The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) – the New PPP

The long awaited $900 billion pandemic relief bill, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), has now been signed into law. In addition to another round of stimulus checks for Americans earning less than $75,000^[1], it provides relief for small businesses, nonprofits, and “venues” struggling to survive the pandemic. . 

The SBA, in consultation with the U.S. Treasury Department, started accepting applications for new PPP Loans on January 13, 2021. The new PPP Act continues to prioritize small businesses and has up to $284 billion available for job retention and certain other expenses through March 31, 2021. The Act also allows certain existing PPP borrowers to apply for a “Second Draw” PPP Loan.

Before discussing “Second Draw” PPP, however, let’s first make sure you’re up to date on the first PPP round and loan forgiveness. By way of reminder, you have 10 months from the end of your first covered period to file for forgiveness or to start making monthly payments (for us, for example only, April 15, 2021). Your lender should be taking forgiveness applications through their own or a third party online portal and they should let you know the application timing and process. If you’ve not been contacted by them, we recommend you affirmatively contact them regarding forgiveness.

Also, if you didn’t get funding through the initial round of PPP, you now have a second chance, and if you did receive the first round of loans, you have the ability to obtain a “Second Draw” Loan. 

Key PPP updates under the new Act include:

• 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;
• PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
• Eligibility is expanded to include 501(c)(6)s, housing cooperatives, destination marketing organizations, among other types of organizations;
• The new PPP Act provides greater flexibility for seasonal employees;
• Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
• Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan. 

I never obtained a PPP loan.  Can I obtain one now?

Yes – first-time borrowers should refer to last year’s rules and will be eligible for the maximum $10 million amount. Initial eligibility requirements include the following and require that your business was operational as of February 15, 2020:

• a small business with fewer than 500 employees, regardless of revenue;
• a small business that otherwise meets the SBA’s size requirements;
• sole proprietors, independent contractors, and self-employed individuals who regularly carry on any trade or business, including those in the “gig economy;”
• a hospitality or food service business (those with an NAICS code beginning with 72) if it has fewer than 500 employees per physical location;
• a non-profit entity under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (Internal Revenue Code), so long as that entity has fewer than 500 employees;
• a veteran’s organization under Section 501(c)(19) of the Internal Revenue Code that meets the SBA’s size requirements; and
• a tribal business entity that meets the SBA’s size requirements.

The Act now also expands eligibility for certain housing cooperatives, news organizations, section 501(c)(6) organizations, and Economic Injury Disaster Loan (“EIDL”) recipients.

I already have a PPP loan.  Am I eligible for a PPP second draw?

Yes – You are generally eligible for a Second Draw PPP Loan if you:

• Previously received a First Draw PPP Loan and will or have used the full amount only for authorized uses;
• Have no more than 300 employees; and
• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

As always, there are a number of exceptions, so be sure to carefully review your eligibility before applying.  The maximum loan amount is 2.5 times your average monthly payroll costs up to $2 million.  There are exceptions to the eligibility and loan amount rules for small businesses in the accommodation and food services industries.  Please do not assume that you are eligible or not eligible for a PPP “Second Draw” solely because you obtained an initial PPP loan.

Can a PPP Second Draw Loan be forgiven?

Yes – PPP “Second Draw” forgiveness is largely similar to current PPP loan forgiveness rules.  Borrowers must spend at least 60 percent of their PPP second draw on payroll costs in order to receive full forgiveness.

What can I spend the PPP second draw loan on to get it forgiven?

The Act expands what PPP loan proceeds can be used for and includes:

Payroll Costs – including but not limited to, group insurance payments for vision, dental, disability and life insurance may be included in Payroll Costs.

Eligible Expenses – including but not limited to:

1. Expenditures for business software or cloud computing service that facilitates business operations and administration (“Covered Operations Expenditures”);
2. Costs related to property damage, vandalism or looting from public disturbances during 2020 that are not covered by insurance (“Covered Property Damage Cost”);
3. Expenditures made to a supplier of goods to the Borrower that are essential to the operations of the Borrower pursuant to an arrangement in place before the Covered Period (“Covered Supplier Cost”); and
4. Costs incurred after March 1, 2020 to facilitate adaptation of activities of the Borrower to comply with COVID-19 requirements, including but not limited to physical barriers, ventilation or filtration systems improvements, expansion of additional business space, health screening capability, and personal protective equipment.

