PPP Round Deux: Who Qualifies, For How Much, and Forgiveness Changes

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While the President vetoed the 2021 NDAA—and has put COVID relief into question—he has not yet acted on the Consolidated Appropriations Act, 2021, which contained the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Act) dealing with the second round of PPP Loans.  So, while the Act may be in jeopardy of a veto also, it has not yet occurred and, regardless, it is likely many of the PPP Loan provisions contained in the Act will be in any final bill put forward before year end, or early next year even if the veto threat is realized.  Thus, we dug through the 5,500-page bill and pulled out key PPP Loan provisions that so many clients have been asking about.  While this is a preliminary review, we will review key aspects of any future bill once signed by the President and report back on any changes.
 
First, the main question that keeps being asked is whether or not a company can qualify for the second round of loans.  To that point, the new PPP “Second Draw” Loans have different qualification requirements than the original PPP Program.  To begin with, the employee eligibility requirements were reduced from a 500-employee maximum to 300 employees.  But the Act has a separate section for firms with more than one physical location which still uses the original PPP 500-employee standard.  As such, if you have one physical location you must be under 300 employees to qualify while companies with more than one location can have up to 500 employees.
 
More importantly, Congress included a major restriction this time around.  Instead of relying on good faith representations, need, or some vague standard, the Act now states that even if you qualify based on the employee size standards above, you must also be able to show severe losses as compared to 2019.  Specifically, the Act states that companies must have had a reduction in gross receipts of 25% or more in the 1st, 2nd, 3rd, or, for applications submitted after January 1, 2021, the 4th quarter of 2020 as compared to that same quarter in 2019.  If a company can show a 25% drop in gross receipts in any of those quarters (not all, just one of them) and the firm meets the employee size standards, the company should qualify for a “Second Draw” PPP Loan.  As noted, this is a very large change from the first round of PPP Loans and, for many companies, likely takes them out of contention for the new loans.
 
As to the amount of the loan, the Act keeps the basic skeleton of the original PPP Program by allowing maximum loan amounts of 2.5x the company’s payroll, but the Act simplifies the period for calculation.  Instead of all the different “covered periods,” the Act simply states that the borrower may elect to use one of two streamlined calculations: (1) the average monthly payroll of 2019 or (2) the average monthly payroll over the one- year prior to the “Second Draw” loan being made.  This is certainly a welcome change as it is far less complex for borrowers.
 
To be eligible, you must have used, or “will use,” the full amount of the original PPP Loan.  This makes sense as Congress wants to make sure the firms seeking assistance are actually using the money provided to pay employees and maintain the business.  However, the inclusion of “will use” is an interesting choice.  In theory, a company could have taken an original PPP Loan in March, be under 300 (or 500 depending) employees, meet the 25% loss threshold, but, for one reason or another, never spent the money and that firm would still qualify so long as they can make a good-faith representation that they will spend it.  The Act does not specify that the money must be spent during the original PPP “covered period” either (the 8 or 24 weeks).  So, companies may simply agree that they will spend the money at some point as a 1% loan and still qualify.  This seems like an odd loophole, but we shall see if this is revised.
 
Second, aside from eligibility, the Act allows for new expenses to also be paid with PPP funds.  Items like property damage, increased supplier costs, and working protection expenses are now allowable expenses for purposes of the PPP Program.  But, in order to be eligible for full forgiveness, companies must still spend at least 60% of the loan proceeds on payroll costs.  Indeed, the Act has a new forgiveness calculation which directly reduces the loan forgiveness amount by the percentage of the loan proceeds spent on non-payroll expenses over the 40% threshold for such spending.  The Act states that you can be forgiven the lesser of the full loan amount or the amount of the loan spent on payroll and divided by “.6” (i.e., the fraction representing 60%).  Thus, if someone were to take out a $1M loan and then only spend $500K on payroll instead of the requisite $600K, the forgiveness amount would be reduced by approximately $166K to $833K.  This too is a much simpler calculation.
 
Third, there are a number of provisions that require SBA to provide specific guidance in a set number of days (between 10 and 17 days in most cases) to clarify various issues.  One of note is that the Act asks SBA to determine how companies that returned PPP Loan amounts out of fear it could re-apply for PPP Funds.  While the Act does not explicitly state this is for companies that misunderstood the rules or that were too afraid based on all the fearmongering around the first PPP Loan program, it implies that SBA should create rules to help those firms.  In a similar vein, the Act also requires SBA to prepare guidance for firms who were eligible for bigger loans based on guidance issued after the fact; thus, allowing early PPP adopters to perhaps seek additional funds if they under-applied.  It will be interesting to see how this shakes out as we believe this may be a larger issue for government contractors than the “Second Draw” program.
 
Lastly, the bill fixes the tax deduction problem by directly overriding the IRS rulings and stating that any costs paid with PPP Loans, even after forgiveness is received, are still tax-deductible expenses.  There is little doubt this will remain in any bill passed by Congress, so companies should rest assured that they will not be taxed on the PPP Loan proceeds.
 
Again, we will be sure to keep everyone up to date on any changes Congress makes given the President’s veto of the 2021 NDAA, the threat against the Act, and we will certainly bring you updates as we have them.

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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