Long-awaited relief has arrived for many struggling small businesses in the form of the Consolidated Appropriations Act of 2021 (the “Appropriations Act”), signed into law by President Donald Trump on December 27, 2020. Under the Appropriations Act, a summary of which can be found here, the Small Business Administration (“SBA”) was authorized to reopen the Paycheck Protection Program (“PPP”) for both first time borrowers (a “First Draw PPP Loan”) and for certain eligible borrowers that previously received a PPP loan (a “Second Draw PPP Loan”), and provide more Economic Injury Disaster Loan (“EIDL”) Advances and other grants to eligible small businesses, as detailed below.
Paycheck Protection Program 2.0
The SBA began accepting applications for First Draw PPP Loans on January 11, 2021. For Second Draw PPP Loans, the SBA began accepting applications on January 13, 2021. The PPP is extended to March 31, 2021 for both First Draw PPP Loans and Second Draw PPP Loans.
The eligibility rules for obtaining a First Draw PPP Loan remains largely unchanged from the rules in place for the initial round of PPP loans in 2020. Eligible small businesses that have 500 or fewer employees can apply for a First Draw PPP Loan, as well as self-employed individuals, sole-proprietorships, and independent contractors (see below for the eligibility requirements for Second Draw PPP Loans). In addition, borrowers that previously received a PPP loan but returned all or some of the proceeds of the loan can re-apply as a first time borrower.
Both First Draw PPP Loans and Second Draw PPP Loans can be used to help fund an expanded list of forgivable expenses, including payroll costs, rent, and utilities, as well as uninsured property damage costs caused by looting or vandalism, certain supplier costs, worker protection expenditures related to COVID-19, and certain operations expenditures (including software, cloud computing, and other human resources and accounting needs). Payroll costs were also expanded to include group life, disability, vision or dental insurance expenses.
Both First Draw PPP Loans and Second Draw PPP Loans qualify for full loan forgiveness if during the covered period following loan disbursement (i) at least 60% of the loan proceeds are spent on payroll costs, (ii) the loan proceeds are spent on eligible expenses (see above), and (iii) the borrower maintains certain employee headcount and compensation levels. A borrower’s loan forgiveness amount is reduced if the borrower decreases the number of its full-time employees or wages beyond 25% and the borrower is unable to restore its employee headcount or compensation, or the borrower is otherwise ineligible for the existing safe harbors. The covered period for incurring the above expenses can be any period between eight and twenty-four weeks following the loan disbursement.
New Rules on PPP Eligibility
The following entities are excluded from PPP eligibility: (i) publicly traded companies; (ii) a business that was not in operation on February 15, 2020; (iii) an entity that received a grant under the Shuttered Venue Operator Grant Program (see below); (iv) entities involved in certain levels of political lobbying; (v) certain entities that are affiliated with the People’s Republic of China; (vi) entities that have permanently closed; and (vii) certain entities owned or controlled by the President, Vice President, heads of executive departments, members of Congress or their spouses.
The Appropriations Act also expanded eligibility to certain entities that were not previously allowed to obtain PPP loans, including 506(c)(3) organizations, subject to the limitations set forth above.
Second Draw PPP Loan Eligibility
A business that received a First Draw PPP Loan may be eligible for a Second Draw PPP Loan if the business meets the following requirements: (i) it does not employ more than 300 employees per physical location; (ii) it has used or will use the full amount of its First Draw PPP Loan prior to the disbursal of the Second Draw PPP Loan funds; and (iii) it can demonstrate at least a 25% reduction in gross receipts in any calendar quarter of 2020 relative to the same 2019 calendar quarter. First Draw PPP Loan funds received and forgiven by the SBA and EIDL Advances should not be included in the revenue base. Further, while the 25% reduction in gross receipts requirement is new for Second Draw PPP Loans, all PPP loan applicants also still must certify in their applications that current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.
A borrower will not be eligible for a Second Draw PPP Loan if it has unresolved issues with the SBA concerning its eligibility for its First Draw PPP Loan.
Second Draw PPP Loan Terms
A borrower may receive a Second Draw PPP Loan in an amount of up to 2.5X its average monthly payroll costs, and a borrower in industries assigned to NAICS Code 72 (Accommodation and Food Services) may receive a loan of up to 3.5X its average monthly payroll costs. The maximum Second Draw PPP Loan amount is $2 million, although a consolidated corporate group is eligible for a maximum of $4 million. An eligible entity may only receive one (1) Second Draw PPP Loan.
Simplified Forgiveness Application
The Appropriations Act provides for borrowers with PPP loans of $150,000 or less to submit a new and simplified one-page forgiveness application.
The Appropriations Act also included tax benefits for PPP borrowers. The Appropriations Act clarified that expenses paid for using PPP loan proceeds are tax deductible expenses for federal income tax purposes. Further, the Appropriations Act allows PPP borrowers to also utilize the employee retention tax credit, another tax benefit provided for by the CARES Act.
Grants for Shuttered Venue Operators
The SBA is authorized to make grants to eligible live venue operators, promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, and talent representatives who can demonstrate a 25% revenue reduction (a “Shuttered Venue Operator Grant”).
An entity that receives a Shuttered Venue Operator Grant is not eligible for a Second Draw PPP Loan.
The SBA may make (i) an initial Shuttered Venue Operator Grant of up to $10 million to an eligible person or entity and (ii) a supplemental Shuttered Venue Operator Grant that is equal to 50% of the initial grant. Such Shutter Venue Operator Grants must be used for specified expenses, including payroll costs, rent, utilities, and personal protective equipment.
For more information on Shuttered Venue Operator Grants, please click here.
Economic Injury Disaster Loan Advances
Businesses in Low-Income Communities
There is now additional targeted funding for eligible entities located in low-income communities through the EIDL Advance program. Entities in low-income communities that previously received an EIDL Advance are eligible to receive an amount equal to the difference between what they previously received and $10,000.
Changes to Program
PPP borrowers are no longer required to deduct the amount of their EIDL Advances from their PPP loan forgiveness amount. Additionally, a PPP borrower who already submitted a forgiveness application with its EIDL Advance deducted may amend its forgiveness application to remove the EIDL Advance deduction.
For more information on these loan and grant programs, please visit the SBA’s website.