The expansion of permitted Payroll Costs and Eligible Expenses are available to all PPP Borrowers that have not received PPP Loan forgiveness as of December 27, 2020. (This is an important takeaway as it applies to prior PPP funds and is not restricted to new PPP funds; i.e. if you’ve not made your application for forgiveness yet, you need to be sure to expand your expenses to include all those now permitted.) 

I already have a PPP loan and do not want a PPP Second Draw.  How am I affected?

The Act impacts existing PPP loans in a number of ways.

• PPP borrowers with loan amounts up to $150,000 may obtain loan forgiveness by submitting a one-page certification to their lenders that describes the number of employees retained due to the loan, estimates the total amount of the loan spent on payroll costs, and states the total loan amount.  Notably, the SBA may review and audit these loans to ensure against fraud.  Therefore, PPP borrowers that submit the one-page certification must maintain documentation that accurately supports the certification.
• EIDL advances are no longer deducted from a borrower’s forgiveness amount.  The SBA will issue rules to ensure that borrowers are made whole if they received forgiveness and the EIDL advance was deducted from that amount.
• PPP borrowers can now elect a covered period that ends at any point between 8-weeks and 24-weeks after loan disbursement.  Previously, PPP borrowers that obtained their loans before June 5 could elect either an 8-week or 24-week covered period.
• The definition of Permitted Expenses has been expanded.

I returned my PPP loan months ago based on SBA guidance at that time.  Can I reapply?

The SBA will release additional guidance to lenders that permits certain borrowers that already returned all or part of their PPP loans to reapply.

Can the SBA audit my PPP loan?

Yes – The Act appropriates $50 million directly to PPP auditing and fraud mitigation purposes.  The SBA has previously announced that it will review certain PPP loans for program compliance.

Are expenses associated with my PPP loan now deductible?

The Act clarifies that expenses paid with forgiven PPP loan proceeds remain tax-deductible.  This overrides previous Internal Revenue Service (“IRS”) guidance disallowing deductions for these eligible expenses. 

What do all of these changes mean?

From a small business perspective, the Act provides increased PPP funding, generally broadens eligible expenses and increases the pool of small businesses eligible.  However, with the increased funding and eligibility comes some added complexity.  Expect the SBA to continue to issue additional updates and guidance implementing the Act into a program that has already undergone several updates and changes since its creation in March 2020.  

While the decision to obtain a PPP loan should not be made too quickly, you shouldn’t dawdle either, funds can run out.  Since its inception, PPP has been a “rollercoaster ride,”  so to ensure you’re eligible for a PPP loan, take time to review your business and corresponding PPP requirements before submitting a PPP loan application. The program will end on March 31^st, or earlier, if the money runs out like it did during the program’s first round. 

➡️ Read the full SBA announcement: https://www.sba.gov/article/2021/jan/11/sba-re-opens-ppp-community-financial-institutions-first

➡️ For updated PPP forms, guidance, and more resources, go to: https://www.sba.gov/ppp

McHattie Advice: We’re urging our clients to apply for the second round promptly, if appropriate, you can always end the process or give the money back. Please let us know if you need any help understanding what’s available, the process, suggested strategies, gathering documents or information. We’re here for you. 

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^[1] For individuals making up to $75,000 per year, or if a couple, making up to $150,000 per year, the check will be $600. For individuals making between $75,000 and $86,900 (couples: $150,000 to $173,900), the check will be between $595 and $5 (the checks decrease $5 for every $100 of income above $75,000/$150,000).

Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. 

This blog is for informational purposes only.  It does not constitute legal advice and may not be relied upon as such.  If you face a legal issue, you should consult a qualified attorney for independent legal advice with regard to your particular set of facts.  This blog may constitute attorney advertising.  This blog is not intended to communicate with anyone in a state or other jurisdiction where such a blog may fail to comply with all laws and ethical rules of that state of jurisdiction.