Resources

PPP Loans REDUX

January 22, 2021

paycheck

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) was enacted which, among other things, reauthorized lending under the Paycheck Protection Program (“PPP”) to first-time borrowers (“First Draw PPP Loans”) and for second draws by certain borrowers who have previously received PPP loans (“Second Draw PPP Loans”). The following is a discussion of the key provisions for the revised PPP loan program and how it applies to borrowers, depending on their status under the program.

Key Dates

Monday, January 11, 2021

First Draw PPP Loan Program Opens for Loans by Eligible Community Financial Institutions (“CFIs”)

Wednesday, January 13, 2021

Second Draw PPP Loan Program Opens for Loans by CFIs

Friday, January 15, 2021

First and Second Draw PPP Program Opens for Loans by Eligible Lenders with less than $1 billion in Assets

Tuesday, January 19, 2021

First and Second Draw PPP Loan Program Opens for Loans by All Eligible Lenders

Wednesday, March 31, 2021

First and Second Draw PPP Loan Program Commitment Period Ends


What’s New

1.  Tax Deductible.

  • Expenses paid from PPP Loan proceeds that are forgiven are deductible by the borrower on its U.S. federal income tax. Tax deductibility of these expenses for state and local income tax purposes varies by state and so you should check with your state and local tax advisors.
  • The portion of a PPP Loan that is forgiven is not taxable income for the borrower on its U.S. federal income tax returns, per prior law.
  • Tax basis and other attributes of the borrower’s assets will not be reduced due to the forgiveness of a PPP Loan.
  • There are a number of tricky tax issues for pass-through tax entities (partnerships, LLCs and Subchapter S corporations) that you should discuss with your tax advisors.

2.  First Draw Loans.

  • Eligible borrowers who have not previously received a PPP Loan can now apply for First Draw Loans, as described below under “First Time PPP Borrowers.”
  • Certain eligible borrowers who returned their First Draw Loans or did not maximize their borrowings under their First Draw Loans because of a change in the PPP Loan rules, can now apply for another draw on their First Draw PPP Loans. (This is different than a Second Draw PPP Loan.) See “First Draw PPP Borrowers Eligible for Increased First Draws.”

3.  Second Draw Loans.

  • Certain First Draw PPP Loan Borrowers are eligible for Second Draw PPP Loans. See “Second Draw PPP Borrowers.”

4.  PPP Borrowers Now Eligible for Employee Retention Credit (“ERC”).

  • Under prior law, borrowers were not eligible for the ERC.
  • The law has been changed to make borrowers eligible for the ERC on a retroactive basis starting with March 13, 2020.
  • The principal new limitation is that qualifying wages paid for from PPP loan proceeds and used to support forgiveness cannot be used to qualify for the ERC. Businesses with PPP loans that have not applied for forgiveness, or will be applying for Second Draw PPP Loans, will want to maximize the forgiveness of the PPP loan by utilizing non-wage eligible expenses to the extent allowed to support their forgiveness application and the remaining to maximize the ERC.
  • The ERC is extended to June 30, 2021.
  • The new law makes a number of beneficial changes to the ERC. Click here for a link to a discussion of those changes.

