General Overview

The SBA has not yet issued regulations and guidelines regarding the new Paycheck Protection Program (PPP) loans available under the new federal economic stimulus package. The U.S. Treasury and the SBA will no doubt provide certain clarification provisions as they did multiple times with the first round of PPP. It appears business owners may be able to begin applying for new PPP loans sometime in the second or third week of January 2021.

The total budgeted amount for new PPP loans is approximately $284 billion. As with the first round of PPP loans, businesses may be eligible for full forgiveness if loan proceeds are spent on certain expenses within a specific time period.

What PPP loans are available?

• First time PPP loans for businesses who qualified under the CARES Act but did not get a loan

• Second time PPP loans for businesses that obtained an initial PPP loan but need additional funding

• Additional funding for businesses that returned their first PPP loan or did not get the full amount for which they qualified

Who is eligible for second time PPP loans?

Similar to the first rounds of PPP, eligible small businesses include:

• First time PPP loans for businesses who qualified under the CARES Act but did not get a loan

• Second time PPP loans for businesses that obtained an initial PPP loan but need additional funding

• Additional funding for businesses that returned their first PPP loan or did not get the full amount for which they qualified

This round of assistance is meant to target smaller businesses impacted by COVID-19. As a result, applicants who qualify generally must also meet the following criteria:

1. The business may not have more than 300 employees

2. Have used or will use all of their first round PPP loan proceeds

3. The business must have at least a 25% reduction in “gross receipts” in at least one quarter in 2020 when compared to previous quarters

Businesses with multiple locations that qualified under the CARES Act may qualify for a second time provided they employ fewer than 300 people in each location.

Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with at least 20% ownership by China. Publicly traded companies are not eligible.

How is the 25% reduction in “gross receipts” calculated?

Business owners will compare gross receipts of the business before expenses are subtracted. They will compare those for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25% for a quarter. A business must have been in operation by February 15, 2020 to be eligible.

If you were not in business during the first or second quarter of 2019 but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.

If you were not in business during the first, second or third quarter of 2019, but you were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.

A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020 to determine whether gross receipts were reduced by at least 25%.

The first quarter runs from Jan 1 – Mar 31, the second quarter runs from April 1 – June 30, the third quarter runs from July 1- Sept 30 and the fourth quarter runs from Oct 1 – Dec 31.

According to the legislation, for loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss. It’s not yet clear what the SBA will consider acceptable until it provides guidance.

How much can I get with a second time PPP loan?

The maximum loan amount is $2 million.

As before, a business may qualify for up to 2.5 times average monthly payroll costs. (To get the average gross monthly payroll cost you’ll total each month’s payroll costs and divide by 12.).

You can arrive at this figure either by one of two methods— your choice (except businesses with a NAICS code starting with 72; see below):

• Multiply average gross monthly payroll cost for the 1-year period before the date the loan is made by 2.5 or

• Multiply average gross monthly payroll cost for 2019 by 2.5.

New businesses (that were not in business for the one-year period preceding February 15, 2020) will use a slightly different formula to arrive at the average monthly payroll costs. They will divide the payroll costs paid or incurred by the date they apply by the number of months in which those costs were incurred and multiply the result by 2.5.

Seasonal businesses may apply based on the average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020.

Businesses with a NAICS code starting with 72 (generally hospitality businesses) may receive up to 3.5 times average monthly payroll cost using their choice of these two methods:

• Multiply average gross monthly payroll cost for the 1-year period before the loan is made by 3.5 or

• Multiply average gross monthly payroll cost for 2019 by 3.5.

Similar to the first round of PPP loans, eligible spending must be comprised of at least 60% on payroll costs over a Covered Period of either 8 or 24 weeks.

Note that all of these methods allow the business to use payroll costs incurred or paid during the applicable time period.

What counts as payroll?

Payroll is the same as defined in the CARES Act with one new addition:

• Salary, wages, commissions or similar compensation

• Payment of cash tips or equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips)

• Allowance for dismissal or separation

• Payment required for the provisions of employee benefits including insurance premiums (employer cost only)

• Payment of any retirement benefit (employer cost only)

• Payment of state or local tax assessed on the compensation of employees

• New: group benefits are defined to include group life, disability, vision, or dental insurance

Payroll does not include:

• The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;

• Any compensation of an employee whose principal place of residence is outside the United States;

• Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act

Self-employed? This legislation does not appear to change the way the self-employed individuals who do not file formal payroll will qualify under the CARES Act. At the same time, it is not specified. Presumably, independent contractors and the self-employed will still qualify based on 2.5 months of net profit on the Schedule C tax form. Until the SBA releases guidance, it’s unclear what time period will be used for the calculation.

