Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act or the Act) was signed into law on December 27, 2020. The Act resurrects the Paycheck Protection Program (PPP) for first- and second-time borrowers, adds additional funding, provides greater loan flexibility, and eases the loan forgiveness application process for certain borrowers.
In January 2021, the Small Business Administration (SBA) posted new guidance concerning the rules for PPP lending and forgiveness, as well as revised application forms for new loans and loan forgiveness.
Additionally, the Economic Aid Act includes a few highly anticipated benefits for small businesses, including (but not limited to):
- Extending the Employee Retention Tax Credit through June 30, 2021, increasing the amount of the tax credit from 50% to 70% of qualified wages paid to an employee (up to $100,000 per calendar quarter), and reducing the threshold to qualify from a 50% decline in gross receipts to 20%.
- Extending payroll tax deferral periods to December 31, 2021.
- Reversing the IRS’s prior guidance concerning the tax deductions and PPP loans. The Act provides that no deduction for business expenses funded with the proceeds of a forgiven PPP loan may be denied by reason of the exclusion of the loan forgiveness from gross income. In other words, PPP borrowers can now deduct from their taxes any expenses paid using PPP loan proceeds.
The Act also appropriates additional funding to small business relief programs like the Economic Injury Disaster Loan advance program, the Section 7(a) debt relief program, and other SBA lending enhancements.
Rebooting the Paycheck Protection Program
The Economic Aid Act appropriates an additional $284.45 billion to the Paycheck Protection Program. This newest version of the PPP includes many of the same parameters as the original program, with a few important differences.
Second PPP loans
The PPP now allows eligible borrowers to apply for a second PPP loan with the same loan terms as their first PPP loan. Second PPP loans have an interest rate of 1% and a maturity of five years.
For most borrowers, the maximum loan amount for a second PPP loan is 2.5x average monthly payroll costs, up to $2 million. For borrowers in accommodation and food services, the maximum loan amount for a second PPP loan is 3.5x average monthly payroll costs, up to $2 million.
A borrower is generally eligible for a second draw PPP loan if the borrower:
- Previously received a PPP loan and will or has used the full amount only for authorized uses on or before the date of disbursement of the second PPP loan;
- Has no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
And, according to the SBA, “at least $25 billion is being set aside for second draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate-income neighborhoods.”
First PPP loans
Businesses that did not receive a PPP loan in 2020 can apply for a first PPP loan until March 31, 2021. The maximum loan amount for first PPP loans is 2.5x average monthly payroll costs, up to $10 million.
Types of eligible businesses and organizations include:
- Small businesses, 501 (c)(3) nonprofits, 501(c)(19) veterans’ organizations, and tribal businesses as described in sec. 31(b)(2)(C) of Small Business Act that employ no more than 500 employees
- Certain news organizations or nonprofit public broadcasting entities that employ no more than 500 employees per location
- Housing cooperatives, eligible section 501(c)(6) organizations, or eligible destination marketing organizations that employ no more than 300 employees
- Independent contractors, eligible self-employed individuals, and sole proprietors
- Employees of an organization are counted together with any affiliates, as applicable
First PPP loans have an interest rate of 1% and a maturity of five years.
Expanded loan forgiveness qualifications
According to the SBA, first and second PPP loans may be eligible for forgiveness if:
- The borrower does not reduce headcount or employee salary or wages past thresholds laid out in PPP rules;
- The loan proceeds are spent on payroll costs and other eligible non-payroll expenses; and
- At least 60% of the requested forgiveness amount was spent on eligible payroll costs.
Previously, expenses eligible for forgiveness were restricted to payroll, rent, mortgage interest, and utilities. Under the Economic Aid Act, the following costs are now eligible:
- Certain operations expenditures, such as payments for business software or cloud computing services that facilitate business operations or other business-related functions
- Property damage costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance
- Supplier costs, including expenditures that a borrower made to a supplier for goods purchased pursuant to a contract, purchase order, or order for goods in effect before the borrower’s covered period that were essential to the borrower’s operations at the time the expense was incurred
- Worker protection expenditures, such as the purchase of personal protective equipment for employees and other operating or capital expenditures to facilitate the adaptation of the borrower’s business activities to comply with federal, state, or local government requirements or guidance with respect to the COVID-19 pandemic
Additionally, borrowers who received both a PPP loan and an EIDL advance will no longer be required to subtract the EIDL advance from their PPP forgiveness amount.
Businesses that have already applied for forgiveness and received a forgiveness determination from the SBA on a first PPP loan cannot claim additional covered expenses or otherwise take advantage of expensed provisions.
Simplified forgiveness for loans up to $150,000
The Economic Aid Act introduced a simplified loan forgiveness process for loans up to $150,000. Borrowers eligible to use this one-page certification can apply for forgiveness by providing information including:
- The number of employees at the time of the loan application and at the time of the forgiveness application
- The amount of the loan spent on eligible payroll costs and the requested forgiveness amount
- Certifications that they complied with all PPP loan requirements, such as rules on use of proceeds, amount of proceeds used for payroll costs, calculation of revenue reduction, and calculation of the forgiveness amount
These borrowers may not be required to submit to lenders the additional documentation that is typically required for PPP loan forgiveness applications. However, the borrower must retain relevant employment records for four years, and certain other records for three years, after submitting the loan forgiveness application in case the SBA requires copies.
As always, it’s a good idea to work with your lender directly if you have questions about PPP loans, loan forgiveness, or eligibility.
Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly, and the information contained herein may be outdated. Please refer to the latest guidance from the SBA and Treasury to confirm current program rules. Given the large demand for additional authorized Paycheck Protection Program funds, not every qualified Paycheck Protection Program applicant will receive a loan. The funding described is made available to businesses located in the United States of America and are not available in other locations. Previous approval of a Paycheck Protection Program loan does not guarantee approval of a second PPP loan.
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