On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act opened up the Paycheck Protection Program (“PPP”) to additional organizations and authorized a second draw of PPP loans. The U.S. Small Business Administration (“SBA”) has issued guidance on changes to the original Program and new second draw loans, and the Program has been partially reopened for both first and second draw loans as of January 13, 2021. Loans will initially only be available through community financial institutions, but SBA has indicated that additional lenders will once again be able to participate in the Program on January 15, 2021, with a full reopening scheduled for January 19, 2021.
Similar to the Program’s original rollout, a number of questions remain with respect to SBA’s implementation of the Act. SBA is also delaying guidance on changes to loan forgiveness, which may once again place borrowers in the position of taking out loans without knowing whether they will be fully forgiven. However, SBA has now been managing the Program for almost ten months, and borrowers will hopefully not be subject to the same level of policy shifts and reversals that was experienced during the Program’s original rollout.
The Act makes first and second draw loans available until March 31, 2021, but there is a good chance that all available funds will be allocated before that date.
Revisions to First Draw PPP Loans
First draw PPP loans continue to be available from participating lenders for organizations and individuals that have yet to participate in the Program, with the new ability to use 2020 as a reference period for calculating average monthly payroll costs that set loan value. Recipients that previously returned or refrained from accepting all or part of a loan prior to the passage of the Act can also reapply for a first draw loan to account for this loss in value. In addition, existing recipients can apply to increase the value of their loans in certain circumstances when they would have been eligible to receive a larger loan after changes in SBA policy.
First draw loans remain capped at $10 million, with a $20 million aggregate cap that applies to loans received by multiple organizations that are directly or indirectly majority owned by a common parent.
Changes in Eligible Recipients and Applicable Size Standards
The Act makes the following new entities eligible to receive PPP loans:
- nonprofit, state, and local destination marketing organizations;
- housing cooperatives;
- certain news organizations and organizations under their majority ownership or control as long as (a) loan proceeds can be used to support expenses at a business component that produces or distributes locally focused or emergency information and (b) the relevant news organization has a sufficient connection to newspaper publishing, radio networks, radio stations, or television broadcasting; and
- nonprofit 501(c)(6) business associations that receive 15 percent or less of their receipts from lobbying activities, at a maximum cost of $1 million in their most recent tax year before February 15, 2020, excluding professional sports leagues and certain organizations that have a purpose of promoting or participating in political activities.
In general, these organizations still need to meet the SBA’s size standards for the Program, which typically requires that an applicant have 500 or fewer employees when combined with organizations that are considered its affiliates under SBA regulations.
However, housing cooperatives and the 501(c)(6) organizations described above must have 300 or fewer employees, and most news organizations and entities under their majority ownership or control can have 500 or fewer employees at each physical location similar to restaurants and hotels under the rules that remain in effect from the original Program. Certain nonprofit and state college or university public broadcasting entities seem to be exempt from size standards under the Act, but SBA appears to be requiring these entities to have 500 or fewer employees at each physical location.
Some organizations can still rely on higher employee- or revenue-based size standards depending on their industry. In addition, organizations that meet SBA’s “alternative size standard” appear to remain eligible to receive first draw PPP loans, which requires that an applicant and its affiliates have (i) a tangible net worth of $15 million or less and (ii) average net income of $5 million or less, after federal income taxes and excluding carry-over losses, for the two full fiscal years prior to the date of the loan application.
Unlike the original Program, the Act makes publicly traded companies ineligible to receive PPP loans after December 27, 2020. In addition, organizations and individuals are not eligible to receive PPP loans if they receive a “Shuttered Venue Operator Grant,” which is also available under the Act for certain entertainment and cultural operations.
Moreover, PPP loans can no longer be made to organizations in which the President, Vice President, head of a federal Executive department, or a Member of Congress directly or indirectly holds a 20-percent voting or equity interest, including convertible and profits interests and any interest also held by such person’s spouse. These types of organizations may retain PPP loans received before December 27, 2020, but must report that they fall into this category within 30 days of submitting a forgiveness application under the Program or by January 26, 2021 for organizations that already submitted a forgiveness application before December 27, 2020.
Expansion of Eligible Uses and Expenses
The Act does not change the requirement that at least 60-percent of loan proceeds must be spent on payroll costs in order to receive full forgiveness. However, the Act clarifies that certain group life, disability, vision, or dental insurance costs are considered payroll costs under the Program. In addition, the Act expands the permissible uses of PPP loans and non-payroll expenses that are eligible for forgiveness to include:
- Digital Work Environment: payments for business software and cloud computing services that facilitate business operations generally, product or service delivery, certain management of payroll expenses, human resources, sales or billing functions, or certain inventory, supply, record, and expense management costs.
- Public Disturbance Costs: costs related to property damage and vandalism or looting due to public disturbances that occurred in 2020 that are not covered by insurance or other compensation.
- Essential Goods: expenditures for goods that are essential to a recipient’s operations at the time at which an expenditure is made and involve either perishable goods or goods purchased under certain existing agreements.
- Workplace Safety: operating or capital expenditures made between March 1, 2020 and the end of the President’s declaration of a national emergency for COVID‑19 for the purpose of adapting business activities to comply with federal requirements or guidance—or state counterparts—relating to sanitation, social distancing, or other worker or customer safety requirements to address COVID‑19. Expenditures on residential real property or intangible property (e.g., intellectual property) are not eligible under this category.
