SBA Issues New Guidance on PPP Amendments

On Jan. 6, 2021, the U.S. Department of the Treasury (Treasury) and the Small Business Administration (SBA) issued two new Interim Final Rules (IFR) providing guidance on amendments to the Paycheck Protection Program (PPP) made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act).

IFR on PPP as Amended by Economic Aid Act

This IFR compiles the changes to the PPP by the Economic Aid Act as well as restates many of the current regulations on borrower eligibility, PPP loan application and loan forgiveness.

Eligibility

Eligible businesses now include housing cooperatives, certain 501(c)(6) businesses, destination marketing organizations and specific news organizations that were in operation on Feb. 15, 2020. See additional details below:

Housing Cooperative, as defined in section 216(b) of the Internal Revenue Code (IRC) of 1986:

  • Must have no more than 300 employees.

501(c)(6) Business:

  • Must have no more than 300 employees.
  • Is exempted from taxation under 501(a) of the IRC.
  • Is not a professional sports league.
  • Is not an organization established for political campaign promotion and participation.
  • Does not receive more than 15 percent of receipts from lobbying activities.
  • Lobbying activities comprise less than 15 percent of total activities of the organization.
  • For the most recent tax year ended prior to Feb. 15, 2020, the cost of lobbying activities was less than $1 million.

Destination marketing organization:

  • Must have no more than 300 employees.
  • Does not receive more than 15 percent of receipts from lobbying activities.
  • Lobbying activities comprise less than 15 percent of total activities of the organization.
  • For the most recent tax year ended prior to Feb. 15, 2020, the cost of lobbying activities was less than $1 million.
  • Is described in Section 501(c) of the IRC and exempt from taxation under 501(a) of the IRC or is a quasi-governmental entity or political subdivision of state of local government.

News organization:

  • Must have no more than 500 employees.
  • Eligible organizations must be majority owned or controlled by a business or nonprofit public broadcasting entity with a 511110 or 5151 NAICS code.
  • If the organization has multiple locations, the organization would be considered eligible if each location had no more than 500 employees.
  • Must certify that the PPP funds are to support expenses for producing and distributing locally focused or emergency information.
  • A nonprofit public broadcasting entity subject to section 511(a)(2)(B) of the IRC is deemed eligible.

Other amendments pertain to seasonal businesses. To be eligible, a seasonal business not fully operating on Feb. 15, 2020, is eligible for PPP funding if operations took place between Feb. 15, 2019, and Feb. 15, 2020, for 12 consecutive weeks

The Economic Aid Act modified the definition of ineligible businesses to include the following:

  1. Businesses not in operation on Feb. 15, 2020.
  2. Businesses that participate in the Shuttered Venue Operator Grant program under Section 324 of the Economic Aid Act. This applies to PPP loans made on or after Dec. 27, 2020.
  3. Businesses in which a direct or indirect controlling interest is held by one of the following individuals: President, Vice President, a member of Congress, an Executive Department head or a spouse of any of the individuals listed.
  4. Businesses that have securities listed on a national securities exchange. This applies to PPP loans made on or after Dec. 27, 2020.
  5. A business that has been permanently closed.

Loan Amount and Covered Period

The Economic Aid Act clarifies that entities applying for a loan in 2021 who are not self-employed or independent contractors may use payroll costs for the 2019 calendar year, the 2020 calendar year or the one-year period before the date the loan is made to calculate the maximum loan amount. The IFR provides additional details with specific instructions and examples. The IFR also includes additional instructions for calculating the maximum loan amount for self-employed individuals, farmers and ranchers.

The Economic Aid Act modified the loan forgiveness covered period to begin on the date the lender disburses the PPP loan and ending on any date selected by the PPP borrower that is at least eight weeks after the date of loan disbursement and ending on a date that is on or before 24 weeks after the date of disbursement. This allows flexibility between eight and 24 weeks to from the disbursement date to determine the covered period.

Payroll Costs

The IFR provides clarification around eligible payroll costs. Eligible cash compensation is consistent with prior guidance and includes wages and tips paid, including pay for vacation, parental leave, family leave, medical and sick leave. The IFR specifically identifies the eligible non-cash compensation to include group life and disability insurance in addition to group health, vision and dental insurance. Employer contributions to retirement plans are still considered eligible noncash payroll costs as well.

