COVID-19 Relief Bill – Extends Paycheck Protection Program and Creates Second Draw Loan Program

Firm Publication

On December 21, the United States Congress passed the Consolidated Appropriations Act, 2021, to fund annual appropriations and, through its “Additional Coronavirus Response and Relief” provisions, to supply a second round of economic stimulus benefits to industries, businesses and individuals impacted by the COVID-19 pandemic. The Appropriations Act became effective upon signing by President Trump on December 27.

Included within the additional COVID-19 relief package is the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” that will extend the previously expired Paycheck Protection Program (PPP) through March 31, 2021 and will make available to certain eligible companies that have previously obtained a PPP loan under the March 27 Coronavirus Aid, Relief, and Economic Security (CARES) Act an additional forgivable PPP loan called a “PPP second draw loan.” More than 5 million companies, nonprofits and individuals obtained PPP loans exceeding $500 billion under the CARES Act earlier this year. Forgivable PPP second draw loans will provide direct relief of up to $2 million per borrower to smaller businesses and nonprofits in industries hit hard by the virus and by the mandated and recommended preventive measures to stem the spread of COVID-19. After the Small Business Administration (SBA) adopts implementing regulations, second draw PPP loans will be available from participating lenders until March 31, 2021. Most banks and financial institutions that participated as PPP first draw loan lenders are expected to continue their PPP lender engagement.

Except for limited circumstances, the Appropriations Act narrows the scope of participation and magnitude of funding for second draw PPP loans compared to the original PPP loans in three significant ways:

  1. First, the maximum loan amount available to a business or nonprofit decreased from $10 million to $2 million per borrower.
  2. Second, subject to certain exceptions, the maximum workforce size for an eligible borrower is reduced from 500 to 300 employees.
  3. Third, a business or nonprofit must demonstrate a 25% loss of revenue during at least one quarter of 2020 compared to the corresponding quarter of 2019.

This content provides an overview of: eligibility requirements for a PPP second draw loan, loan amounts, use of loan proceeds, forgiveness of the PPP second draw loan, and clarification regarding tax deductibility of expended loan proceeds.

Eligibility for a PPP Second Draw Loan

A company or nonprofit must satisfy the following conditions of eligibility:

Prior PPP Loan

The borrower must be a prior PPP borrower that has used or will use the full amount of their first PPP loan on or before the expected date of disbursement of the PPP second draw loan.

One Loan per Borrower

Only one PPP second draw loan may be obtained per business or nonprofit, regardless of the number of locations where its workforce is employed.

Size of Workforce Cap

The borrower may not have more than 300 employees. The limitation to 300 employees is a reduction from the 500-employee limitation that applied to first draw PPP loans. However, business concerns that have more than one physical location and are 72 NAICS-coded companies (Accommodation and Food Services) may employ not more than 300 employees per physical location and retain eligibility. Selective additional exceptions under the CARES Act that allowed companies with certain designated NAICS codes to satisfy larger alternative “size of business” workforce number for eligibility will not apply to PPP second draw loans.

Effect of SBA Affiliation Rules

Comparably to PPP “first draw” loans, long-standing SBA affiliation rules apply to PPP second draw loans for purposes of determining compliance with the number of employees eligibility cap. Accordingly, an entity that is under common control with one or more other companies (e.g., controlled by a corporate parent or by a common private equity sponsor) that in the aggregate combined with such other affiliated entities have a workforce exceeding 300 employees will generally not be eligible to receive a PPP second draw loan. However, the same waiver created under the CARES Act for certain PPP first draw borrowers from the application of the SBA affiliation rules that would otherwise treat multiple “affiliated” entities as a single borrower for purposes of counting the number of permitted maximum employees toward the size of workforce eligibility cap also applies to a PPP second draw loan. Accordingly, the employees of affiliates of any of the following categorized entities would not be counted toward the size of workforce cap:

  • A business operating within one of 15 specified 721 or 722 NAICS code subsectors.
  • A business operating as a franchise that is assigned a franchise identifier code by the SBA.
  • A business that receives financial assistance from a Small Business Investment Company (SBIC).
Loss of Revenue

The business or nonprofit must have suffered a 25% reduction in gross receipts in any quarter of 2020 compared to the corresponding 2019 quarter. For businesses that were not in operation in Q1, Q2, Q3, and Q4 of 2019, the legislation provides similar applicable timelines. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Certification of Financial Need

The borrower must certify its economic “need” for the loan, as similarly applied to initial PPP loans, that “… current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business or nonprofit. A potential PPP second draw borrower must consider whether it satisfies this condition of “current” need in addition to satisfying the 25% revenue reduction from comparable quarters of 2020 compared to 2019.

