December 30, 2020
On December 27, 2020 President Trump signed the Consolidated Appropriations Act, 2021 (“the Act”). The Act reopens the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) that allows businesses to apply for a loan for the first time or allows existing PPP borrowers to apply for a second loan. First-time PPP borrowers will be subject to the PPP’s original eligibility rules, and second-time PPP borrowers will be subject to the following requirements:
Borrowers that previously received a PPP loan may apply for a second PPP loan under the Act if they meet certain eligibility requirements, which are different than for the first PPP loan. The employee eligibility requirement is reduced from a maximum of 500 employees to a maximum of 300 employees. However, the Act provides that businesses with more than one physical location can still use the original 500 employee maximum. Therefore, businesses with one physical location must have 300 employees or less, and businesses with more than one physical location must have 500 employees or less to be eligible for a second loan.
The Act also adds two requirements to qualify for a second PPP loan. First, the borrower must have used or “will use” the full amount of its original PPP loan. Currently, the Act does not specify that the loan must be spent during the original PPP covered period, so the exact requirements for “will use” are unclear. Additionally, a business must have experienced a 25% reduction in gross receipts during one quarter in 2020 (not all, just one of them) compared with the same quarter in 2019.
The maximum amount for a second-time loan is $2 million, as opposed to $10 million in the first round of PPP loans. However, the loan amount of 2.5 times the company’s payroll costs remains the same. Therefore, second-time PPP borrowers will be eligible to receive an amount equal to the lesser of 2.5 times their average monthly payroll costs or $2 million. However, second-time borrowers in the accommodation and food services industry will be eligible to receive an amount equal to the lesser of 3.5 times their average monthly payroll costs or $2 million. Additionally, the Act simplifies the calculation of payroll costs. The borrower may elect to use one of two calculations: (i) the average monthly payroll of 2019 or (ii) the average monthly payroll over the one-year period prior to the second PPP loan being made.
As with the first round of PPP loans, borrowers must spend at least 60% of the loan funds on payroll costs and up to 40% of the loan funds on other eligible costs over either eight or 24 weeks to receive full forgiveness of the PPP loan. However, other eligible costs are expanded to include the cost of personal protective equipment, facility modification expenditures, supplier costs, software and operations expenditures such as property damage cost due to public disturbances in 2020. The Act also simplifies the forgiveness calculation for loan proceeds spent on more than 40% of non-payroll expenses. A borrower can be forgiven the lesser of the full loan amount or the amount of the loan spent on payroll divided by 0.6.
Additionally, the Act clarifies that businesses may take tax deductions for the expenses, including payroll costs, covered by forgiven loans. The Act also provides a simplified forgiveness application process for PPP loans of $150,000 or less. These borrowers must complete a one-page certification that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated amount spent on payroll costs and the total loan amount.
The Act also directs the SBA to issue rules for cases where a PPP loan recipient returned or did not accept the maximum amount of loan it was eligible for. Currently, there is no set date for when the program will reopen, and the SBA has ten days to establish regulations after the Act is signed into law. Deadlines for this round of PPP loans will be March 31, 2021.