SBA Issues Guidance on Next Round of PPP Loans, But Questions Remain

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The Small Business Administration (SBA) has released updated Paycheck Protection Program (PPP) interim final rules which implement and provide additional guidance on the new PPP provisions contained in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act, or “EAA.”) The EAA reopens the Paycheck Protection Program through March 31, 2021 and includes changes to the underlying PPP rules and the authorization of “Second Draw PPP Loans.” The SBA issued a set of interim final rules addressing each of those components. While the much-anticipated rules provide significant guidance, several additional questions that borrowers may have remain unanswered to date.

Changes to PPP Eligibility

The EAA and subsequent interim final rules expand the set of eligible borrowers under the PPP to include: (1) housing cooperatives (as defined in Section 216(b) of the Internal Revenue Code) that do not employ more than 300 people; (2) certain news organizations that employ not more than 500 employees per physical location and have an assigned NAICS code beginning with 511110 or 5151; (3) certain 501(c)(6) organizations that are exempt from taxation under Section 501(a) of the Internal Revenue Code, employ not more than 300 people, and do not exceed the identified limits on lobbying activities; (4) certain destination marketing organizations that do employ more than 300 people and do not exceed the identified limits on lobbying activities.

The EAA and interim final rules also contain new restrictions on eligibility for PPP Loans, providing that the following entities are ineligible: (1) businesses that were not in operation on February 15, 2020; (2) any business that received a grant for shuttered venue operators under the EAA; (3) otherwise eligible businesses in which certain members of the executive and legislative branches of the federal government, or their spouse, owns or controls a 20 percent stake; (4) publicly traded companies; and (5) any business that has permanently closed.

These new eligibility provisions apply both to new First Draw PPP Loans and Second Draw PPP Loans. As discussed below, Second Draw PPP Loan borrowers must also meet additional eligibility criteria.

Changes to Eligible and Forgivable Expenses and the Covered Period

Prior to the EAA, PPP loan proceeds could be used for payroll costs (including the cost of employee benefits), mortgage interest payments, rent payments, utility payments, interest payments on any other debt obligations incurred prior to Feb. 15, 2020, and refinancing an SBA EIDL loan made between Jan. 31, 2020 and April 3, 2020.

The EAA and subsequent interim final rules add the following four new categories of eligible expenses:

  • “Covered operational expenses,” which are defined as 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.
  • “Covered property damage costs,” which are defined as costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
  • “Covered supplier costs,” which are defined as expenditures made by a borrower to a supplier for goods that are essential to the operations of the borrower at the time at which the expenditure is made and is made pursuant to a contract, order, or purchase order that was either (i) in effect at any time before the covered period of the loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period of the loan.
  • “Covered worker protection expenditures,” which are defined as operating or capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements or guidance established or issued by federal, state, or local authorities pertaining to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

These four (4) additional allowable expenses are also eligible for forgiveness. However, the requirement that at least 60 percent of loan proceeds go to covered payroll costs remains.

The EAA also redefined the “covered period” (the period during which money spent on forgivable costs are eligible for forgiveness.) Previously, the “covered period” for forgiveness was the 24-week period starting on the date the borrower received the loan proceeds (a borrower that received the loan prior to June 5, 2020 could elect to utilize the original 8-week covered period or the new 24-week covered period implemented by the PPP Flexibility Act). The covered period still starts on the day a borrower receives the PPP loan proceeds, but now borrowers can choose an end date for the covered period that falls anywhere between 8 and 24 weeks after the start of the covered period.

These new additional eligible costs and changes to the covered period apply to Second Draw PPP Loans and First Draw PPP Loans as long as the SBA has not remitted a loan forgiveness payment to the lender for First Draw PPP Loan prior to December 27, 2020.

Second Draw PPP Loans

In order to be eligible for a Second Draw PPP Loan, a borrower must: (1) be an eligible entity that received a First Draw PPP Loan; (2) employ, together with any affiliates, 300 or fewer total employees, except for businesses in the accommodation or food service industry with a NAICS code beginning with 72, which must have 300 or fewer employees at each physical location; (3) have used, or will use, the full amount of the First Draw PPP Loan on eligible expenses on or before the date the Second Draw PPP Loan will be disbursed; and (4) have experienced a qualifying revenue reduction in 2020 relative to 2019 of at least 25 percent.

In order to calculate the revenue reduction, the borrower must compare its quarterly “gross receipts” for any one quarter in 2020 with its “gross receipts” for the corresponding quarter of 2019. Alternatively, the borrower may compare annual gross receipts in 2020 with annual gross receipts in 2019. “Gross Receipts” is defined to include all revenue in whatever form received or accrued (in accordance with the borrower’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. Generally, receipts are considered “total income” (or in the case of a sole proprietorship or independent contractor, “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms. Gross receipts also do not include the amount of forgiveness received for a First Draw PPP Loan. Significantly, borrowers with affiliates must include the gross receipts of any affiliates to determine whether a qualifying revenue reduction occurred. Special rules apply for entities that were not in business for 2019 or entities that added or lost affiliates during 2020.

Generally, the maximum loan amount for a Second Draw PPP Loan is the lesser of 2.5 times the average total monthly payroll costs incurred by the borrower during 2019 or 2020 (at the election of the borrower) or $2 million. However, for borrowers in the accommodation or food service sector with an NAICS code beginning with 72, the maximum loan amount is the lesser of 3.5 times the average total monthly payroll costs incurred by the borrower during either 2019 or 2020 (at the borrower’s election) or $2 million. New special rules apply for seasonal borrowers that take the cyclical nature of their payroll into account when determining the maximum amount of a Second Draw PPP Loan.

Next Steps and Remaining Issues

If the SBA has not remitted a loan forgiveness payment to the lender for a First Draw PPP Loan prior to Dec. 27, 2020, First Draw PPP Loan borrowers that did not previously expect to receive 100 percent forgiveness should immediately review the new eligible expenses and changes to the covered period to determine whether they may be eligible for increased forgiveness. Borrowers that are pursuing a Second Draw PPP Loan should begin working with their accountants, attorneys, and payroll providers to ensure they meet all eligibility requirements for a Second Draw PPP Loan and to calculate the maximum amount of that loan.

While many borrowers are eager to submit for and receive their Second Draw PPP Loan, they should remember that all aspects of the forgiveness rules for these loans are not yet clear. For example, while the interim final rules generally indicate that the existing forgiveness rules will apply to Second Draw PPP Loans, we do not know how any loss of forgiveness due to a reduction in employees or reduction in salary/wages will be calculated or how the existing “safe harbors” to avoid such a loss of forgiveness will be applied. Similar to the initial PPP process, this puts borrowers in the position of applying for and obtaining loans before they are clear about the rules governing forgiveness.

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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