Can I reapply for a loan if I returned my first one?

If you returned all or part of your initial PPP loan, you may apply for an “amount equal to the difference between the amount retained and the maximum amount applicable.” Or, if you did not accept the full amount, you may request a modification to allow you to borrow the full amount for which your business is eligible.

How does the simplified PPP forgiveness work?

The SBA will have 24 days after the law is enacted to release a new one-page forgiveness application for loans of $150,000 or less— which includes all PPP loans, both under the first round and the new ones.

It will require the borrower to:

• Describe the number of employees retained due to the PPP loan,

• The estimated amount of the loan proceeds spent on payroll, and

• The total amount of the loan

The borrower will have to certify they have complied with the requirements of the loan and retain records to prove compliance (Employment related records must be retained for four years while others must be retained for three years).

How must I spend the money?

Similar to the first round of PPP, this program is primarily intended to keep employees on payroll and to pay other specific expenses.

To obtain full forgiveness, borrowers will need to spend at least 60% of loan proceeds funding on qualified payroll expenses. Borrowers may spend up to 40% on other qualified non-payroll expenses during the covered period. This list of eligible non-payroll expenses has been expanded to include:

It will require the borrower to:

• Rent

• Mortgage interest

• Utilities

• Covered operations expenditure – payment for any business software or cloud computing services that facilitates business operations, product or service delivery, payroll processing, human resources, sales and billing functions or accounting for supplies, inventory, records and expenses.

• Covered property damage cost – cost related to a property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.

• Covered supplier costs – an expenditure to a supplier that is essential to the operations at the time at which the expenditure is made and is made pursuant to a contract, order, or purchase order.

• Covered worker protection expenditure – means an operating or capital expenditure to facilitate the adaption of business activities of an entity to comply with COVID-19 federal, state or local government health and safety guidelines.

The “covered period” is the specific period of time in which you must spend the funds. It starts when the PPP loan is originated. (That’s the date the funds are deposited to your bank account.) You can choose a covered period of 8 or 24 weeks to spend the funds.

Deductibility of Expenses Used to Obtain Forgiveness

Congress has long signaled bipartisan support to overrule the position of the IRS that the expenses used to obtain forgiveness on a PPP loan are not deductible. In the bill, the deductibility of these expenses is reported to be included, though it is not clear whether there are any limitations on who is eligible for this relief. On December 21, Secretary Mnuchin stated on CNBC that Congress will restore the deductibility of these expenses with the legislation, further solidifying the position.

What other help is available for my small business?

In addition to the new PPP loans, the Act authorizes the following:

• Another $20 billion in new emergency EIDL grants.

• Pandemic unemployment benefits for the self-employed and independent contractors will be extended.

• Payment relief for eligible SBA loans will be extended. That means the SBA will cover the payment on eligible SBA loans—including interest, for up to a total of $9,000 per payment—for the next 3-8 months, depending on the borrower’s industry code and the type of loan.

• Funding ($12 billion) will be available for Community Development Institutions and Minority Development Institutions which in turn will help minority and low-income small business owners through a new Neighborhood Capital Investment program.

• Live venues, independent movie theaters, and cultural institutions may be eligible for $15 billion in dedicated grants. (Note that these organizations will have to choose between these grants and the new PPP loans – they can’t get both.)

• Landlords may benefit from the rental assistance program.

• Childcare businesses may be eligible for part of the $10 billion allocated for assistance.

The borrower will have to certify they have complied with the requirements of the loan and retain records to prove compliance (Employment related records must be retained for four years while others must be retained for three years).

Will an EIDL Grant be subtracted from my PPP loan forgiveness?

No. The legislation repeals the requirement that an EIDL grant be deducted for purposes of PPP forgiveness. In addition, the SBA is required within 15 days of when this legislation is enacted to “ensure equal treatment” for borrowers whose loans have already been forgiven and who had their grants subtracted from the forgiven amount.