** Updated 1/8/21 **
The long awaited follow up to the CARES Act passed back in March was signed into law on Sunday, December 28, 2020. The Consolidated Appropriations Act, 2021 includes a $284 billion allocation to the Small Business Association (SBA) for the continuation of the Paycheck Protection Program (PPP). The program will now provide loans to both first time borrowers as well as businesses that already received a PPP loan. The subsequent loans, known as the “PPP Second Draw,” are meant to support smaller and harder hit businesses with up to $2 million for payroll and other eligible expenses.
Who Is Eligible for PPP Funds in Round Two?
To qualify for a second draw of PPP funds, borrowers who previously received a PPP loan must not employ more than 300 employees and must have used (or plan to use) all previously received PPP loan proceeds. For borrowers under NAICS code 72, the restaurant and hospitality exception, the affiliation rules have been waived again and these businesses must have fewer than 300 employees per physical location. The application will also require that potential recipients demonstrate their gross receipts have fallen by at least 25% in any quarter of 2020 relative to the same 2019 quarter.
First Time Borrowers
First time borrowers must not have more than 500 employees and meet the requirements under the SBA 7(a) loan program. This includes sole proprietors, independent contractors, self-employed individuals and not-for-profits. The program still excludes businesses not in operation as of February 15, 2020, and those listed as ineligible for SBA loans under 13 CFR Section 120.110 that have not been specifically exempted.
First-time borrowers include 501(c)(6) organizations and Destination Marketing Organizations with fewer than 300 employees and less than 15% of gross receipts from lobbying activities. Housing Cooperatives as defined in Section 216(b) of the Internal Revenue Code with less than 300 employees were also added. The Act also added FCC license holders and newspapers with more than one physical location that have fewer than 500 employees per location and waived the affiliation rules for newspapers, TV and radio broadcasters, and public broadcasters, as long as each location has fewer than 500 employees.
Increased First Round Loan Eligibility
By January 14, 2021, the SBA is required to issue guidance that would allow an eligible recipient that returned all or part of an included covered loan to reapply for the maximum amount applicable, as long as they have not received forgiveness. If an eligible recipient’s calculated loan amount increased due to subsequent interim final rules, they may work with their lender to modify the loan value. Both the reissuance or increased loan amount would be considered part of the original program and fall under those rules, and eligible borrowers could still apply for the PPP Second Draw.
Interaction with Shuttered Venue Operator Grants
The Act also included $15 billion of grants specifically for operators of live venues such as theatres, performing arts centers, museums, and movie theatres as well as talent representatives known as the Shuttered Venue Operator Grant Program. The funds will be awarded in phases over time depending on percentage of lost revenue with a 25% minimum and must be spent on specified expenses similar to the PPP loans. Participation in the program immediately disqualifies the business from receiving a first-time or second draw PPP loan.
How Do You Calculate a 25% Revenue Reduction, and How Are Gross Receipts Defined?
Borrowers can calculate the 25% revenue reduction by comparing any quarter of 2020 to the same quarter for 2019, or by comparing annual 2020 gross receipts to 2019 gross receipts.
Gross receipts, consistent with the definition of receipts in 12 C.F.R 121.104 of SBA’s size regulations, includes all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses.
Gross receipts do not include the following:
- Taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees);
- Proceeds from transactions between a concern and its domestic or foreign affiliates; and
- Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
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.
What Are the Loan Terms in the Second Round of the PPP?
Borrowers can receive up to 2.5 times the average monthly payroll costs in the previous 12 months or calendar year, with the option to use 2020 or 2019 calendar year, with a maximum loan of $2 million. Alternate calculations are available for seasonal employers and new businesses. The restaurant and hospitality industries can receive up to 3.5 times average monthly payroll. Repayment terms will be over five years, have an interest rate of 1% and fees are waived for both borrowers and lenders, similar to the original program.
To qualify as a seasonal employer, the company must operate for no more than seven months a year and have earned no more than 1/3 of their revenue in any six months of 2019. They may select a 12-week period between February 15, 2019, and February 15, 2020, to calculate their maximum loan amount.
The definition of payroll remains the same as laid out in the original CARES Act, with the addition of group benefits which now specifically include life, disability, vision and dental insurance.
Are Loan Forgiveness Terms of Round Two the Same as the First Round?
Loan forgiveness is again available for loan proceeds spent on payroll and eligible mortgage interest, rent and utilities. However, round two also adds operational expenditures such as software, cloud services and accounting needs; property damage in 2020 from public disturbances not covered by insurance; and supplier costs and worker protection expenses, including adaptive investments to comply with federal, state, or local health and safety guidelines. The 60/40 cost allocation between payroll and other expenses for full forgiveness remains, and a simplified forgiveness process will also be available by January 21, 2021, for all PPP loans up to $150,000.
When Can Borrowers Apply for This PPP Round?
On January 6, 2021, the SBA released regulations to carry out this program. The SBA has also stated they will initially open the program only to community financial institutions starting Monday, January 11, 2021, for first draw PPP applications and Wednesday, January 13, 2021, for Second Draw PPP loan applications. The SBA will open the program to all participating lenders shortly thereafter. If you qualify for an initial loan or a second draw, you should be pulling the information now to be ready when it is officially opens up.
Between the updated PPP rules discussed above, the existing Interim Final Rules the SBA has released since the CARES Act, and the deductibility issue off the table thanks to this new legislation, it should be a much easier decision on whether to apply for a first time loan or a second draw request under the PPP.
>> Read “Congress Passes COVID Stimulus Bill, Allows Taxpayers to Deduct Expenses Paid with PPP Funds”
We will continue to share more details as they are released regarding the updated PPP, along with other highlights of this legislation related to the EIDL Advance Program, changes to existing SBA loans prior to CARES Act and the new grants for live venues.
Contact Adam Hill at email@example.com, Peter Myeroff firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.