Congress recently enacted the ‘‘Consolidated Appropriations Act, 2021” (CAA – H.R.133) on December 27, 2020 – nine months to the day after Congress passed the CARES (Coronavirus Aid, Relief and Economic Stimulus) Act. This was Congress’ latest effort at pandemic relief and provides various provisions to assist individuals, businesses, health care providers and others.
A key part of the CARES Act was the introduction of “Paycheck Protection Program” (PPP) loans. PPP loans provided liquidity and capital to businesses in need at the onset of the pandemic and were designed to keep employees working. If the borrowers used these PPP loans primarily for payroll and other permitted expenses (utilities, rent, interest), then the loans could be forgiven. Following the issuance of CARES, the SBA offered frequent guidance on PPP loans, including information related to loan application, loan forgiveness, new forms and other issues. Many employers took advantage of the PPP loan and obtained necessary funding for their businesses and organizations. Once the initial PPP loan deadline expired, Congress determined in CAA that additional funding for PPP loans was needed.
Key Provisions of PPP Loans (from CARES)
There were many aspects of the PPP loan as adopted by the CARES Act and with subsequent guidance issued by the SBA. Here are several key provisions in the initial PPP loan, also referred to as PPP First Draw:
- PPP borrower was in business as of February 15, 2020.
- PPP loans were capped at $10 million.
- Loan was determined to be 2.5 times the average monthly payroll of a borrower. Payroll was based on average monthly payroll over trailing 12 months or average monthly payroll in 2019.
- The loans carried a low interest rate of 1%, and this was deferred for six months. Also, the prospect that the loan could be forgiven (as noted above) was advantageous.
- PPP loans were not for all businesses but for mid-size and smaller businesses. CARES included a 500-employee limit for PPP loans.
- There were exceptions to this 500-employee limitation as spelled out in SBA rules that permitted higher limits if certain “SBA size standards” were met.
- The 500-employee limit for a PPP borrower included affiliated companies both foreign and domestic. Note: employees in the foreign affiliates are included for purposes of the 500-employee limit for PPP loan qualification, but the wages paid to the foreign employees are not included for purposes of determining the amount of the PPP loan.
- There were also special rules for the 500-employee limit for businesses in the NAICS Code 72 (mostly hospitality). This permitted the 500-employee limit to apply per location.
- Another exemption in CARES to the SBA affiliations rules applied to any business that receives financial assistance from a “Small Business Investment Company” (SBIC) (a company licensed under Section 301 of the Small Business Investment Act of 1958).
- The “Covered Period” for the PPP loan began with the date the loan was disbursed. This period would run for either 8-weeks or 24-weeks as determined by the borrower.
- PPP loan borrowers needed to attest on their loan application that “economic uncertainty” existed at the time of the loan that made the loan necessary for the borrower.
- Any borrowers that obtained PPP loans were not permitted to also claim the “Employee Retention Credit” (ERC).
- For loan forgiveness, the borrower must spend at least 60% of the loan proceeds on payroll related costs. Non-payroll eligible costs include utilities; rent; mortgage payments; and interest on loans (taken out before February 15, 2020).
- Further, loan forgiveness could be reduced if wage rates are not maintained during the covered period within 25% of the wage rates for the time before the covered period. Loan forgiveness reduction occurs if employee levels (on an FTE basis) are not maintained in the covered period at the same amount as during a base period of January 1, 2020 through January 29, or February 15, 2019 through June 30.
Changes Made in CAA to PPP First Draw
- Section 501(c)(6) organizations (mainly Chambers of Commerce) are now eligible for a PPP loan.
- Publicly traded companies are not eligible for PPP loans.
- The $10,000,000 cap in the PPP loan remains, as does the 2.5 times the average monthly payroll of the borrower.
- Four new types of non-payroll costs were added by CAA:
- Covered Supplier Costs: payments made to a supplier of the borrower for a supply of goods essential to the business and made for certain contracts or purchase orders.
- Covered Operations Costs: payments for computer software of cloud services that assists business operations or products delivery and other functions.
- Covered Worker Protection: payments made to foster compliance with safety and sanitation standards from the pandemic.
- Covered Property Damage: costs attributed to property damage from the vandalism from disturbances in 2020 that were not covered by insurance.
- The above limits on 60% of payroll related costs (with 40% for qualifying non-payroll related costs) for loan forgiveness continues.
- Borrowers must also maintain employee wage rates and employment levels, or they could face a loan forgiveness reduction.
