial projections and burn rate calculations, evaluations of other cash or liquid assets available, any written analysis, and your board of directors’ actions authorizing the new PPP loan.
Before submitting any application for a new First Draw Loan, an increase, a Second Draw Loan, or a Loan Forgiveness Application, talk to your lender soon regarding its procedures, timing, the documentation needed, and expectations. Some lenders are choosing not to participate in the new round of PPP loans. Other lenders are not yet ready to accept Second Draw Loan applications. You do not have to use the same lender for the Second Draw Loan that you used for your First Draw Loan. Speaking early and regularly with your lender will help to match expectations and reduce potential disappointment.
Additional contributors for this material include: Matthew I. Pollack, Steven P. Larson, and Ethan Lee Rosenfeld.
Ulmer’s Banking & Commercial Finance Practice Group is available to provide you with strategic advice and counseling as you navigate the business challenges of the COVID-19 pandemic. Please reach out to our attorneys if you have any questions.
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The information provided in this client alert speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. This legal update was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this client alert, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Alan W. Scheufler at firstname.lastname@example.org, Stephen G. Nesbitt at email@example.com, Bradley D. Kaplan at firstname.lastname@example.org, or Frederick N. Widen at email@example.com.