Ineligible payroll costs continue to include:

  • Payments made in excess of $100,000, annualized, and prorated for the period the payments were made;
  • Federal employment taxes during the period;
  • Income taxes withheld; or,
  • Wages that qualify for credits under the Families First Coronavirus Response Act

Nonpayroll Costs

The interim final rule identified certain expenses that are now eligible as a forgivable nonpayroll cost per the Economic Aid Act as follows:

  • Covered operational expenses include payments for “any business software or cloud computing service that facilitates 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.”
  • Covered property damage costs are for damages incurred during any of the 2020 public disturbances that are not covered by insurance or other compensation.
  • Covered supplier costs are for goods that are:
    • Essential to the operations of the business and made pursuant to a contract, purchase order or order that was in effect at any time before the covered period of the covered loan.
    • For perishable goods, the goods must be essential to the operations of the business and made pursuance to a contract, purchase order or order that was in effect before or at any time during the covered period of the covered loan.
  • Covered worker protection expenses are for operating and capital expenditures made by the entity to comply with Federal health and safety guidelines (or equivalent local/state guidance) from March 1, 2020, and ending the date the COVID-19 national emergency expires. Eligible expenses include maintenance, renovation and purchase of drive-through facilities; air ventilation and filtration; physical barriers; expansion of indoor, outdoor or combined spaces; and health screening facilities.

In addition, the IFR notes that the proceeds of a PPP loan cannot be used for lobbying activities.


IFR on PPP Second Draw Loans

This IFR discusses the eligibility requirements, loan terms and application process for those borrowers who have received a PPP loan during the first round in 2020 and meet the requirements to receive a second PPP loan draw. The requirements to receive a second draw PPP loan are narrower than the first PPP loan.

Eligibility for Second Draw Loans

The eligibility requirements for a second draw loan are as follows:

  • The borrower must have no more than 300 employees.
  • The borrower must have had a revenue reduction of 25 percent or greater in any calendar quarter in 2020 as compared to the same calendar quarter in 2019. The determination of the revenue reduction is made by comparing gross receipts from the chosen 2020 quarter to the corresponding quarter in 2019. To reduce the administrative burden of this calculation, a borrower that was in operation for all four quarters of 2019 and experiences a 25 percent or greater reduction in annual gross receipts in 2020 versus 2019 may submit annual tax forms to substantiate the period over period decline in revenue. If the borrower received forgiveness on a first draw PPP loan during 2020, the forgiveness amount is excluded from the calculation of 2020 gross receipts.
    • The borrower must have received a PPP loan during the first round, and the full amount of the first draw will need to be used prior to the date that the second draw is disbursed. This includes the use of any funds received due to an increase in the first draw PPP loan as a result of the modifications made in the Economic Aid Act.[1]
    • The first round of PPP loans allowed businesses with a NAICS code beginning with ‘72’ with multiple locations to receive PPP funding if there were no more than 500 employees per location. For second draws, this criteria has reduced to allow eligibility if each location has no more than 300 employees.

If a borrower was ineligible to receive a PPP loan during the first round, the borrower is also ineligible to receive a second draw PPP loan. The Economic Aid Act also expressly prohibits certain businesses from being eligible for a second draw PPP loan:

  • Businesses with a political activity or lobbying focus.
  • Businesses “organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong.”
  • Businesses that are “required to submit a registration statement under Section 2 of the Foreign Agents Registration Act.”
  • Businesses that participated in the Shuttered Venue Operator Grant program.
  • Businesses where a direct or indirect controlling interest is held by one of the following individuals: President, Vice President, a member of Congress, an Executive Department head or a spouse of any of the individuals listed.
  • Businesses that have securities listed on a national securities exchange.
  • Businesses that have been permanently closed.

Further, if a borrower’s first draw PPP loan is in process of being reviewed by the SBA, the borrower may still proceed with an application for the second draw PPP loan; however, a Second Draw loan and the respective SBA loan number will not be provided to the borrower until the first draw loan review and unresolved matters are addressed.

Amount of PPP Funding for Second Draw

Similar to the first round, the amount of the second draw PPP loan will be the lesser of $2 million or 2.5 months of the borrower’s average monthly payroll costs. Note that the Economic Aid Act amended the calculation to state that the time period to be used to determine the payroll costs should be either calendar year 2019 or the 12 months prior to when the second draw loan was made. Further, the Economic Aid Act states that using calendar year 2020 would also be sufficient in determining the payroll costs.

For businesses with a NAICS code beginning with ’72,’ the entity can substitute three and a half months of payroll, rather than two and a half months of payroll when calculating the maximum loan amount of the second draw PPP loan.

Also, no more than an aggregate $4 million in second draw PPP loan proceeds is to be received by businesses that are a part of a single corporate group. The corporate group limit for a first draw PPP loan was $20 million

Application and Additional Documentation Requirements

The requirements for the second draw of PPP loans are similar to the first round; however, lenders may request additional documentation. Loans with an amount greater than $150,000 will now be required to submit the documentation supporting the revenue reduction criteria. This documentation is currently not required to be provided to lenders at the application stage of loans less than $150,000; however, it is still required to be provided prior to or at the application date for forgiveness for this population of borrowers.

For additional information regarding the two aforementioned IFRs or the Economic Aid Act, reach out to us at CARESActQuestions@dhg.com.

Reference:

[1] The first draw must have been used on eligible expenses.

ABOUT THE AUTHORS

Denny Ard
Managing Partner, DHG Solutions Lab
Denny.Ard@dhg.com

Payal Shah
Manager, Assurance

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