President Trump has signed a $900 billion bill which contained the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“Act”) that will provide some additional financing to businesses in need. Many small businesses that applied for Paycheck Protection Program (PPP) Loans under the Coronavirus Aid, Relief and Economic Security (CARES)Act have fully expended their PPP loans and need additional financial help to continue to survive the current economic conditions. The Act not only provides $284,450,000,000 for PPP funding, but it also makes changes to the existing PPP along with allowing a second draw on PPP.
CHANGES TO EXISTING PPP
If the borrower has already applied for forgiveness of their PPP loan, most of these provisions will be irrelevant.
- The Act adds additional costs which are eligible for forgiveness. As before, 60% of the total forgiveness amount must be incurred on payroll.
- Covered operations expenditures – this includes business software or cloud computing service that facilitates business operations, product delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory needs, records and expenses
- Covered property damage costs – this includes costs not covered by insurance or other compensation related to property damage or vandalism or looting due to public disturbances that occurred in 2020
- Covered supplier costs – this includes payments for the supply of goods that
- Are essential to the operations when the payment is made, AND
- Is made pursuant to a contract, order or PO that was in effect prior to the covered period. If the goods are perishable, the contract, order or PO can be in effect prior to or at any time during the covered period.
- Covered worker protection expenditures – this includes operating or capital expenditures to facilitate the adaptation of the business activities to comply with guidance issued by the Department of Health and Human Services, CDC, OSHA or any equivalent guidance issued by State and local governments. This may include items such as the creation or expansion of: drive through windows, ventilation or filtration systems, physical barriers such as sneeze guards, expansion of indoor or outdoor space, health screening, personal protective equipment.
- The Act also clarifies that group insurance payments includes not only health but group life, disability, vision and dental insurance.
- The borrower is allowed the flexibility to choose the length of the covered period. The covered period will start the day of the loan origination and can end between 8 weeks to 24 weeks.
- There will be a simplified loan forgiveness application for loans under $150,000. The application is limited to one page in length. While there will be limited information to substantiate the amount of forgiveness submitted with the application, the borrower should have documentation readily available.
- The Act clarifies that a business that was not in operation on February 15, 2020 is not eligible for a PPP loan.
- Entities that receive a Shuttered Venue Operator Grant will not be eligible for a PPP loan.
- With the retroactive allowance of the Retention Credit (more on this in a different insight) for businesses that received a PPP loan, wages that are used for the Retention Credit are not eligible to be forgiven.
- Borrowers that would have been eligible for additional funds under PPP due to any SBA interim final rules that were issued, may request an increase in the loan, so long as the existing PPP loan has not already been forgiven.
- The Act provides access to PPP funds for qualifying farmers and ranchers that operate without employees, destination marketing organizations, housing cooperatives, news organizations, and Section 501(c)(6) organizations.
- The Act finally provides the definition of a seasonal employer. A seasonal employer is any employer that is not in operation for more than 7 months during the year, or if gross receipts for any 6 months during the year were not more than 33.33% of the gross receipts for the other 6 months of that year.
- EIDL advances no longer reduce the amount of PPP forgiveness. The EIDL advance will not be taxable and the expenses paid with the EIDL advance will be deductible. Within 15 days after the enactment of the Act, SBA is to issue rules for those borrowers that had EIDL advances deducted from their forgiven PPP loans.
A SECOND DRAW FROM THE WELL – PPP II
A second round of PPP will be available to eligible businesses that had received a loan under PPP and has used or will use the entire PPP proceeds by the date of disbursement of PPP II. Most terms of the second draw are the same as the first, except the following:
- Eligibility – Business concerns must have no more than 300 employees (down from 500 under PPP I) and a reduction of gross receipts of at least 25% during a quarter in 2020 as compared to 2019. Unlike PPP I, entities that met the size standards set by the SBA do not appear to qualify for PPP II.
The following business concerns are specifically not eligible for PPP II:
A. Business concerns who are engaged in lobbying or advocacy.
B. Business concerns who are owned 20 percent or more by a Chinese entity or has a board member who is a Chinese resident, or a person that has to submit a registration statement under section 2 of the Foreign Agents Registration Act.
C. Except for nonprofits and religious organizations, business concerns that are described in section 120.110 of title 13 code of Federal Regulations.
D. A business that receives a Shuttered Venue Operator Grant.
- Amount – The maximum amount of the loan is again dependent upon the payroll of the business concern. The maximum amount is capped at $2,000,000 based on 2.5 times the borrower’s average monthly payroll of either 2019 or the 1-year period prior to the loan. Seasonal employers can use any 12-week period between February 15, 2019 and February 2020 to determine average monthly payroll. Entities that did not exist during the one year prior to February 15, 2020, will use monthly payroll as of the date of the loan application. Entities that are covered by NAICS code 72 (Accommodations and Food Services) will be able to use a multiplier of 3.5 times monthly payroll and will be eligible for a maximum loan of $3,500,000.
- Simplification – a business concern that applies for a loan of not more than $150,000 will be able to submit a certification that they meet the revenue loss requirement at the time of application. However, when the entity applies for forgiveness they will then submit adequate support to demonstrate that they met the revenue loss requirement.
Even though the PPP II is similar in structure to the first round, there are clarifications from the SBA that will be required. For instance, PPP II does not appear to reference the same certification requirements as PPP round I, specifically the “loan necessity requirement”. Is the fact that there was a reduction in the gross receipts sufficient to meet the requirements of granting the loan? The Act does not define how a borrower determines gross receipts. Do they use their tax method of accounting to determine gross receipts? When will clarification be forthcoming? The Act requires the SBA to issue guidance within 10 days of enactment of the Act that will hopefully provide additional clarity.
We will provide further guidance in regards to the PPP as it becomes available.