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$284 Billion PPP Funding Deep Dive

  • Written by Steel Rose

On Monday, December 21, 2020, the House and Senate passed the second largest stimulus bill in United States history (only second to the CARES Act), which provides $892 billion in pandemic relief, including $284,450,000,000 in funding for additional loans under the Paycheck Protection Program (PPP).

As part of Congress’ sprawling 5593-page legislation (the Consolidated Appropriations Act, 2021), which also funds the government through September 30, 2021, is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (hereinafter, the “Economic Aid Act”). The Economic Aid Act can be found at Sections 301 through 348 of the Consolidated Appropriations Act, 2021. It serves to modify certain PPP rules for existing loans, as well as provide more than $284 billion in new loan funding, under new qualification rules, available through March 31, 2021 (or until the money runs out).

Retroactive Effect for Round One of PPP

Certain changes apply retroactively, as if they were part of the CARES Act, passed on March 27, 2020, and therefore apply to existing loans and new loans. Most of the retroactive changes will be well received by borrowers, and include the following:

A. Eligible Nonpayroll Expenses

Nonpayroll expenses eligible for loan forgiveness were previously limited to covered payments of: (1) interest on mortgage obligations; (2) rent; and (3) utilities. The Economic Aid Act expands this list to include four additional categories:

  • Operations expenditures (i.e., business software or cloud computing services);
  • Property damage (resulting from vandalism or looting during 2020);
  • Supplier costs (payments to suppliers of goods, if certain terms are met); and
  • Worker protection expenditures (e.g., renovations, PPE).

The existing requirement to utilize at least 60 percent of the loan for payroll expenses, however, still applies and will likewise apply to new loans.

B. Eligible Payroll Expenses

Payroll expenses previously included “payment required for the provision of group health care benefits, including insurance premiums.” The Economic Aid Act expands these eligible expenses to include “payment required for the provision of group health care or group life, disability, vision, or dental insurance benefits, including insurance premiums.” This change clarifies ambiguity in the prior provision, and also expands coverage to other types of insurance that are often paid by employers.

C. Simplified Loan Forgiveness for Loans of $150,000 and Less

Section 307 of the Economic Aid Act instructs the Small Business Administration (SBA) to create a certification that is no more than one page in length for the forgiveness of loans in the amount of $150,000 or less. Such borrowers must still certify to compliance with PPP requirements; however, they will only be required to maintain documentation of compliance, rather than submitting additional—and time consuming—material to the lender at the time of loan forgiveness.

Congress also instructed the SBA to submit an audit plan within 45 days that details its plan for the review of loans greater than $150,000, including the policies and procedures it will use to conduct loan forgiveness reviews and audits, as well as the metrics it will use to determine which loans to audit.

D. Repeal of EIDL Advance Reduction

Certain borrowers received both a PPP loan and a loan under the Economic Injury Disaster Loan (EIDL) Program. An EIDL must be repaid, however these loans also provide an advance grant of up to a $10,000 which need not be repaid. Borrowers receiving this advance, however, were previously required to subtract it from their eligible PPP loan forgiveness amount, requiring them to repay the advance back to the SBA.

This result seemed fundamentally unfair and Congress has fixed it by repealing the EIDL advance deduction. Congress also funded an additional $20 billion in EIDL advance funds to enable new EIDL borrowers to receive EIDL advances through December 31, 2021.

E. Repeal of IRS Prohibition on Deductibility

In a prior client alert, we discussed the Internal Revenue Service’s (IRS) position that otherwise deductible business expenses paid with PPP loan funds could not be deducted. This would have had a significant impact on borrowers’ 2020 tax bills and the IRS’ position received bipartisan opposition in Congress.

