Articles

Client Alert: New Congressional Action Means Big Things for the Paycheck Protection Program

On December 21, 2020, Congress passed H.R. 133, the Consolidated Appropriations Act, 2021 (the “Omnibus Act”), which includes among its more than 5,000 substantive pages, long-awaited follow-ups to the CARES Act to provide additional resources to individuals and businesses. Among the provisions are updates to the Paycheck Protection Program (“PPP”), which will benefit both existing and new borrowers. Below is a look at some of the significant developments under the Omnibus Act related to the PPP. This summary does not include every update to the PPP in the Omnibus Act, but highlights certain key changes.

For all PPP borrowers – Deductibility of forgiven expenses
One of the immediately impactful developments is Congress’s countermanding of Treasury’s guidance that PPP borrowers could not deduct business expenses paid with PPP loan proceeds that are ultimately forgiven.

Under the COVID-related Tax Relief Act of 2020 (included as part of the Omnibus Act), no deductions will be denied, or other tax attributes restricted or affected, as a result of excluding from gross income amounts forgiven under the PPP. This is a direct rejection of Treasury’s rationale in Notice 2020-32 for prohibiting PPP borrowers to deduct the cost of expenses paid with forgiven PPP proceeds. This means that PPP borrowers can deduct business expenses to the same extent they ordinarily would. This change applies to all PPP borrowers.

For all PPP borrowers – Expanded forgivable uses of PPP proceeds
The Omnibus Act also includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”), which affects a number of areas of the PPP. Section 304 of the Economic Aid Act expands the types of expenses that are permitted uses of PPP funds and eligible to be included in the forgiveness calculation. As a reminder, prior to the Economic Aid Act, the permitted uses eligible for the forgiveness calculation were:

1. Payroll costs;
2. Rent paid on any lease in force prior to February 15, 2020 (including personal property leases);
3. Interest paid on any mortgage incurred prior to February 15, 2020; and
4. Payment on any utility for which service began before February 15, 2020.

The Economic Aid Act adds the following as permitted eligible for the forgiveness calculation:

1. “Covered operations expenditures” – payments for any business software or cloud computing service that facilitates business operations (including payroll processing, sales and billing functions, and inventory tracking);
2. “Covered supplier costs” – expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan;
3. “Covered worker protection expenditures” – costs for purchasing personal protective equipment and adaptive investments to help a loan recipient comply with any governmental health and safety guidelines related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration; and
4. “Covered property damage costs” – costs related to damage or looting due to public disturbances that occurred during 2020 and not covered by insurance;

All PPP borrowers, including those who received their PPP loan prior to passage of the Omnibus Act, can utilize the expanded scope of eligible expenses, except for PPP borrowers who have already had their loans forgiven.  However, to be eligible for full forgiveness of the loan, the borrower still must be able to demonstrate spending at least 60% of the PPP loan amount on eligible payroll costs during the covered period (which must range from at least 8 weeks to a maximum of 24 weeks from the loan date).

For certain existing PPP borrowers – An opportunity to take an additional PPP loan
Section 311 of the Economic Aid Act authorizes “second draw loans” under the PPP. According to published reports, there will be approximately $284,000,000,000 in funds available to disburse for second draw PPP loans (each a “PPP2 Loan”).[1]  To be eligible for a PPP2 Loan, among other things an applicant must have:

1. 300 or fewer employees;
2. Suffered declines in revenues of at least 25% in comparing any calendar quarter of 2020 with that same quarter in 2019; and
3. Used the full amount of its initial PPP loan by the disbursement date of the PPP2 Loan.

PPP2 Loans are generally treated and administered under the same terms as other PPP loans, which includes a maximum loan amount of 2.5x monthly payroll, up to a $2 million cap (as compared to first draw PPP loans that were capped at $10 million); a requirement to spend at least 60% of PPP2 Loan proceeds on payroll costs to be eligible for full forgiveness; and the expanded range of permissible and forgivable uses of loan proceeds (described above).

For existing PPP borrowers that are restaurants and hotels – Increased multiple for PPP2 Loans
In recognition of a particularly hard-hit sector of the economy, the Economic Aid Act permits entities in industries assigned to NAICS code 72 (Accommodations and Food Services) to receive a PPP2 loan of up to 3.5x average monthly payroll costs. Such borrowers should be sure to note that this increased multiple does not change the requirement that at least 60% of PPP2 Loan proceeds be spent on payroll costs to be eligible to receive full forgiveness.
 