5.  Additional Eligible Expenses.

  • With respect to loans for which the SBA has not yet remitted a forgiveness payment to the PPP lender, in addition to Payroll Costs (as defined by existing SBA PPP Loan rules), interest on certain mortgage obligations, rent and utilities, PPP loan proceeds used for the following expenses are now eligible for forgiveness:
  1. Covered Operations Expenditures: Payment for any business software or cloud computing service that facilitates business, financing and other human resources operations.
  2. Covered Property Damages Costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
  3. Covered Supplier Costs: Expenditures made for the supply of goods that are essential to the operations of the business and made pursuant to a contract, order, or purchase order in effect at any time before the borrower’s applicable Covered Period, or, with respect to perishable goods, in effect before or at any time during the borrower’s applicable Covered Period.
  4. Covered Worker Protection Expenditures: Operating or capital expenditures to facilitate the adaptation of the business activities of a business to comply with applicable government requirements related to COVID-19.
  • Important Note: Payroll Costs must still represent at least 60% of the amount to be forgiven, as required by prior law.
  • The expanded list of Eligible Expenses is applicable to First Draw PPP Loans that were not forgiven prior to December 27, 2020. It is not clear how this impacts borrowers who applied for forgiveness prior to December 27, 2020, but did not have their PPP Loan forgiven prior to that date, who would like to take advantage of the expanded definition of Eligible Expenses.
  • While PPP Loan proceeds also can be used for interest payments on other debt incurred before February 15, 2020, those payments are still not eligible for forgiveness and at least 60% of the loan proceeds must be used for Payroll Costs.

6.  Borrowers May Select Covered Period Between 8 and 24 Weeks.

  • Borrowers now have a Covered Period that starts at loan origination and ends at any time between 8 and 24 weeks thereafter, as selected on their forgiveness application (Form 3058, Form 3058EZ, Form 3058S). It is not clear how this impacts borrowers who have already filed their forgiveness applications but have not yet had their loans forgiven.
  • The concept of an Alternative Covered Period has been eliminated because this new selection process makes that concept moot.

7.  Simplified Forgiveness Application for PPP Loans up to $150,000.

  • The SBA is directed to publish a one-page forgiveness application for PPP Loans of up to $150,000 by January 20, 2021, that does not require borrowers to submit any supporting documentation.
  • Important Note: This does not change the requirements applicable to the forgiveness of these PPP Loans. It only eases the process used to apply for forgiveness. The SBA still has the right to audit these loans and ask for supporting documentation for the forgiveness request.
  • Second Draw PPP Loan borrowers with loans of $150,000 or less are required to submit documentation supporting their revenue reduction with their forgiveness application, not their loan application (although they can submit the documentation with their loan application).

8.  Watch for the SBA’s Audit Plan.

  • The SBA has to provide Congress with its plan for conducting forgiveness reviews and audits by February 10, 2021.

9.  Group Insurance Benefits Includes Group Life, Disability, Vision and Dental.

10. Borrower Must Have Been in Business on February 20, 2020, to be Eligible for First or Second Draw PPP Loan.    

11. Recipient of Shuttered Venue Operator Grant under the Economic Aid Act is Not Eligible for a PPP Loan.

  • The Economic Aid Act permits certain Shuttered Venue Operators (“SVOs”) to apply for grants.
  • SVOs who receive or expect to receive grants cannot now apply for a First Draw PPP Loan or a Second Draw PPP Loan. But those SVOs who have previously received a First Draw PPP Loan can apply for the grants.
  • SVO means a live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative that meets certain requirements outlined in the Economic Aid Act.

12. New Rules for Farmers and Ranchers.

  • New rules were adopted for how farmers and ranchers calculate their maximum loan amount for both First Draw and Second Draw PPP Loans.
  • Lenders may, but are not required to, permit such borrowers who are now eligible for increased borrowings to draw down those additional amounts as First Draw PPP Loans if they have not yet applied for forgiveness of their First Draw PPP Loan. See “First Draw PPP Borrowers Eligible for Increased First Draws.”

13. Seasonal Employers.

  • Seasonal Employer” now means a borrower that (i) does not operate for more than seven months in any calendar year; or (ii), during the preceding calendar year, had gross receipts for any six months of that year that were not more than one-third of the gross receipts of the employer for the other six months of that year.
  • This change is retroactive back to March 27, 2020, the original date of the CARES Act.
  • Seasonal Employers determine their maximum loan amount using their average total monthly payments for any 12-week period between February 15, 2019, and February 15, 2020, selected by them.
  • This change is expected to permit many Seasonal Employers to borrow increased amounts under their First Draw and Second Draw PPP Loans. See “First Draw PPP Borrowers Eligible for Increased First Draws.”
  • Those who meet the new Seasonal Employer definition that have already received First Draw PPP Loans may draw down additional amounts under that loan, as discussed below under “First Draw PPP Borrowers Eligible for Increased First Draws.”
  • The new definition will provide greater flexibility to borrowers who thought they were Seasonal Employers but are not covered under the new definition and who have not applied for forgiveness, in calculating the reduction in their forgivingness amount due to an FTE reduction because they can now select one of two different comparative periods (February 15 – June 30, 2019, or January 1 – June 30, 2019).