As part of the COVID-related Tax Relief Act of 2020, also contained in the Consolidated Appropriations Act, 2021, Congress overruled the IRS’ position. In Section 276, titled “Clarification of Tax Treatment of Forgiveness of Covered Loans,” Congress provided that any amount of loan forgiveness could not be included in the borrower’s gross income, nor could it result in the denial of any otherwise deductible expenses. Thus, PPP borrowers will be able to take business expense deductions notwithstanding the use of PPP funds to pay those expenses.

F. Opportunity for a Redo

Perhaps recognizing the rocky road that borrowers have traveled due to the SBA’s continuously changing rules, Section 312 of the Economic Aid Act provides an opportunity for borrowers that previously repaid, in part or in full, their PPP loans to reapply for a loan amount equal to the amount previously returned. To be clear, this does not alter the original PPP requirements, but rather gives borrowers an opportunity to reevaluate earlier decisions considering additional rules since issued.

New Rules for Round Two of PPP

The Economic Aid Act repurposed $146,500,00,000 of unobligated funds from the first round of PPP and added an additional $137,950,000 of new funds, creating a total pot of $284,450,000,000 in newly available PPP funds. Congress also sought to ensure that the remaining money reached its desired destination by establishing minimum funding requirements for certain categories of borrowers, such as those with ten or fewer employees, those located in low-income or moderate-income neighborhoods, and new borrowers that did not receive a round one PPP loan.

Borrowers that already have a PPP loan may also be eligible for a second loan, if the first loan has already been used and the borrower meets the new requirements, discussed below.

A. Gross Receipts Reduction of 25 Percent or More

The first round of PPP funding required no showing of economic harm by the borrower. Rather, the borrower had to certify that “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” This same certification will be required in the new round of funding.

In addition, the Economic Aid Act requires a borrower to have experienced at least one quarter in 2020 that reflects a 25 percent or greater reduction in gross receipts as compared to the same quarter in 2019. This requirement seeks to limit new borrowers to those that can demonstrate a significant reduction in revenue during at least a portion of the pandemic, as compared to 2019.

B. New Size Requirements

Prior size requirements permitted “small business concerns” as defined in 15 U.S.C. § 632, as well as any business concern, nonprofit organization, veterans organization, or Tribal business concern, that employed not more than 500 employees or otherwise met SBA’s industry-based size standard in number of employees.

The Economic Aid Act, however, does not appear to include all “small business concerns” as defined in 15 U.S.C. § 632. Rather, it only includes business concerns with not more than 300 employees and other designated organizations (e.g., nonprofit organizations, veterans organizations) with 300 employees or less. Thus, “small business concerns” that previously qualified for PPP based on the SBA’s revenue-based criteria or its Alternative Size Standard, would not qualify for a second loan if they have more than 300 employees.

NAICS 72 business concerns (e.g., hotels, restaurants, bars) with greater than 300 employees still meet size requirements if they do not employ more than 300 employees per physical location. In addition, the waiver of affiliation rules for NAICS 72 businesses, franchises, and companies with Small Business Investment Company assistance still applies.

While the maximum loan amount for new loans is calculated in a similar fashion as round one (i.e., 2.5 times average monthly payroll in 2019 or in the one-year prior to the new loan), loans are capped at $2,000,000, a significant reduction from the prior $10,000,000 cap.

Terms are slightly improved for NAICS 72 entities, which may take up to 3.5 times average monthly payroll, however these entities are likewise capped at $2,000,000.

Loan amount calculation methods also differ for seasonal employees (Section 311(a)(37)(C)(ii)) and for farmers and ranchers (Section 313).

Aside from streamlining the process for loans of $150,000 and less, and adding new categories of eligible expenses, the Economic Aid Act largely adopts the loan forgiveness rules contained in the CARES Act. Section 306 does, however, provide borrowers with additional flexibility to choose a covered period for loan forgiveness that is between 8 and 24 weeks, rather than the previous binary choice of 8 or 24 weeks. Much more on loan forgiveness under round two funding will likely be explained by the SBA through new interim final rules and frequently asked questions.

E. Newly Eligible Borrowers

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