Paycheck Protection Program

The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. The legislation includes another $284 billion in funding for forgivable loans through the Paycheck Protection Program (PPP) for both first-time and second draw borrowers. The following are highlights from interim guidance published by the SBA:

• provide an opportunity for businesses to receive an initial PPP if they did not seek one in 2020
• allow existing PPP borrowers (except for borrowers who have already received forgiveness) to spend proceeds on additional forgivable expenses, including business software, personal protective equipment, and other operating or capital expense to comply with public health directives
• create a simpler forgiveness process for loans under $150,000
• allow small and hard-hit businesses to apply for a second loan, known as “PPP Second Draw” loans

Businesses eligible for First Draw and Second Draw PPP Loans include:

• any small business concern that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)
• sole proprietors
• independent contractors
• self-employed individuals
• certain non-profits (the new bill has expanded eligible businesses to include certain 501(c)(6) non-profit organizations)
• seasonal employers; the new bill has clarified the definition of these to be businesses that operate no more than seven months within a year or earn no more than a third of gross receipts within a six-month period
• faith-based organizations that have less than 150 employees
• housing cooperatives that employ less than 300 people

To be eligible for a First Draw PPP Loan (for those that did not receive PPP funding in 2020):

• your business has less than 500 full-time, part-time, or seasonal employees
• your business was operational before February 15, 2020 and remains operational

To be eligible for a Second Draw PPP Loan (for those that received PPP funding in 2020):

• your business has less than 300 full-time, part-time, or seasonal employees; if you have multiple locations, you may not have more than 300 employees per location
• you are able to demonstrate a revenue reduction of at least 25% in the first, second, or third quarter of 2020 (when compared with the same quarter in 2019)
• you have used or will use the full amount of your initial PPP loan
• your business was operational before February 15, 2020 and remains operational

Overview

Unlike PPP loans made prior to August 8, 2020, new first-time applicants, including farmers and ranchers, will have the ability to use either 2019 or 2020 when calculating their maximum loan amount. The maximum loan amount remains the lesser of 2.5x average monthly payroll or $10 million.

Covered eligible expenses are expanded and now include:

• Payroll costs
• Rent
• Mortgage interest
• Utilities
• Operations expenditures
• Property damage costs
• Supplier costs, and
• PPE (for worker protection) expenditures.

Eligibility Requirements

Eligible applicants that did not receive a PPP loan prior to August 8, 2020 will have the ability to apply for a PPP First Draw Loan on or before March 31, 2020. Businesses will need to prove they were in operation on February 15, 2020, are not permanently closed, and are not excluded based on other ineligibility criteria.

In addition to previous eligibility criteria, the Econmic Aid Act included expanded eligiblity for:

• select 501(c)(6) organizations
• housing cooperatives
• detination marketing organizations, and
• select nonprofit news organizations with fewer than 500 employees that have a NAICS code beginning with 511110 or 5151.

501(c)(6) organizations are eligible to receive a PPP Loan provided they do not derive more than 15% of their revenue from lobbying, lobbying activities make up loess than 15% of the business' total activity, lobbyng activites did not exceed a cost of $1,000,000 during 2019, and the organization has fewer than 300 employees.

For purposes of expanded eligiblity, housing cooperatives are defined in section 216(b) of the Internal Revenue Code.

Destination Marketing Organizations are eligible to receive a PPP Loan provided they do not derive more than 15% of their revenue from lobbying, lobbying activities make up loess than 15% of the business' total activity, lobbyng activites did not exceed a cost of $1,000,000 during 2019, and the organization has fewer than 300 employees.

Additional Resources

• SBA FAQ on First Draw PPP Loans published January 17, 2021

Overview

Most entities may borrow 2.5 times their monthly payroll cost or $2 million, whichever is less. A borrower in the Accomodation and Food Services sector, with NAICS code beginning with 72 (e.g. resturant), may borrow 3.5 times its monthly payroll costs.

Second Draw PPP Loans are generally subject to the same terms, conditions, and requirements as First Draw PPP Loans. These include:

• The government guarantee percentage is 100%.
• No collateral is required.
• No personal gaurantees are required.
• The interest rate is 1.00%, calculated on a non-compounding, non-adjustable basis.
• The maturity is five years.

