The Paycheck Protection Program and The Economic Aid Act: What Does it all Mean?

Signed into law on December 27, 2020, The Consolidated Appropriations Act, 2021 included $900 billion in stimulus relief, including $284 billion of additional Paycheck Protection Program (PPP) funding via the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act). Those that did not receive a First Draw PPP Loan (or that decided to return a First Draw PPP Loan in full or in part), or were not previously eligible can apply for a First Draw PPP Loan through March 31, 2021. Some borrowers may be able to increase the amount of their First Draw PPP Loan. In addition, those that did receive a First Draw PPP Loan may also be eligible to apply for a Second Draw PPP Loan through March 31, 2021.

On January 6, 2021, the Small Business Administration (SBA) issued policy guidance (Interim Final Rules) on changes to the PPP for First Draw PPP Loans and Second Draw PPP Loans. The SBA also released new loan application forms SBA FORM 2483 (first draw) and SBA FORM 2483-SD (second draw). Existing and potential new PPP borrowers will want to become familiar with these documents. Below is a summary of some key updates to the forms:

Classes of Borrowers

The Economic Aid Act expanded the list of eligible borrowers for First Draw PPP Loans to include:

• Housing Cooperatives
• Nonprofit News Organizations
• Destination Marketing Organizations
• 501(c)(6) Organizations

But just as the Economic Aid Act giveth, it also taketh away. New classes of borrowers that are not eligible for Second Draw PPP Loans (or First Draw PPP Loans on or after December 27, 2020) include:

• Entities receiving a grant under the Shuttered Venue Operator Grant program (Sec. 324 of the Economic Aid Act)
• Entities directly or indirectly controlled by the President, the Vice President, the head of an Executive Department, or a Member of Congress (including spouses)
• Entities listed on a national securities exchange
• Entities that have permanently closed with no intention of reopening

Forgiveness Regime

The PPP loan forgiveness regime also got a facelift under the Economic Aid Act. The universe of forgivable costs was expanded (retroactively), and the long-anticipated break for those that borrowed $150,000 or less has come to fruition.

Many have asked whether forgivable non-cash compensation costs can include employer-paid life and/or disability insurance premiums. We now know the answer is yes. Other expansions of the list of forgivable costs include the following:

1. Covered operations expendituresⁱ
2. Covered property damage costs associated with 2020 public disturbancesⁱⁱ
3. Covered supplier costsⁱⁱⁱ
4. Covered worker protection expenditures

For PPP loans of $150,000 or less, the forgiveness process was streamlined. As of January 15, 2021, the SBA had not published the form for this new simplified forgiveness threshold. However, according to the Economic Aid Act, it is expected to be a one-page form (similar to Form 3508S) requiring the borrower to attest to complying with PPP requirements and report information such as its loan amount, the number of employees retained and the estimated amount of the loan spent on payroll.

Also under the Economic Aid Act, the CARES Act provision requiring Economic Injury Disaster Loan (EIDL) advance amounts received by a PPP borrower to be deducted from the PPP loan forgiveness is repealed. If a PPP borrower had its EIDL advance amount deducted from its forgiveness for a PPP loan already forgiven by the SBA, the SBA will return that amount.

Another change has to do with the forgiveness covered period. The forgiveness covered period now has a more flexible definition: “the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.” The alternative payroll covered period, which gave PPP borrowers with a bi-weekly (or more frequent) payroll schedule the option of aligning the start of their forgiveness covered period with the first day of their first pay period following their loan disbursement date, is eliminated under the Economic Aid Act.

Second Draw PPP Loans

Like First Draw PPP Loans, up to 100% of a Second Draw PPP Loan (principle and accrued interest) may be forgiven if required conditions are met. While a limited number of lenders have already begun accepting Second Draw PPP Loan applications, all other PPP lenders are expected to begin accepting applications on Tuesday, January 19, 2021. The program runs through March 31, 2021. Here’s what you need to know regarding eligibility, loan amounts, loan terms and documentation:

Eligibility

You are generally eligible for a Second Draw PPP Loan if you:

1. Received a First Draw PPP Loan and have used, or will use, the full amount on or before the expected disbursement date of the Second Draw PPP Loan;
2. Have 300 (not 500) or fewer employees across all locations and affiliates (certain borrowers such as hotels and restaurants will use 300 employees per location); and
3. Experienced a decrease in gross receipts in 2020 relative to 2019 of 25% or more in any quarter or in total.