- Borrowers begin their covered period upon the loan disbursement date, but rather than use an 8-week or a 24-week period, the covered period can end at any point between eight weeks and 24 weeks (at their decision).
- Borrowers are further entitled to claim an ERC even if they have obtained a PPP loan.
- PPP loan borrowers that have not received full loan forgiveness in their PPP loan by December 27, 2020 are also entitled to a revision in their PPP First Draw loans in these situations:
- A borrower that returned all or part of a PPP loan they obtained may reapply for a PPP First Draw loan amount for the new amount they are permitted to apply for.
- A borrower that did not accept the full amount of their PPP loan can request the additional amount.
- Partnerships that did not request any PPP loans for its partners can apply for this now.
Establishment of “PPP Second Draw” Loan
A borrower can request a PPP Second Draw loan if several requirements are met. A borrower qualifies if they have used or will use the full amount of their PPP First Draw loan by the time of disbursement of the PPP Second Draw loan. Further, they must have less than 300 employees (down from 500 employee limit). Lastly, they must show at least a 25% or more reduction in gross receipts. This 25% reduction in gross receipts is measured by comparing any quarter in 2020 with the same quarter in 2019. The following other changes should be noted with PPP Second Draw loans:
- Borrowers with the NAICS Code 72 can apply for a PPP Second Draw loan with 300 employees per location.
- A similar per location exception applies for certain news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes). They too may qualify for the affiliation waiver.
- The CARES exemption addressed above to the SBA affiliations rules for any business receiving financial assistance from an SBIC applies again under CAA, but with a 300-employee threshold.
- Second Draw Loans to Borrowers with Unresolved First Draw PPP Loans. If the PPP First Draw loan is under review and the SBA has unresolved issues, a borrower will not issue an SBA loan number for the Second Draw loan. Borrowers will be notified by the SBA if this is the case, and the SBA has agreed to try to resolve all issues expeditiously to allow for Second Draw loans to be reviewed and approved. Additionally, funds will be set aside to resource these loans once all issues are resolved.
- In looking at the 25% reduction in gross receipts, borrowers can compare the entire year of 2020 with the 2019 year, rather than a quarter-by-quarter analysis.
- Gross receipts for this purpose were not defined in the CAA. The gross receipts determination for PPP Second Draw loans is thus made by looking to SBA guidance as follows:
- Gross receipts include all revenue received by the borrower and applying the borrower’s method of accounting. This covers sales of products/services, dividends, interest, royalties, rents. It is reduced by returns and allowances.
- The SBA takes a different approach in defining gross receipts by indicating that total income (gross profit) plus cost of goods sold to arrive at gross receipts.
- The SBA further defines gross receipts as not including taxes that are collected (mainly sales taxes); related party transactions; and amounts collected for another party.
- Capital gains and losses of the borrower are also excluded.
- Any income recognized on debt forgiveness of PPP loans is not included in gross receipts.
- The maximum PPP Second Draw loan is $2,000,000 (down from $10,000,000). In addition, borrowers for Second Draw loans use the same 2.5 times average monthly payroll to determine the amounts of PPP Second Draw loan they can apply for. There is a special rule for borrowers with a NAICS Code of 72 as they can apply for 3.5 times average monthly payroll.
- Borrowers can use 2020 or 2019 as the period to measure employee payroll for purposes of determining the amount of their PPP Second Draw loan.
- The PPP Second Draw loan application process is more involved. Borrowers must provide documentation to support 25% reduction in gross receipts. Further, payroll information to support the amount of PPP Second Draw loan must also be submitted, unless it is the same information submitted with the initial PPP loan, and the loan is submitted to the same lender as their initial PPP loan. Background checks may also be performed with these PPP Second Draw loans.
When determining the amount of reduction, borrowers who believe they qualify should carefully review the quarterly revenue rules to ensure that revenues were reported properly and comparably to the prior year quarter. Secondly, closely consider the certifications in the loan application. Since the PPP First Draw loan started in March 2020, additional guidance and analysis has been provided to eligible borrowers to allow them to better determine whether they meet the intent of these certifications. Finally, consider other grant and credit programs available. One or more of these programs may in fact be a better fit. One example is the Employee Retention Credit. For more information on this credit, click here.
We have included some recently released SBA guidance on the PPP loan, both on the First Draw and Second Draw, as well as the latest loan applications. There are many new provisions to be aware of in the CAA with PPP loans. Additional guidance is also expected from the SBA on these provisions. Please contact your Sikich advisor with any questions.