For religious organizations, 501(c)(6)s and destination marketing organizations – Codified and expanded PPP loan eligibility
In the Economic Aid Act, Congress reaffirmed SBA guidance that religious organizations are eligible PPP loan recipients and specifically codified that 13 CFR 120.110(k) (excluding religious organizations from eligibility for SBA business loans) does not apply to PPP loans.
The Economic Aid Act also expands eligibility for PPP loans to 501(c)(6) organizations and destination marketing organizations, subject to additional limitations. A 501(c)(6) organization is eligible for a PPP loan if:

1. The organization has 300 or fewer employees;
2. It does not receive more than 15% of its receipts from lobbying;
3. Lobbying activities do not account for more than 15% of the total activities of the organization (we expect that eventual regulations will address how to make this determination);
4. The organization’s lobbying costs were not more than $1 million during the most recent tax year ending before February 15, 2020; and
5. It is not a professional sports league or formed with the purpose of promoting or participating in a political campaign.

Similarly, a destination marketing organization is eligible for a PPP loan if:

1. The organization has 300 or fewer employees;
2. It does not receive more than 15% of its receipts from lobbying;
3. Lobbying activities do not account for more than 15% of the total activities of the organization;
4. The organization’s lobbying costs were not more than $1 million during the most recent tax year ending before February 15, 2020; and
5. It is described in 501(c) of the Internal Revenue Code or it is a quasi-governmental entity, political subdivision or instrumentality thereof.

For smaller PPP borrowers – Simplified PPP2 Loan application and simplified forgiveness application
Entities applying for a PPP2 Loan of $150,000 or less may, instead of providing documentation to support the revenue decline requirements (in a 2020 quarter as compared to the same quarter in 2019), submit a certificate attesting that it meets such requirement. However, to obtain loan forgiveness any entity making such certification will need to provide documentation of such revenue decline.
 
All PPP borrowers who receive (or previously received) a PPP loan of $150,000 or less “shall” receive forgiveness if they:

1. submit a one-page certificate to the lender (to be developed by the SBA within 24 days) that requires such PPP borrowers to provide only: a description of the number of employees the PPP borrower was able to retain because of the PPP loan; the estimated amount of the PPP loan spent on payroll costs; and the total PPP loan value;
2. attest that the PPP borrower accurately complied with the PPP requirements; and
3. maintain relevant employment records for 4 years and all other relevant records for 3 years.

This limited forgiveness application is the closest to automatic forgiveness that can be expected for small PPP borrowers and the forgiveness application will be reduced even further than the Form 3508S.
 
PPP borrowers who have received a PPP loan of $150,000 or less and are preparing to submit a forgiveness application should consider waiting for the new forgiveness application form, which will take much less effort to submit than the current options.
 
For all PPP borrowers – No deduction for EIDL advances
Under the PPP before passage of the Economic Aid Act, PPP borrowers were required to deduct from the amount for which they were eligible for forgiveness the amount of any EIDL advance they received. Further, Congress has instructed the SBA to adopt procedures to make whole PPP borrowers who had their PPP forgiveness amount reduced by an EIDL advance.
 
General PPP Authority Changes
Section 323 of the Economic Aid Act extends the sunset of the PPP from December 31, 2020, to March 31, 2021. It also increases the total appropriation to the PPP from $659 billion to $806,450,000,000 (an increase of $147,450,000,000), and providing the following borrower set-asides (among other set-asides and appropriations):

1. $35 billion of PPP2 loans must be disbursed to first-time PPP borrowers; and
2. $25 billion for PPP2 Loans must be disbursed to either borrowers who either have 10 or fewer employees (i.e., "micro-borrowers"), or in loans less than $250,000 to businesses that operate in low-income areas.

Other Notable Changes
As a result of the Economic Aid Act, in applying for forgiveness all PPP borrowers can choose a covered period that ranges from a minimum of 8 to a maximum of 24 weeks, beginning on the date of disbursement of the PPP loan.  For example, the covered period could be 12 or 15 weeks, rather than the minimum or maximum durations previously specified.

Congress has directed the SBA to issue guidance addressing barriers to access to capital for underserved communities no later than 10 days following enactment of the Omnibus Act.
PPP eligibility is extended to housing cooperatives (as defined in Section 216(b) of the Internal Revenue Code) that have no more than 300 employees.

The SBA may determine, under Section 320 of the Economic Aid Act, that certain small business debtors in bankruptcy reorganization are eligible for Paycheck Protection Program loans. If done, there will be a special procedure that requires court approval for PPP loans to these debtors and requires any such loan be given a super-priority claim in the bankruptcy process.

Beginning on the date of passage of the Economic Aid Act, publicly traded companies are ineligible PPP borrowers.

Wrapping Up
We expect the PPP to remain as fluid and enigmatic as when it was initiated under the CARES Act, as the SBA pushes to issue new guidance during the holiday season and in the waning days of the current administration. We will endeavor to provide the most relevant updates as they are released.