The Act expressly prohibits the use of loan proceeds for lobbying activities. In addition, SBA has clarified that improper use of Program funds will result in a demand for repayment, with the potential for additional liability including fraud charges if Program funds are knowingly misused.
Changes to Forgiveness
With respect to forgiveness of PPP loans, the Act changes the prior election between 8-week and 24‑week forgiveness periods to allow recipients to elect any forgiveness period ranging from 8 to 24 weeks.
This change should allow recipients to avoid lingering uncertainty that previously resulted when a recipient incurred enough expenses to support full forgiveness between 8 and 24 weeks after receiving a loan. In such circumstances, recipients could apply for forgiveness early, but had to consider lingering issues like whether their forgiveness amount would be reduced based a decrease in employees before a 24-week forgiveness period expired.
Advances of Economic Injury Disaster Loans or “EIDLs” also no longer need to be subtracted from a recipient’s final forgiveness amount. In addition, the Act overrules prior Internal Revenue Service guidance and confirms that expenses identified to support forgiveness can be deducted for tax purposes. However, the Act did not clarify whether these types of expenses can be reimbursed under government contracts, which the U.S. Department of Defense continues to prohibit.
Separately, the Act simplifies the forgiveness application and process for loans valued at $150,000 or less. Now, recipients of these loans only need to describe the number of employees they were able to retain as a result of receiving a loan, with an estimate of the amount of the loan spent on payroll costs, a commitment to retain relevant records, and a certification that they complied with the Program’s requirements.
SBA appears to still intend to audit whether recipients of PPP loans valued at $2 million or more were justified in certifying that economic uncertainty necessitated the submission of an application for a PPP loan. Additional details about how SBA will handle this issue and the revised forgiveness process generally is expected in the future.
New Second Draw PPP Loans
Under the Act organizations and individuals that have received an initial PPP loan will also now be eligible to receive a single second draw loan if they:
- used or will use the full value of their initial loan by the date on which a second draw loan is expected to be disbursed;
- have 300 or fewer employees, which can be per location for the first-draw exceptions covering restaurants, hotels, and news organizations; and
- suffered a 25-percent reduction or more in gross “receipts,” which is roughly equivalent to revenue, based on (a)a comparison of 2020 to 2019 revenue in the aggregate or in the same two quarters in each of these years or (b) one of a number of alternative comparisons for organizations that were not in business for all of 2019.
Importantly, SBA has not indicated that higher employee- or revenue-based size standards can be used to qualify for second draw loans. In addition, SBA has not stated that the “alternative size standard” applicable to first draw loans can be relied on to qualify for second draw loans.
SBA has also adopted a definition of “receipts” that applies in other small business programs and requires the receipts of all affiliates to be aggregated for this purpose. As a result, unless SBA issues contrary guidance in the future, it currently appears to contemplate that organizations will be eligible for second draw loans based on the revenues of their entire affiliated group.
For example, an organization that meets the receipt standard individually does not appear to qualify if its affiliates’ receipts offset the organization’s receipts to prevent the affiliated group from meeting the 25-percent threshold. Similarly, an organization that does not meet the receipt standard individually appears to qualify if its affiliates suffered significant reductions in receipts that would bring down the affiliated group’s total to meet the 25-percent threshold.
Notably, first draw PPP loans are specifically excluded from gross receipts, but SBA has not indicated that other forms of COVID relief can similarly be excluded.
Applicants are required to provide documentation of gross receipts when they submit an application for a second draw loan valued at more than $150,000. For second draw loans valued at $150,000 or less, this documentation is not required until an applicant requests forgiveness. SBA has indicated that tax forms, quarterly financial statements, or bank statements would be sufficient to demonstrate a reduction in receipts, and SBA may ultimately even be willing to accept an affidavit or other forms of documentation based on guidance that applies to related small business programs.
Except as noted, second draw loans are generally subject to the same requirements as first draw loans.
Second Draw Loan Ineligibility
Under the Act, applicants for second draw loans are ineligible if:
- Ownership with Ties to China or Hong Kong: an organization created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or having significant operations in these areas, directly or indirectly owns or hold at least 20 percent of the economic interest in the applying organization;
- Chinese Resident Board Members: the applicant has a member of its board of directors who is a resident of the People’s Republic of China; or
- Foreign Agents: the applicant is required to register under the Foreign Agents Registration Act, 22 U.S.C. § 612.
In addition, the Act specifically notes that entities that are ineligible based on being primarily engaged in political or lobbying activities include certain organizations that pursue related research or public advocacy or political strategy, including organizations that describe themselves as “think tanks.”
SBA has also indicated that it will refuse to provide a loan number and guarantee for a second draw loan application if the applicant is under review by SBA for potentially being ineligible to receive a first draw loan. However, SBA has suggested that it will at least set aside funds to support issuing a second draw loan if SBA’s review is resolved in an applicant’s favor.
Second Draw Loan Amounts
Similar to first draw loans, the value of second draw loans is determined by multiplying 2.5 by the average monthly payroll of an applicant for 2019, 2020, or the one-year period preceding the date of an application.
However, in contrast to first draw loans, second draw loans are capped at $2 million instead of $10 million, and organizations assigned a North American Industry Classification System or “NAICS” code under Section 72 (e.g., restaurants and hotels) can use a multiplying factor of 3.5 instead of 2.5. In addition, organizations that are directly or indirectly owned by a common parent are subject to an aggregate cap of $4 million instead of $20 million.