14. New Eligible Borrowers Include Certain Housing Cooperatives, News Organizations, 501(c)(6) Organizations and Destination Marketing Organizations.

  • Housing cooperatives, 501(c)(6) organizations (trade associations, business leagues, chambers of commerce, etc.) and destination marketing companies cannot have more than 300 employees. Eligible news organizations can have up to 500 employees or otherwise meet the SBA alternative size standard.
  • There is a waiver of the affiliation rules for eligible news organizations that permits them to count employees or satisfy SBA alternative size standards by physical location when determining eligibility.
  • For a 501(c)(6) organization to be eligible, its lobbying activities must satisfy limitations set forth in the SBA regulations.

15. New Ineligible Borrowers Beginning December 27, 2020.

  • New ineligible borrowers under PPP starting on December 27, 2020, include:
  1. Entities with securities traded on a national securities exchange (New York Stock Exchange, The Nasdaq Stock Market, etc.).
  2. Entities controlled by U.S. President, Vice President, Head of an Executive Department or Member of Congress or their spouses.

16. Interest on PPP Loans Does Not Compound and Is Not Adjustable.

First Time PPP Borrowers.

  • Eligible borrowers who have not previously received a PPP Loan can apply for a PPP loan under the original program terms, as modified by the Economic Aid Act, through March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in PPP.
  • Applications are made using Form 2483 (revised 01-08-21) or the participating lender’s equivalent form.
  • Eligible borrowers must have been in operation on February 15, 2020, and cannot have permanently closed or filed bankruptcy at the time of the loan disbursement. Temporary closure (i.e. the business intends to reopen) does not impact eligibility.
  • Borrowers must certify that economic uncertainty makes the First Draw PPP Loan request necessary to support ongoing operations of the applicant.
  • In determining eligibility, borrowers must follow the SBA’s affiliation rules applicable to PPP Loans, which require the borrower to include employees of affiliates as defined under those rules in its calculation, including its domestic and foreign affiliates.
  • The following entities are eligible for PPP First Draw Loans:
  1. Sole proprietors, independent contractors, and self-employed persons.
  2. Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard).
  3. Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
    1. 500 employees, or
    2. That meets the SBA industry size standard in number of employees if more than 500.
  4. Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.
  5. A housing cooperative, an eligible Section 501(c)(6) Organization, or an eligible destination marketing organization, that employs no more than 300 employees.
  6. A news organization that is majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151, that employs no more than 500 employees per physical location.

First Draw PPP Borrowers Eligible for Increased First Draws.

  • Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020, may:
  1. reapply for a First Draw PPP Loan if they previously returned some or all of their First Draw PPP Loans funds, or
  2. under certain circumstances which are listed below, request to modify their First Draw PPP Loan amount (approved on or before August 8, 2020) if they previously did not accept the full amount for which they are eligible.
  • PPP Borrowers Who Returned or Did Not Accept PPP Loan Proceeds.
  1. If a borrower returned all of a PPP loan, the borrower may reapply for a PPP Loan in an amount the borrower is eligible for under current PPP rules.
  2. If a borrower returned part of a PPP Loan, the borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
  3. If a borrower did not accept the full amount of a PPP Loan for which it was approved, the borrower may request an increase in the amount of the PPP Loan up to the amount previously approved.
  4. Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds.
  • Entities Taxed as Partnerships.
  1. If a partnership received a First Draw PPP Loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensations, the lender may electronically request through SBA’s E-Tran Servicing site to increase the PPP Loan amount to include appropriate partner compensation, even if the loan has been fully disbursed.
  2. The increased loan amount cannot exceed the maximum loan amount allowed under the PPP program, which is $10 million for an individual borrower or $20 million for a corporate group.
  3. The borrower must provide the lender with required documentation to support the calculation of the increase.
  4. Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds.
  • Seasonal Employers.
  1. Section 336 of the Economic Aid Act revised the method by which a seasonal employer may determine its maximum loan amount for purposes of the PPP to allow the seasonal employer to use the average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.
  2. If a seasonal employer would be eligible for a higher maximum loan amount under section 336 of the Economic Aid Act, the lender may electronically submit a request through E-Tran to increase the PPP Loan amount, even if the loan has been fully disbursed.
  3. The increased loan amount cannot exceed the maximum loan amount allowed under the PPP program, which is $10 million for an individual borrower or $20 million for a corporate group.
  4. The borrower must provide the lender with required documentation to support the calculation of the increase.
  5. Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds.
  • Farmers and Ranchers.
  1. Section 313 of the Economic Aid Act changed the calculation of the maximum loan amount for certain farmers and ranchers.
  2. If a farmer or rancher would be eligible for a higher maximum loan amount under section 313 of the Economic Aid Act, the lender may electronically submit a request through E-Tran to increase the PPP Loan amount, even if the loan has been fully disbursed.
  3. iii. The increased loan amount cannot exceed the maximum loan amount allowed under the PPP program, which is $10 million for an individual borrower or $20 million for a corporate group.
  4. The borrower must provide the lender with required documentation to support the calculation of the increase.
  5. Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds.
  • The SBA will issue further guidance on the process to reapply or request a loan increase.

Second Draw PPP Borrowers.

