COVID-19 Relief: Understanding New Paycheck Protection Loan Opportunities

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The Economic Aid Act continues the CARES Act’s Paycheck Protection Program with an additional $284 billion to provide forgivable loans to eligible small businesses, including certain borrowers that already received loans.

TAKEAWAYS

  • Under the Economic Aid Act, Congress has appropriated an additional $284 billion in connection with the reopening of the CARES Act’s PPP loans, which are available to first-time qualifying borrowers in amounts of up to $10 million (First Draw PPP Loans).
  • The Act also allows certain companies that already obtained PPP loans, but have experienced significant declines in revenue, to obtain second PPP loans of up to $2 million (Second Draw PPP Loans).

On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) into law. The Economic Aid Act reinitiates the Paycheck Protection Program (PPP), appropriating $284 billion for both First and Second Draw PPP Loans. The Economic Aid Act reopens the Paycheck Protection Program, amends borrower eligibility criteria, adds permissible uses of the loan proceeds and establishes new eligibility requirements for borrowers seeking Second Draw PPP Loans. Community financial institutions were able to begin making First Draw PPP Loans on January 11 and will begin Second Draw PPP Loans on January 13, with wider availability from other lending institutions to follow. The application form for a First Draw PPP Loan can be found here, and the application for a Second Draw PPP Loan can be found here.

Borrowers seeking First Draw PPP Loans will be eligible based upon the requirements previously set forth by the CARES Act and restated in the January 6th Interim Final Rules—including the requirement that the borrower have no more than 500 employees, subject to certain exceptions enumerated in the CARES Act and implementing regulations. The rules governing affiliation, size and payroll calculations for First Draw PPP Loans are discussed here, here and here. Borrowers seeking a Second Draw PPP Loan must have received a First Draw PPP Loan and have used, or will use, the full amount of the First Draw PPP Loan on or before the date on which the Second Draw PPP Loan is expected to be disbursed. In the case of each First Draw PPP Loan and Second Draw PPP Loan, a borrower may elect any length of time between eight and 24 weeks as the “covered period” during which its PPP Loan is to be used for permitted expenses.

Congress has designated $35 billion exclusively for new First Draw PPP Loan borrowers, with $15 billion set aside for borrowers that have no more than 10 employees or are located in low- and moderate-income neighborhoods and are seeking loans of less than $250,000. $25 billion, meanwhile, is set aside for Second Draw PPP Loans for the same categories of borrowers.

Familiar Terms and Conditions
The maximum available loan size for First Draw PPP Loans will continue to be $10 million, with an aggregate cap of $20 million for businesses that are majority owned, directly or indirectly, by a common parent. The SBA will permit all new borrowers to use their 2019 or 2020 average monthly payroll for purposes of calculating their maximum loan amount to ensure that borrowers of new First Draw PPP Loans do not see their permissible loan amounts reduced due to financial distress experienced in 2020.

Second Draw PPP Loans generally are subject to the same terms, conditions and requirements as First Draw PPP Loans, including that no collateral or personal guarantees are required and that the loans will feature a non-compounding interest rate of 1.00% and a five-year maturity. In addition, the SBA’s prior guidance and regulations implementing the PPP (summaries linked above), continue to apply to Second Draw PPP Loans except where expressly superseded.

As with First Draw PPP Loans, the amount of a borrower’s Second Draw PPP Loan is equal to its average monthly payroll costs multiplied by 2.5. However, a borrower in the accommodation and food services industry with a NAICS code beginning with 72 may receive a Second Draw PPP Loan equal to its average monthly payroll costs multiplied by 3.5. In any case, Second Draw PPP Loans are capped at $2 million for any single borrower, with an aggregate cap of $4 million for businesses that are majority owned, directly or indirectly, by a common parent.

Second Draw PPP Loan Details
A borrower that: (i) previously received a First Draw PPP Loan; (ii) met the eligibility criteria for such loan; and (iii) has used, or will use, the full amount of its First Draw PPP Loan on uses authorized under the amended PPP may receive a Second Draw PPP Loan if it meets all of the following requirements:

Size Eligibility
The borrower does not have more than 300 employees, including the employees of any affiliates.

  • Exceptions to size requirements—A business entity (1) that is assigned a NAICS code beginning with 72 or (2) which broadcasts pursuant to a license granted by the Federal Communications Commission under title III of the Communications Act of 1934 may, in each case, be eligible if it has no more than 300 employees per physical location.
  • Affiliation Waiver—Business concerns with a NAICS code beginning with 72 qualify for a waiver of SBA’s affiliation rules for Second Draw PPP Loans if they employ 300 or fewer employees, while news organizations with a NAICS code beginning with 511110 or 5151 (or are majority owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees per physical location. As discussed below, the newly created exception for news organizations also applies to First Draw PPP Loans and specifies a size threshold of 500 or fewer employees.

Business Purpose and Ownership

  • The borrower is not primarily engaged in political activities or lobbying activities, including research or engagement in advocacy in public policy, political strategy, or otherwise describes itself as a think tank in any public documents.
  • No entity created in, organized under the laws of, or has significant operations in China or Hong Kong holds, directly or indirectly, 20 percent or more of the economic interest of the borrower.
  • No member of the board of directors of the borrower is a resident of China.
  • The borrower is not a person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938.
  • The borrower does not meet any of the new ineligibility criteria for First Draw PPP Loans described below in “Modified Eligibility Criteria for First Time PPP Loan Borrowers—Ineligibility Criteria”.

