In late December, Congress passed, and President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”). This week, the Treasury Department and Small Business Administration (SBA) announced the re-opening of the Paycheck Protection Program (PPP) on Monday, January 11, 2021 for first-time borrowers of PPP Loans (“First Draw PPP Loans”) and Wednesday, January 13, 2021 for second-time PPP borrowers of PPP Loans (“Second Draw PPP Loans”).
For those unfamiliar with the PPP loan program, we invite you to first read our previous blog posts on the CARES Act to learn more background on how the program works https://www.manningfulton.com/news/client-alert-what-every-small-business-should-know-about-the-cares-acts-paycheck-protection-program/.
This is the 3rd round of the popular PPP program, with several key provisions business owners should consider as they navigate the public health crisis and related economic impact summarized below.
- Expense Reductions for Everyone. Whether or not you plan to seek a Second Draw PPP Loan, one of the key benefits from the Economic Aid Act was to make qualifying expenses for any PPP loan also deductible under federal income tax law. This last-minute, year-end change permitted small businesses to receive the full economic benefits from forgiven PPP loans without the specter of income tax liability resulting from the otherwise inability to deduct the qualified expenses incurred. This action should provide a significant stimulus to all PPP borrowers.
- Am I eligible for a First Draw PPP Loan if I either didn’t receive one before or returned all or some of my approved loan? Yes, Congress expressly provided you can participate under the rules already in place for First Round PPP Loans along with the benefits of expanded scope. Prior to doing so, you should discuss with your legal counsel whether your current circumstances meet the economic necessity test.
- Who is eligible for a Second Draw PPP Loan? All eligibility requirements for First Draw PPP Loans apply to borrowers of Second Draw PPP Loans, plus borrowers must meet the following additional requirements:
- Borrowers must have 300 or fewer employees or, if you are operating a restaurant or hospitality business (NAICS Code 72), the 300-employee requirement is measured on a per location basis.
- Borrowers must have experienced a revenue reduction of at least 25% measured either on a calendar year basis or on a quarterly basis against 2019.
- Participation was expanded to include 501(c)(6)s organizations, housing cooperatives, and direct marketing organizations.
- How much money can I receive in a Second Draw PPP Loan? 2.5 times qualifying monthly payroll expenses for all borrowers except restaurant and hospitality businesses who can receive 3.5 times monthly qualifying payroll expenses.
- How is the 25% revenue reduction calculated? Several options exist for determining whether you have experienced a revenue reduction of 25% in 2020 relative to 2019. The 25% revenue reduction can be calculated based on the borrower’s gross receipts from each of the respective 2019 and 2020 quarters. Alternatively, for borrowers who do not have quarterly revenue information readily available, the SBA has clarified that “a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.” Borrowers who were not open for the first half of 2019 but were open during the second half can demonstrate their 25% reduction against their 3Q-4Q 2019 revenue. Any forgiveness amount of a First Draw PPP Loan that a borrower received in 2020 is excluded from a borrower’s receipts for purposes of calculating the reduction of revenue.
- How can I use the money from a Second Draw PPP Loan? The use of funds generally has the same restrictions and requirements as First Round PPP Loans, with the following additional flexibility:
- PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs.
- The Economic Aid Act and associated regulations expand the scope of eligible expenses for all PPP loans including employee group health contributions as well as the following:
- Payments for any software, cloud computing and other human resources/accounting needs.
- Property damage related to public disturbances occurring during 2020.
- Supplier costs that were essential to business operations, whether or not incurred during or prior to obtaining the PPP loan.
- Worker protection expenditures including personal protective equipment, capital expenditures, and adaptive investments required to comply with federal and state worker safety requirements related to COVID-19.
- The Act also provides greater flexibility for seasonal employees to be calculated using any 12-week period between February 15, 2019 and February 15, 2020.
7. Can I obtain a PPP loan if I started my business after February 15, 2020? The Economic Aid Act expressly prohibits such businesses from receiving PPP loans.
8. Can I obtain a loan if I have closed my business? If the business is a temporary closure, yes. If the business is permanently closed, no, as one of the purposes of the PPP loan is to maintain and foster employment.
9. If you haven’t used your First Loan yet, can you obtain a Second Draw PPP loan? Yes, but Borrowers who received a First Draw PPP Loan must have used – or will have used – 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.If you haven’t used your First Loan yet, can you obtain a Second Draw PPP loan? Yes, but Borrowers who received a First Draw PPP Loan must have used – or will have used – 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.
10. Is it advantageous for me to use the same lender who provided my First Round PPP Loan? Generally, yes. The regulations specifically streamline what is required to document your qualified payroll expense. However, you should consider using a different lender if you (i) were not satisfied with the service provided by your original PPP lender during the PPP loan or forgiveness process and/or (ii) you did not use a community bank as the lender and want to take advantage of the preferential treatment community banks will receive this time, prioritizing their clients’ funding with both VIP access to the process as well as funds expressly allocated towards their borrowers.
11. What should you be doing now? If you haven’t already, you should (i) be discussing with your legal and financial advisor whether you qualify for the expanded First Draw PPP loan program and/or the Second Draw PPP Loans, (ii) establishing contact with your original PPP loan lender or, if you don’t have one, a community bank who was involved in the original PPP loan process where your advisors know clients had good experiences (priority being given to loans originating from community banks), and (iii) gathering your payroll information together so you can apply at the beginning of the process as demand for these loans will most likely be fierce. Borrowers seeking less than $150,000 do not have to have their supporting documentation available at the time of application.
12. Who are not eligible to participate, even if they meet the standard eligibility criteria?
- Entities receiving a grant under the Shuttered Venue Operator Grant program established under the Economic Aid Act.
- Entities engaged in political or lobbying activities.
- Publicly traded companies.
13. What help is available for special event venues? The Economic Aid Act authorizes $15 billion to make grants to qualifying venues who demonstrate a 25% reduction in 2020 or 2021 revenue when compared to the same quarter in 2019. Qualifying venues include live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives. Obtaining these grants is in lieu of receiving a Second Draw PPP Loan, as they are designed to maintain these venues versus promoting short-term employment.
14. What other groups received a carve-out from the 300-employee requirement? Under the Economic Aid Act, licensees of the Federal Communication Commission (a/k/a television and radio stations) receive the same treatment as those in the restaurant and hospitality industry by permitting them to obtain PPP loans if they have no more than 300 employees per location.
Navigating the PPP loan process can be challenging and, if past is prologue, the benefits will go to those businesses who act swiftly. Manning Fulton’s attorneys have been on the vanguard helping our business clients obtain the vital economic aid they need.