What is considered gross receipts for the purposes of the 25% decrease requirement?

Gross receipts include all revenues, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Gross receipts do not include taxes collected for and remitted to a taxing authority, proceeds from transactions between domestic or foreign affiliates, amounts collected for another, or loan forgiveness related to a First Draw PPP Loan. The method of accounting used to calculate gross receipts may be clarified by subsequent guidance. The Interim Final Rule on Second Draw PPP Loans indicates:

• For eligible nonprofit entities, gross receipts generally has the meaning in section 6033 of the Internal Revenue Code of 1986.
• For other borrowers, gross receipts are defined “consistent with the definition of receipts in 13 C.F.R. 121.104 of SBA’s size regulations because this definition appropriately captures the type of income that is typically included in a small business’s gross receipts.”

For purposes of determining if gross receipts decreased by 25% or more, borrowers compare the gross receipts for one calendar quarter in 2020 (such as the second quarter of 2020) to the same quarter of 2019. For example, an applicant that had gross receipts of $30,000 in the second quarter of 2020 and had gross receipts of $50,000 in the second quarter of 2019 experienced a 40% decrease.^iv

Alternatively, borrowers may utilize a year-over-year comparison of 2020 to 2019 (calendar years).

Keep in mind that there remains a required certification that current economic uncertainty makes the loan request necessary to support ongoing operations.

Loan Amount

Second Draw PPP Loan amounts are determined based on average monthly payroll costs, measured over either (i) the 12-month period prior to applying for the loan^v or (ii) calendar year 2019.^vi Payroll costs for this purpose include cash compensation limited to $100,000 on an annualized basis, as well as certain employer-paid benefits.

The loan amount is then calculated by multiplying average monthly payroll costs by a factor of 2.5. Entities with a NAICS code beginning with 72 (accommodation and food services sector) will use a factor of 3.5. The maximum loan amount is $2,000,000 (or $4,000,00 for a group of affiliates).

Loan Terms

Like First Draw PPP Loans, loan maturity for Second Draw PPP Loans is five years after the disbursement date. The interest rate is also unchanged, at 100 basis points or 1.00%. However, The Economic Aid Act stated that the interest on PPP loans made on or after December 27, 2020, is calculated on a “non-compounding, non-adjustable basis.” For PPP loans made prior to December 27, 2020, the “non-compounding, non-adjustable basis” interest rate would require the mutual agreement of the PPP borrower and PPP lender.

Documentation

Based on the foregoing, what documentation will need to be submitted with the loan application in order to substantiate a borrower’s decrease in gross receipts and average monthly payroll costs?

To substantiate a decrease in gross receipts, documentation may include annual tax forms, quarterly financial statements or bank statements. If the borrower opts for the year-over-year comparison of 2020 to 2019, then annual tax forms are to be submitted. For loans of $150,000 or less, documentation is not required with the loan application, but rather will be required with the loan forgiveness application.

With respect to average monthly payroll costs, if calendar year 2019 payroll costs are used to calculate the Second Draw PPP Loan amount, then the borrower shouldn’t need to resubmit this information provided that (i) the same lender is used and (ii) the First Draw PPP Loan application was also based on calendar year 2019 payroll costs. Otherwise, the borrower would submit Form 941 and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (or equivalent reports), along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions. In addition, a partnership would include its IRS Form 1065 K-1s.

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[i] These costs seem to be limited to payments for specified software or cloud computing services.

[ii] To the extent not covered by insurance.

[iii] Forgivable supplier costs generally must be essential to operations and made pursuant to a contract, order, or purchase order.

[iv] Refer to the IFR on Second Draw PPP Loans for additional examples if the entity was in operation as of 2/15/20, but not 2019 or not all quarters of 2019.

[v] SBA guidance indicates that borrowers may use calendar year 2020 in place of the 12-month period prior to the application.

[vi] First Draw PPP Loan amounts are calculated using average monthly payroll costs for either (i) calendar year 2020 or (ii) calendar year 2019.