  • Eligible borrowers who previously received a PPP Loan can apply for a PPP loan under the original program terms, as modified by the Economic Aid Act, through March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in PPP.
  • “Gross receipts” includes all revenue in whatever form received or accrued (in accordance with the entity’s accounting method for tax purposes) from whatever source (sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances). “Gross receipts” excludes net capital gains or losses, taxes collected for and remitted to a taxing authority (such as sales or other taxes collected from customers) and proceeds from transactions between a concern and its domestic or foreign affiliates.
  • For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, eligible 501(c) organization, or eligible destination marketing organization, “gross receipts” has the meaning in section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization from all sources, including contributions and grants.
  • Applications are made using Form 2483-SD (revised 01-08-21) or the participating lender’s equivalent form.
  1. Borrowers with loans of $150,000 or less may submit documentation supporting their revenue reduction with their forgiveness application, rather their loan application (although they can submit the documentation with their loan application).
  • Borrowers who received a First Draw PPP Loan are eligible if they meet the following criteria:
  1. Borrower must be a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw PPP Loan, veterans organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization.
    1. Important Note: “small business concerns” are no longer a separate category of eligible borrowers, meaning revenue-based NAICS codes and the alternative size test no longer apply.
  2. Borrower must have been eligible to receive the First Draw PPP Loan in accordance with the updated First Draw PPP Loan eligibility requirements.
  3. Borrower must have used, or will use, the full amount of its First Draw PPP Loan on authorized uses prior to the date of the Second Draw PPP Loan disbursement.
  4. Borrower must not employ more than 300 employees, with certain exceptions for businesses with a NAICS code beginning with 72 (Accommodation and Food Services) and eligible news organizations with more than one physical location.
    1. Important Note: Unlike in First Draw PPP Loans where the 500 employee test expanded the definition of eligible borrowers from the baseline requirement of having to be a “small business concern,” Second Draw PPP Loan borrowers are required to meet this test which will mean there are many First Draw PPP Loan borrowers that are ineligible for Second Draw PPP Loans.
  5. Borrower must have experienced either (1) a reduction in gross receipts in at least one calendar quarter of 2020 of at least 25% from borrower’s gross receipts during the same quarter in 2019, with additional guidelines for businesses not in operation for some or all of 2019, or (2) if in operation for the entirety of 2019, a reduction in gross receipts of at least 25% in annual gross receipts in 2020 compared to 2019.
  • SBA Affiliation Rules apply to both employee counting and calculation of gross receipts.
  1. In determining eligibility, including calculation of gross receipts for purposes of demonstrating at least a 25% reduction in revenue, borrowers must follow the SBA’s affiliation rules applicable to PPP Loans, which require the borrower to include (1) employees of affiliates, as defined under those rules, in its calculation, including its domestic and foreign affiliates, and (2) gross receipts of those affiliates.
  2. In addition to the waivers under the First Draw PPP Loan eligibility requirements, a waiver of the affiliation rules is also provided for Second Draw PPP Loans for:
    1. a business concern with not more than 300 employees that is assigned a NAICS code beginning with a 72 (Accommodation and Food Services).
    2. a business concern that employees not more than 300 employees, per physical location and is majority-owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 (Newspaper Publishers) or 5151 (Broadcasting).
    3. a nonprofit organization that is assigned a NAICS code beginning with 5151 (Broadcasting).
  3. Special rules apply in calculating gross receipts of affiliates acquired or disposed of, or if the borrower was acquired, during the period covered by the applicable calculation.
  • Expanded List of Ineligible Borrowers.
  1. In addition to the expanded list of ineligible First Draw PPP Loan Borrowers discussed under “What’s New,” the following persons are ineligible for Second Draw PPP Loans:
    1. business concerns primarily engaged in political activities or lobbying activities.
    2. certain entities organized under the laws of China or Hong Kong or have specified ties to such entities.
    3. person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938.
    4. a business concern that has permanently closed.
  • Maximum Amount of Second Draw PPP Loans is $2 million, Group Cap is $4 million.
  1. Second Draw PPP Loan amount generally is calculated the same as for First Draw PPP Loans, just with a lower cap of $2 million.
  2. Second Draw PPP Loans to borrowers that are part of a single corporate group are capped at $4 million in the aggregate.
  3. Borrowers have the option of resubmitting the information used to calculate the First Draw PPP Loan or to submit new information for calendar year 2020.
  • Required Certifications.
  1. Borrowers must certify that economic uncertainty makes the Second Draw PPP Loan request necessary to support ongoing operations of the applicant. 
    1. Open Question: Does the economic uncertainty good faith certification safe harbor for loans less than $2 million still apply to Second Draw PPP Loans, particularly now that the loan amount cap has been lowered to $2 million from $10 million? The updated loan forgiveness application contains a box to check if the borrower’s Second Draw PPP Loans, together with its affiliates, are $2 million or more, suggesting the answer is likely yes.
  • Unresolved Borrowers.
  1. If the First Draw PPP Loan is under review because the borrower may not have been eligible for the First Draw PPP Loan it received or for the amount of the First Draw PPP Loan, the lender will receive notification when it submits the guaranty application to the SBA.
  2. The borrower may still receive a Second Draw PPP Loan as soon as the SBA resolves the issue (and it is required to resolve it quickly) so long as the program is still active and there are funds available for the guaranty.
  3. The SBA has indicated that it will set aside appropriations to fund Second Draw PPP Loans applied for by such borrowers in the event they are approved.
  4. So an eligible borrower whose First Draw PPP Loan is under review should still apply now for a Second Draw PPP Loan and hope that the SBA has set aside sufficient funds to permit its Second Draw PPP Loan to be funded once the review of its First Draw PPP Loan has been resolved.
  • Stay tuned for updated Frequently Asked Questions, in particular as they relate to Second Draw PPP Loans.

Please contact Tom Vaughn (313-568-6524), Alexis Schostak (248-203-0598), Emphani Aldridge (313-568-6606), or your regular Dykema attorney with any questions.

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