Eligilbity Requirements for Borrowers for Second Draw PPP Loans

A borrower is eligible for a Second Draw PPP Loan only if the borrower satisfies all of the following:

• Is a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw PPP Loan, veterans organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization;
• Has 300 or fewer employees;
  • Exception: A business with a NAICS code beginning with 72 and eligible news organizations with more than one physical location (and each location has no more than 300 employees);
• Experienced a revenue reduction of 25% or greater in 2020 relative to 2019;
• Previously received a First Draw PPP Loan;
• Has used, or will use, the full amount of the First Draw PPP Loan (on eligible expenses under the PPP rules) the borrower previously received, on or before the expected date on which the Second Draw PPP loan is disbursed to the borrower.
  • The "full amount" includes the amount of any increase on the borrower's First Draw PPP Loan made pursuant to the Economic Aid Act.

The same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP Loans. In most cases, a borrower is considered together with its affiliates to determine eligiblity for the PPP. The CARES Act waived the affiliation rules for certain categories of borrowers, and the Small Business Act, as amended by the Economic Aid Act, applies the same waivers to Second Draw PPP loans, adds a waiver for certain eligible news organizations, and makes adjustments to reflect the reduced size requirement for Second Draw PPP Loans.

Excluded Entities

In an addition to the list of entities that are ineligible to receive a First Draw PPP Loan, the Economic Aid Act also prohibits the following from receiving a Second Draw PPP Loan:

• Business primarily engaged in political or lobbying activites;
• Business created under Chinese or Hong Kong laws or who has a Chinese resident on the business' board of directors;
• Registered foreign agents;
• Entity that received a grant for shuttered business operators;
• Entity where the President, Vice President, executive agency head, member of Congress, or spouse of such person, holds a controlling interest in the company;
• Publically traded company;
• Previous recipient of a Second Draw PPP Loan;
• Entity that has permanently closed.

Calculation of 25% Revenue Reduction

To be eligible for a Second Draw PPP Loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 realtive to 2019. That revenue reduction is to be calculated as follows:

• The borrower had gross receipts during the first, second, third, or fourth quarter in 2020 that demonstrate at least a 25% reduction from the applican't gross receipts during the same quarter in 2019.
• If the borrower was not in business during the first or second quarter or 2019, but was in business during the third and fourth quarters of 2019: the applicant must have gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the applicant's gross receipts during the third or fourth quarter of 2019.
• If the borrower was not in business during the first, second, or third quarter of 2019, but was in business during the fourth quarter of 2019: the applicant must have gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the fourth quarter of 2020.
• If the borrower was not in business during 2019, but was in operation on Feburary 15, 2020: the borrower must have gross receipts during the second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the gross receipts of the entity during the first quarter of 2020.
• A borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.

Calculation of gross receipts:

• Gross receipts includes all revenue in whatever form received or accrued from whatever source. Generally, receipts are "total income" plus "cost of goods sold" and excludes net capital gains or losses. Gross receipts do not include taxes if already included in income, proceeds from transactions between a concern and its affiliates, and amounts collected by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder, or customs broker.
• The amount of any forigven First Draw PPP Loan shall not be included toward any borrower's gross receipts.

Maximum Loan Amount

Generally, the maximum amount of a Second Draw PPP Loan is the lesser of 2.5 months of the borrower's average monthly payroll costs or $2 million. As part of the loan process, the borrower must certify that they have provided documentation verifying the number of full-time equivalent employees on payroll at the time of application.

Unlike First Draw PPP Loans, the relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP Loan is either (a) the 12-month period prior to when the loan is made, or (b) calendar year 2019.

The SBA provides separate formulas for calculating the maximum amount of a Second Draw PPP Loan provided to the following:

• Seasonal employer;
• Employer that did not exist during the 1-year period preceding February 15, 2020;
• Borrower assigned a NAICS code beginning with 72 (i.e., restaurant);
• Farmer or rancher;
• Borrower with self-employment income;
• Borrower that files taxes as a partnership.

Businesses that are part of a single corporate group may not receive more than $4 million of Second Draw PPP Loans in the aggregate.

A borrower in the Accommodation and Food Services sector, with NAICS code beginning with 72, may borrow 3.5 times its monthly payroll costs.

Additional Resources

• SBA FAQ on Second Draw PPP Loans published January 19, 2021