In response to the continued market disruption and economic impact of the COVID-19 pandemic, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, or the Act, on December 21, 2020 as a part of the Consolidated Appropriations Act, 2021, which provides additional funding to small businesses under the Paycheck Protection Program, or PPP, allows eligible borrowers to receive a second draw loan, simplifies loan forgiveness for loans under $150,000 and classifies forgiven PPP loans as tax deductible.
The Act provides for an additional $284 billion of funding for additional PPP loans through the Small Business Administration, or the SBA, and allows the hardest-hit small businesses to receive a second draw forgivable PPP loan. In order to be eligible for a second draw loan, the small business must (i) have received a PPP loan; (ii) used or will use the full amount of the existing PPP loan on or before the second draw loan is disbursed; (iii) have 300 or fewer employees; and (iv) sustained a 25% revenue loss in any full quarter of 2020, as compared to that same quarter in 2019.
The maximum second draw loan under the Act is the lesser of $2,000,000 or:
- For non-seasonal employers, the average total monthly payment for payroll costs for either, as determined by the borrower, (i) the one year period before the date of the loan or (ii) calendar year 2019, multiplied by 2.5.
- For seasonal employers, the average total monthly payment for payroll costs incurred or paid by the borrower for any 12-week period between February 15, 2019 and February 15, 2020 as chosen by the borrower, multiplied by 2.5.
- For an entity that is assigned a North American Industry Classification System code beginning with 72 (accommodation and food services), the average total monthly payment for payroll costs for either, as determined by the borrower, (i) the one year period before the date of the loan or (ii) calendar year 2019, multiplied by 3.5.
Business are only allowed to receive one second draw PPP loan. Additionally, the Act clarifies that a business or organization that was not in operation on February 15, 2020 is ineligible for a loan, as is a person or business that receives a grant under the Shuttered Venue Operator Grants. Publicly-traded businesses and entities affiliated with the People’s Republic of China cannot qualify for a new PPP loan.
The Act expands eligible expenses for both existing loans and second draw loans to include:
- group life insurance, disability, vision or dental insurance;
- payment for any business software or cloud computing service that facilitates business operations;
- costs related to property damage from vandalism or looting due to public disturbances in 2020, which expenses were not covered by insurance;
- supplier costs which are essential to operations or made pursuant to a contract in effect at the time of the PPP loan; and
- operating or capital expenditures made to comply with requirements or guidance published by the Department of Health and Human Services, the Centers for Disease Control, Occupational Safety and Health Administration, or any state equivalent from March 1, 2020 until the President ends the national emergency related to COVID-19 (such as drive-through windows, air or filtration units, physical barriers, PPE, or expansions of outdoor space).
The changes to eligible expenses are not applicable to PPP loans which were forgiven before the date of the Act.
The Act instructs the SBA to release guidance permitting borrowers that would have been eligible to receive more under the PPP to modify their loans and request an increase regardless of whether the initial PPP amount has been disbursed or the lender has submitted its Form 1502 to the SBA related to the covered loan.
Consistent with the SBA’s guidance to date, the Act simplifies the loan forgiveness application for borrowers with existing PPP loans or second draw loans of $150,000 or less. The simplified one-page loan forgiveness application will only require the borrower to provide:
- a description of the number of employees the borrower was able to retain because of the loan;
- the estimated amount of the covered loan spent by the borrower on payroll costs;
- the total value of the loan; and
- an attestation that the borrower accurately provided the required certification and complied with the PPP.
The Act provides that not only are forgiven PPP loan amounts not to be included as income to the recipient, but no deduction shall be denied as a result of this exclusion from income. This sets the stage for a reversal of an unpopular IRS ruling that states that business expenses paid using forgiven PPP funds could not be counted as deductible business expenses.
Under the Act, small 501(c)(6) organizations will also be eligible, so long as they are not are not lobbying organizations and have 300 employees or fewer, and certain non-profit destination marketing organizations engaged in marketing and promoting communities or facilities to leisure travelers will also be eligible. In addition, the Act includes specific set-asides for small businesses with 50 or fewer employees and underserved communities, including Community Development Financial Institutions, credit unions, small community banks, Minority Depository Institutions, farm service lenders and the Minority Business Development Agency. The Act also provides funding for independent live venue operators affected by COVID-19 stay-at-home orders under the Shuttered Venue Operator Grants.