Update Regarding the Paycheck Protection Program
(as of December 22, 2020)
On December 21, 2020, the U.S. Senate and the U.S. House of Representatives passed the Consolidated Appropriations Act of 2021, which includes the COVID-Related Tax Relief Act of 2020 (“COVIDTRA”). The President is expected to sign the bill into law.
COVIDTRA updates and clarifies certain provisions in the Coronavirus Aid, Relief, and Economic Security Act, passed in March 2020, as amended (“CARES Act”), including the CARES Act’s Paycheck Protection Program (“PPP”).
Under COVIDTRA, new PPP loans (“PPP2 Loans”) will be available to both first-time qualified borrowers and to businesses that previously received a PPP Loan.
1. Are the terms of a PPP2 Loan Similar to a PPP Loan?
Just like the original PPP Loans, a Borrower may receive a loan up to two and one-half (2.5) times such Borrower’s monthly average payroll costs in the twelve-month period prior to the loan or in the prior calendar year. Borrowers with North American Industry Classification System (NAICS) codes starting with 72 (hotels and restaurants) can get up to three and one-half (3.5) times their monthly average payroll costs.
Also, just like the original PPP Loans, the PPP2 Loans are eligible for loan forgiveness. However, there are some new rules regarding the maximum amount borrowed and the use of proceeds eligible for forgiveness.
2. Is the Maximum Amount of a PPP2 Loan the same as a PPP Loan?
No. Subject also to the maximum amount described in Question 1 above, the maximum amount of a PPP2 Loan cannot exceed $2,000,000.00 (the original PPP Loans had a maximum amount of $10,000,000.00).
3. If a Borrower previously received a PPP Loan, can that same Borrower apply for a PPP2 Loan?
Yes, provided such Borrower meets all of the following requirements:
- Borrower has 300 or fewer employees;
- Borrower used or will use the full amount of such Borrower’s first PPP Loan; and
- Borrower can show a twenty-five percent (25 percent) gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
4. Who is eligible as a first-time Borrower for a PPP2 Loan?
The following first-time Borrowers are eligible to receive a PPP2 Loan:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans;
- Sole proprietors, independent contractors, and eligible self-employed individuals;
- Not-for-profits, including religious organizations such as churches, synagogues, and mosques; and
- Accommodation and food services operations with NAICS codes starting with 72 (i.e., hotels and restaurants) with fewer than 300 employees per physical location.
5. To be eligible for Full Loan Forgiveness, how much of a PPP2 Loan must be used for Payroll?
Similar to a PPP Loan, to be eligible for full loan forgiveness, not less than sixty percent (60 percent) of the PPP2 Loan Proceeds must be spent on payroll over a covered period of either eight (8) or twenty-four (24) weeks, as selected by the Borrower.
6. Are the Use of Proceeds eligible for Forgiveness of a PPP2 Loan the same as a PPP Loan?
Essentially, yes, with a few changes. Under both, the use of proceeds eligible for loan forgiveness include payroll, rent, covered mortgage interest, and utilities. However, the following are also eligible for forgiveness under a PPP2 Loan:
- Covered worker protection and facility modification expenditures, including personal protective equipment to comply with COVID-19 federal health guidelines;
- Expenditures to supplies that are essential at the time of purchase to the Borrower’s current operations; and
- Covered operating costs such as software and cloud computing services and accounting needs.
7. Can Borrowers Deduct Expenses Paid with PPP Loan Proceeds or PPP2 Loan Proceeds?
COVIDTRA overrules and supersedes prior IRS guidance and specifies that business expenses which would otherwise be tax-deductible, which are paid with forgiven PPP Loan proceeds or forgiven PPP2 Loan proceeds, remain tax-deductible. Consistent with the CARES Act, forgiven PPP Loans and forgiven PPP2 Loans are excluded from gross income.
In the coming days and weeks, we fully expect to receive additional SBA Guidance to all of the foregoing.
Keith T. Zimmet is the Chair of our Commercial Finance Practice Group.
This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.