Revenue Reduction
The borrower must have experienced a reduction in gross receipts of at least 25 percent in at least one quarter of 2020 relative to the corresponding quarter in 2019 or, if not in operation in 2019, the first quarter of 2020.

  • For loans greater than $150,000, the borrower must provide documentation to the lender substantiating the decline in gross receipts.
  • For loans of $150,000 or less, the borrower need only provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness or upon the SBA’s request.

A summary of the SBA’s guidance on the calculation of gross receipts is provided at the end of this Alert.

Expanded Eligibility for Certain Organizations

The Economic Aid Act expands eligibility to the following types of organizations previously excluded from participation in the original Paycheck Protection Program:

  • Any nonprofit organization covered by Section 501(c)(6) of the Internal Revenue Code, and that is exempt from taxation under section 501(a) of the Code, and “destination marketing organizations” engaged in marketing and promoting communities and facilities and that derive revenue from life events, so long as:

- in the case of a Section 501(c)(6) organization, such organization is not a professional sports league or an organization whose purpose is promoting or participating in political campaigns;

- the organization does not receive more than 15 percent of its receipts from lobbying activities;

- the lobbying activities of the organization do not comprise more than 15 percent of the total activities of the organization;

- the cost of the lobbying activities of the organization did not exceed $1 million during the most recent tax year of the organization that ended prior to February 15, 2020; and

- the organization employs not more than 300 employees.

  • Nonprofit and tax-exempt news organizations with no more than 500 employees per location, including any organization of any college or university that is a public broadcast entity, that certify the PPP loans will be used to support locally focused or emergency information. The SBA’s affiliation rules are waived for any entity with 500 or fewer employees per location that either has a trade or business under NAICS code 511110 or 5151 or is either majority owned or controlled by a NAICS code 511110 or 5151 business.
  • Housing cooperatives (as defined in Section 216(b) of the Internal Revenue Code) that employ no more than 300 employees.

Ineligibility Criteria
The Economic Aid Act adds ineligibility criteria to exclude certain businesses that might have been eligible under the original PPP, including:

  • Any business that has received or will receive a grant under the Shuttered Venue Operator Grant program under section 324 of the Economic Aid Act. We summarized the Economic Aid Act’s shuttered venue grant provisions here.
  • Any business in which the President, the Vice President, the head of an Executive Department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds 20 percent or more, by vote or value, of the outstanding amount of any class of equity interest.
  • Any business that is an issuer of securities listed on a national securities exchange.
  • Any business that has gone out of business and has no intention of reopening, though any business that has temporarily closed or temporarily suspended its operations, and intends to reopen, remains eligible.

Expanded Permitted Uses of PPP Loans under the Economic Aid Act.
The Economic Aid Act expands the forgivable uses of PPP loans retroactively to include PPP loans issued prior to the Economic Aid Act (unless such loans already have been forgiven). In addition to the uses permitted under the CARES Act (which, generally, are (1) payroll costs, (2) rent, (3) utilities and (4) mortgage interest payments), proceeds of PPP loans used for the following purposes are eligible for forgiveness:

  • Payments for any business software or cloud computing service that facilitates 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;
  • 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;
  • Expenditures made to a supplier for the supply of goods that (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the covered period with respect to the applicable PPP Loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable PPP loan; and
  • Any operating or capital expenditures to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements or guidance issued by a state or local government, during the period starting March 1, 2020, and ending the date on which the national emergency with respect to the COVID-19 expires. Such expenditures must relate to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Despite the additional forgivable uses, at least 60 percent of a borrower’s PPP loan must be used for payroll costs.

Options for Businesses that Returned or Declined PPP Loans
Borrowers that have returned their PPP loans or declined to accept the full amount of loans for which they were eligible also are eligible to obtain new or supplemental loans. A borrower that returned all of its PPP loan may reapply for a PPP loan in an amount for which the borrower is eligible under the amended PPP. A borrower that returned part of its PPP loan may apply to receive an amount equal to the difference between the retained portion of its PPP loan and the PPP loan amount previously approved. A borrower that did not accept the full amount of a PPP loan for which it was approved may request to receive the declined portion of the total amount approved.

Calculation of Gross Receipts

  • Gross receipts consist of all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
  • All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, are not excluded.
  • A borrower with affiliates must include the gross receipts of each affiliate, subject to the following conditions:

- If a borrower has acquired or been acquired as an affiliate in 2020, gross receipts of the affiliate for the entire measurement period must be added unless the acquired entity is a segregable division, in which case only gross receipts following the acquisition need be added.

- If a borrower sold a segregable division during 2020, it must include the receipts from the period prior to the sale. Otherwise, the gross receipts of a former affiliate need not be included.

  • Gross receipts do not include the following:

- taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees);

- proceeds from transactions between a concern and its domestic or foreign affiliates; and

- amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

- Any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020.

- Net capital gains or losses as these terms are defined and reported on IRS tax return forms.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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