Paycheck Protection Program Reopened and Modified

January.08.2021

On December 27, 2020, President Trump signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which, among other things, appropriates $284.45 billion to reopen the Paycheck Protection Program (the PPP). Subsequently, on January 6, 2021, the Small Business Administration (SBA) and the Department of the Treasury (Treasury) issued two interim final rules that implement portions of the Economic Aid Act and consolidate previously-issued interim final rules and guidance for ease of borrower and lender reference.

Prior to the Economic Aid Act, the PPP had been closed to new loan applications since August 8, 2020. For first-time PPP borrowers, the Economic Aid Act makes only limited changes to the eligibility requirements and other conditions that applied under earlier phases of the PPP. But for borrowers that previously received a PPP loan and apply for a second loan, the Economic Aid Act imposes significant eligibility and other limitations.

Below is a discussion of the Economic Aid Act as it applies to first-time and to second-time (“second draw”) borrowers, followed by an overview of certain other significant provisions of the Economic Aid Act. This latest phase of the PPP will remain open for loan applications until March 31, 2021.

First-time PPP borrowers

For most first-time PPP borrowers, the same eligibility and affiliation rules and other terms and conditions (including the $10 million loan amount cap) generally will apply as under previous phases of the PPP. However, publicly traded companies, businesses not in operation before February 16, 2020, and recipients of “shuttered venue operator” grants under the Economic Aid Act are ineligible to receive loans under this new phase of the PPP.

Second-draw borrowers

For second-draw borrowers, loans will be capped at $2 million, rather than the $10 million cap applicable to first-time borrowers. Subject to the $2 million cap, a second-draw borrower may receive loan proceeds up to 2.5 times (or 3.5 times for accommodation or food service businesses) its average total monthly payroll during, at the borrower’s election, either (i) the one-year period prior to the origination of the PPP loan or (ii) 2019.

To be eligible, a second-time PPP borrower must (i) have fewer than 300 employees and (ii) have experienced a reduction of at least 25% in gross receipts during a quarter of 2020 as compared with the same quarter in 2019 (or if it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019 and submits annual tax forms substantiating the revenue decline). The Economic Aid Act provides that businesses engaged in political or lobbying activities are ineligible for a second draw. Additionally, a business is ineligible for a second draw if it is owned, directly or indirectly, 20 percent or more by a parent that is organized under, or that has significant operations in, the People’s Republic of China or the Special Administrative Region of Hong Kong, or if it has a board member who is a resident of the People’s Republic of China.

Other provisions

Certain other key provisions of this new phase of PPP under the Economic Aid Act include the following:

  • Covered period. A borrower may choose the length of the “covered period” during which PPP loan proceeds must be used, but it must be at least 8 weeks and not more than 24 weeks.
  • Eligible expenses. The Economic Aid Act expands the uses of loan proceeds allowed under previous phases of the PPP to also include (i) costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation, (ii) expenditures made to suppliers for certain goods in connection with a borrower’s business, and (iii) costs incurred in connection with compliance with COVID-19-related health and safety guidelines, including sanitation standards, social distancing requirements, and other worker or customer safety measures related to COVID-19.

    Additionally, the Economic Aid Act expands the types of expenditures eligible for loan forgiveness to also include payments for business software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

  • Simplified loan forgiveness application. A borrower that receives a loan for not more than $150,000 will be able to apply for loan forgiveness using a simplified 1-page application, requiring only the following information to be included: (i) the number of employees the borrower would able to retain because of the covered loan; (ii) the estimated amount of the loan proceeds that were spent on payroll costs; and (iii) the total loan amount. The borrower must also certify compliance with program requirements and retain relevant records.
  • Deductibility of Expenses. The Economic Aid Act allows tax deductions for expenses that are paid with loan proceeds under the current or previous phases of the PPP.
  • EIDL Deduction. A borrower that also received an Economic Injury Disaster Loan will not be required to deduct the amount of that advance from its PPP loan forgiveness amount, unlike under previous phases of the PPP.
  • Enforcement Against Lenders. If a lender relies in good faith on a PPP borrower’s certifications and documentation and all relevant laws applicable to the lender with respect to the PPP loan are satisfied, an enforcement action may not be taken against the lender and the lender will not be subject to any penalties related to loan origination or forgiveness.

Given the popularity of the PPP during 2020, we expect considerable interest around the reopening of the program. However, many would-be borrowers under the program may have already received a PPP loan in 2020 and find themselves ineligible for a second draw, due to, for example, the revenue decline requirement discussed above. We will continue to monitor SBA and Treasury regulations and other developments in connection with this latest phase of the PPP.