On December 27, the Consolidated Appropriations Act of 2021 (the “Act”) was signed into law. This Act makes available $284 billion for second draw loans under the Paycheck Protection Program (“PPP-2”) and also makes important changes to the existing Paycheck Protection Program (“PPP-1”). Below is a summary of PPP-2 and key changes to PPP-1.

Eligibility for PPP-2 loans

PPP-2 loans will be available until March 31, 2021 to both first-time eligible borrowers as well as eligible borrowers that previously received a PPP-1 loan. Eligible borrowers may apply for a PPP-2 loan of up to $2 million, provided they:

• Have 300 or fewer employees;
• Have used or will use the full amount of their first PPP loan; and
• Had gross receipts during the first, second, third, or, only with respect to a loan application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrate not less than a 25% reduction from the gross receipts of the borrower during the same quarter in 2019.

PPP-2 borrowers may receive a loan amount equal to 2.5 times their average monthly payroll costs in the year prior to the loan or calendar year 2019, or $2 million, whichever is less. PPP-2 borrowers with NAICS codes starting with 72 (hotels and restaurants) can get loans equal to 3.5 times their average monthly payroll costs, subject to the $2 million cap, provided that if such NAICS code 72 borrower has more than one physical location, such borrower has no more than 300 employees per physical location.

PPP-2 uses the same affiliation rules as applicable to PPP-1, and it is expected that principles related to other Small Business Administration (SBA) affiliation concepts may be implicated. PPP-2 includes the same PPP-1 eligible borrowers and also expands loan eligibility to certain 501(c)(6) nonprofit organizations and destination marketing organizations, provided they have limited lobbying expenses. PPP-2 includes new restrictions on publicly traded businesses and entities that are organized under Chinese or Hong Kong law or have significant operations in China or Hong Kong.

PPP loan eligible costs

The borrower’s costs and expenses eligible for loan forgiveness in PPP-2 include payroll, rent, covered mortgage interest, and utilities. The Act also adds the following expenses:

• Operations expenditures, such as software and cloud computing services and accounting needs that facilitates business operations and expenses;
• Property damage costs, which includes costs related to property damage, vandalism or looting that occurred during 2020 that was not covered by insurance;
• Supplier costs, which includes expenditures to suppliers that are essential at the time of purchase to the borrower’s current operations; and
• Worker protection expenditures, which includes operating or capital expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.

The Act provides that these new eligible expenses are applicable to both PPP-2 loans as well as any PPP-1 loans that have not yet been forgiven. 

New flexibility for PPP-2 covered period

To be eligible for full loan forgiveness, PPP-2 borrowers will have to spend no less than 60% of the funds on payroll over the forgiveness covered period, which is consistent with existing PPP-1 requirements. Under the Act, a PPP-2 borrower’s covered period will begin on the date of the loan and end on a date selected by the borrower that occurs during the subsequent eight-week or 24-week period. As a result, the PPP-2 borrower doesn’t have to wait until the end of the eight-week or 24-week period, and can select an earlier ending date to avoid reduction in workforce penalties before making a reduction in workforce, as long as the workforce is at its pre-February 15 levels on the last day of the covered period.

Simplified forgiveness certification for PPP loans under $150,000

The Act provides that any borrower that received not more than $150,000 in PPP loans seek forgiveness by signing a simplified certification that is not more than one page in length, which will include a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. This provision applies to loans under both PPP-1 and PPP-2.

The SBA must create the simplified application form within 24 days and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.

Tax deductibility for PPP expenses

The Act specifies that business expenses paid with forgiven PPP loans will be tax-deductible. This supersedes IRS guidance that such expenses could not be deducted. This provision applies to loans under both PPP-1 and PPP-2 loans.

Best practices

As with the PPP-1, it is expected that there will be further guidance and clarification by the SBA. However, companies should consider ensuring that adequate safeguards are put in place associated with applying for and accepting the PPP to ensure the statute and SBA guidelines are addressed. The SBA’s Office of Inspector General is already saturated with complaints related to PPP-1 and other government programs. Other government agencies, including the U.S. Department of Justice and individual state attorneys general, have not only initiated investigations, but brought criminal complaints against those companies that have attempted to take advantage of COVID-19 related economic relief programs. Many of these complaints are driven by competitors, elected officials, watchdog nonprofit organizations, and the media. As such, proper documentation of the company’s decision to apply for PPP-2 (and seek forgiveness for PPP-1 or PPP-2) is encouraged. As a part of these safeguards, a company should consider putting in place procedures to address contingencies if the PPP-1 or PPP-2 forgiveness application is questioned by third parties (such as the media) or if government law enforcement agencies make inquires.