Economic Aid Act – PPP Loan Update
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. Here is what you need to know:
What is the Economic Aid Act?
The Economic Aid Act, among other things, reauthorizes lending under the Paycheck Protection Program (PPP) through March 31, 2021, modifies provisions related to making PPP loans and forgiveness of PPP loans, and authorizes Second Draw PPP Loans under new Section 7(a)(37) of the Small Business Act for PPP borrowers that previously received a PPP loan. The Small Business Administration (SBA) has released interim final rues which address the Economic Aid Act requirements while also consolidating previously issued in connection with the PPP program under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Under the Economic Aid Act, for eligible employers with a maximum of 10 employees OR for loans up to $250K or less:
- At least $15 billion is being set aside for First Draw PPP loans
- At least $25 billion is being set aside for Second Draws PPP loans
What are First Draw PPP Loans?
Under the Economic Aid Act, First Draw PPP Loans are those loans either (i) previously issued under the PPP program under the CARES Act or (ii) loans for which new PPP borrowers may apply.
Who is eligible to apply for a First Draw PPP Loan?
Eligible borrowers must:
- Be a small entity, that together with its affiliates (if applicable), has 500 or fewer employees – including non-profits, veterans organizations, tribal concerns, self-employed individuals, sole-proprietorships, and independent contractors.
- Entities with more than 500 employees in certain industries that meet the SBA’s alternative size standard or SBA’s size standards for those particular industries may apply.
If I am an existing PPP Loan borrower, can I reapply for a First Draw PPP loan and/or request a loan increase?
Yes – if you are an existing PPP borrower that did not receive loan forgiveness by December 27, 2020 you may (i) reapply for a First Draw PPP Loan if you previously returned some or all of your First Draw PPP Loan funds OR (ii) under certain circumstances, request a modification of your First Draw PPP Loan if you previously did not accept the full amount for which you were eligible at the time you initially applied.
For first-time PPP borrowers, will 2019 or 2020 be used as the base period for which my maximum loan amount will be calculated?
First-time PPP borrowers will have the flexibility to choose a base period that maximizes such borrower’s eligibility (i.e., new borrowers are permitted to use 2019 or 2020 for purposes of calculating their maximum loan amount).
What are Second Draw PPP Loans?
The Economic Aid Act, borrowers are eligible to apply for Second Draw PPP Loans are loans only if such borrower: (i) previously received funds under the PPP program and (ii) will use or has used the full amount of the prior PPP loan only for authorized uses.
Who is eligible to apply for a Second Draw PPP Loan?
Eligible borrowers must:
- Have received a First Draw PPP Loan;
- Have used, or will use, the full amount of the First Draw PPP Loan on eligible expenses on or before the expected date on which the Second Draw PPP Loan is disbursed;
- Have no more than 300 employees; and
- Be able to demonstrate a revenue reduction of 25% or greater in 2020 relative to 2019 which may be calculated by (i) comparing the quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019 or (ii) if a borrower was in operation for all four quarters of 2019, such borrower is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 20202 compared to 2019.
In addition to the application, what supplemental documentation is required in order to apply for a Second Draw PPP Loan?
- For loans with a principal amount greater than $150,000 – documentation adequate to establish that the borrower experienced a revenue reduction of 25% or greater in 2020 relative to 2019 (which may include relevant tax forms, annual tax forms, or, if such relevant tax forms are not available, quarterly financial statements or bank statements).
- For loans with a principal amount less than or equal to $150,000 – no documentation required at the time the application is submitted but must be submitted on or before the date the borrower applies for loan forgiveness.
How much can I borrow under a Second Draw PPP Loan?
Generally, the maximum loan amount of a Second Draw PPP Loan is 2.5x average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector, the maximum loan amount for a Second Draw PPP Loan is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million.
What can First Draw PPP Loans and Second Draw PPP Loans be used for?
The loans may be used to fund payroll costs (including benefits); mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
Do the Affiliation Rules in connection with the CARES Act still apply?
Generally, yes – the same affiliation rules apply to First Draw PPP Loans also apply to Second Draw PPP Loans.
What are the First Draw and Second Draw PPP loan forgiveness terms?
Both First Draw and Second Draw PPP Loans qualify for full loan forgiveness if during the 8-24 week covered period following loan disbursement:
- Employee and compensation levels are maintained in the same manner as required under the First Draw PPP loan;
- The proceeds are spent on payroll costs and other eligible expenses; and
- At least 60% of the proceeds are spent on payroll costs.
When and how can I apply for a First Draw PPP Loan or Second Draw PPP loan?
Now. Borrowers can apply for a First Draw or Second Draw PPP Loan from now until March 31, 2021, through any existing SBA lender (or other eligible financial institution). All Second Draw PPP Loans will have the same loan terms regardless of the lender or borrower.
How are forgiven amounts treated for tax purposes?
The Economic Aid Act clarifies the tax treatment of forgivable PPP loan amounts. The existing CARES Act provides that forgiven PPP loans do not constitute taxable income to borrowers. However, later in 2020, the IRS issued Notice 2020-32 and Rev. Rul. 2020-27, which provided that expenses paid for with forgivable PPP loan proceeds were not deductible. The Economic Aid Act provides that borrowers using such amounts (including prior PPP loans, and new PPP loans) on otherwise deductible expenditures are entitled to deduct such expenditures. Consistent with this provision, the IRS has indicated in Rev. Rul. 2021-2 that IRS Notice 2020-32 and Rev. Rul. 2020-27 are obsolete.
 This includes businesses with a NAICS Code that begins with 72 (Accommodation and Food Services sector) or eligible news organizations with no more than 500 employees per physical location, as well as housing cooperatives, 501(c)(6) organizations, or destination marketing organizations with no more than 300 employees.