The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “PPP2 Act”) is contained in the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”), a $900 billion, nearly 5,600-page bill passed by the House and Senate and signed by the President on December 27, 2020.
The PPP2 Act sets aside $284 billion for the Paycheck Protection Program (“PPP”). The PPP2 Act and the 2021 Appropriations Act contain several changes important to PPP borrowers and “new” borrowers. Except as otherwise provided, the PPP2 Act requires the Small Business Administration (“SBA”) to promulgate rules within 10 days of enactment of the law.
This high-level overview is limited to provisions that impact PPP loans and is not a complete outline or summary of the PPP2 Act and 2021 Appropriations Act. Schwabe expects to produce more comprehensive resources in the future, to include the rulemaking and other guidance from SBA.
PPP Loan Forgiveness and Expense Deductibility
The 2021 Appropriations Act clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans. As we previously outlined here and here, the IRS has taken a firm position that otherwise deductible ordinary and necessary business expenditures that provide for the forgiveness of a PPP loan would not be deductible by the PPP loan borrower. The 2021 Appropriations Act reverses the IRS, and clearly provides that these ordinary and necessary business expenditures are deductible by the borrower.
Certain Changes to Existing PPP Provisions (or PPP1 loans) (most changes apply to PPP1 loans, including forgiveness of the loan):
- Expands PPP allowable and forgivable expenses to include “covered operations expenditures” (certain technology expenses), “covered property damage costs,” “covered supplier costs” (certain supplier/vendor expenses essential to the business, including perishable goods), and “covered worker protection expenditures” (worker safety expenses). Exclusion for loans already forgiven.
- Allows borrowers to select their loan forgiveness covered period between 8 weeks and 24 weeks.
- Specifies certain group insurance payments as payroll costs, to include group life, disability, vision, or dental insurance.
- Simplifies the forgiveness application process for loans of $150,000 or less while increasing SBA’s ability to audit and review forgiven loans.
- Provides a hold-harmless safe harbor from enforcement actions for PPP lenders who originated the loan in good faith, complied with all regulations, and relied in good faith on a borrower’s certification and documentation.
- Repeals the CARES Act provision that required PPP borrowers to deduct the amount of their Economic Injury Disaster Loan (“EIDL”) advance from their PPP forgiveness amount.
- Improves the coordination between the PPP and Employee Retention Tax Credit and extends and modifies the Employee Retention Tax Credit.
First Time PPP Borrowers and New Second Draw Loans (or PPP2 Loans)
- A second round of PPP loans was created for eligible businesses. Open through March 31, 2021.
- PPP2 loans are available to first-time qualified borrowers and to businesses that previously received a PPP loan (second draw borrowers), subject to certain eligibility requirements and limitations.
- First time PPP borrower eligibility is the same as PPP1 (500 employees or fewer and other eligibility requirements).
- Second draw borrower eligibility is limited:
- Not more than 300 employees
- Have used or will use the full amount of their first PPP loan
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019 (for non-profits, gross revenue is defined as revenue on Form 990)
- Loan amount maximum of $2 million, and with all outstanding PPP1 loans, the maximum is $10 million
- Entity must have been in business by February 15, 2020
- Other businesses include 501(c)(6) business organizations and “destination marketing organizations” with 300 or fewer employees and that do not receive more than 15% of receipts from lobbying.
- PPP eligibility is expanded to local newspapers, TV and radio stations, and housing cooperatives.
- Other borrowers include:
- “Businesses concerns.”
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Nonprofit organizations (including churches and religious organizations), veterans organizations, tribal business concerns, or small agricultural cooperatives.
- “Necessity” certification is also required.
- Borrowers receive full loan forgiveness if they spend at least 60% of their PPP loan on payroll costs over a time period of their choosing between 8 weeks and 24 weeks.
- PPP1 borrowers who returned all or part of their previous PPP1 loan may reapply for the maximum amount applicable, and PPP1 borrowers that did not accept the full amount of a covered loan may request a modification to increase the amount of a loan to the maximum amount. SBA is to issue rules and guidance within 17 days after the date of enactment of the PPP2 Act.
- The costs eligible for loan forgiveness in PPP2 include payroll, covered rent obligations, covered mortgage obligations, covered utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
- PPP2 borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year 2019. “Seasonal employer” is also defined.
- PPP2 borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs.
- The maximum loan amount calculation for farmers and ranchers is clarified and may be used for additional funds, but excluded for loans already forgiven.
- A procedure is established for the bankruptcy process if SBA determines certain small business debtors are eligible for PPP loans.
- The list of ineligible businesses for PPP loans is codified to include publicly-traded businesses, entities listed in 13 C.F.R. 120.110 except for entities from that regulation that have otherwise been made eligible by statute or guidance, entities primarily engaged in political or lobbying activities, entities affiliated with entities in the People’s Republic of China or the Special Administrative Region of Hong Kong, registrants under the Foreign Agents Registration Act, and entities that are receiving a grant under the live venues grant program.
- For conflict of interest purposes, the President, Vice President, the head of an Executive department, or a Member of Congress as well as their spouses are required to disclose their status when receiving forgiveness on a Paycheck Protection Program initial loan, and it prohibits these individuals from obtaining a future PPP loan.
This is a high-level summary only and is not complete. We expect to provide additional materials on this topic. Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about PPP, visit our PPP Portal. This article summarizes aspects of the law relevant to the PPP program, it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.