No Publicly Traded Companies

The business may not be a publicly traded company. (This can be viewed as Congress’ political response to the fierce criticism that arose in certain quarters when the participation of certain public companies as PPP borrowers under the CARES Act became known.) Additional ineligible entities include: entities involved in political and lobbying activities, entities affiliated with entities in the People’s Republic of China, registrants under the Foreign Agents Registration Act, and entities that receive a grant under the parallel Shuttered Venue Operator Grant program established under the Appropriations Act.

Pre-COVID-19 Operations

The business or nonprofit must have been in operation on February 15, 2020.

Eligibility of Religious Organizations

The Appropriations Act effectively codifies SBA and Treasury regulations adopted in April 2020 expressly designating religious organizations such as churches, synagogues and mosques as eligible PPP borrowers, and prohibits the application of SBA regulations otherwise forbidding organizations principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs from obtaining SBA loans.

Loan Amounts

Formula Based on Monthly Payroll

In general, borrowers may receive a loan of up to a maximum amount that is the lesser of (1) 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year 2019 or (2) $2 million, with the following exceptions:

  • Eligible entities that did not exist during the one-year period prior to February 15, 2020 may receive loans of up to 2.5 times the sum of average monthly payroll costs not to exceed $2 million.
  • Seasonal employers may calculate their maximum loan amount, not to exceed $2 million, based on a 12-week period beginning February 15, 2019 through February 15, 2020.
  • Entities in industries assigned to NAICS code 72 may receive loans of up to 3.5 times the average monthly payroll costs (subject to the $2 million cap).
$2 Million Cap

The loan amount of a PPP second draw loan is capped at $2 million per borrower, regardless of the number of the borrower’s locations. Initial PPP loan borrowers under the CARES Act were allowed to borrow up to $10 million and certain franchises, hotel and restaurant companies were allowed to borrow up to $10 million per location as a result of the application of affiliation waivers for such industries.

Use of Loan Proceeds

The Appropriations Act expands the categories of allowable and forgivable uses of PPP initial and second draw loan proceeds beyond the CARES Act original categories of payroll costs, rent, scheduled interest payments on mortgage debt or other pre-existing debt, and utilities, to include the following:

  • Covered operations expenditures: Payment for any software, cloud computing, and other human resources and accounting needs.
  • Covered property damage costs: Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
  • Covered supplier costs: Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
  • Covered worker protection expenditure: Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. Investments may include the purchase, renovation or maintenance of assets that create or expand: drive through window facilities, air pressure ventilation or filtration systems, physical barriers, expansion of additional business space, or onsite or offsite health screening capability.

PPP first draw borrowers may retroactively utilize the expanded categories of forgivable expenses with respect to their PPP first draw loan if the forgiveness process for that prior PPP loan has not already been completed.

The Appropriations Act also clarifies that payroll costs include expenses for group life, disability, vision or dental insurance.

As a result, initial PPP borrowers who have not yet applied for forgiveness, or that have pending forgiveness applications, should assess whether they will be eligible for a higher forgiveness amount under these new rules.

Forgiveness of the PPP Second Draw Loan

Borrowers of a PPP second draw loan that maintain certain employee retention requirements are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the “covered period.” The minimum 60% allocation to payroll costs and maximum 40% allocation to non-payroll costs that have applied to prior PPP loans to attain full forgiveness will continue to apply to PPP second draw loans.

The Appropriations Act allows for flexibility in the “covered period” by allowing the borrower to designate a covered period of between 8- and 24-weeks ending at a point of the borrower’s choosing between the 8th and 24th week after the origination date of a covered loan.

Tax Deductibility of Expended Loan Proceeds

The Appropriations Act clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. It also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This provision is applicable to both the initial PPP first draw loans and PPP second draw loans.

Implementation

The Appropriations Act requires the SBA Administrator to establish regulations to carry out the provisions of the new PPP second draw loan program no later than 10 days after enactment of the Appropriations Act. The SBA has so far declined to comment on when it would open up the PPP portal.

SBA Audits

The SBA, which is already immersed in auditing original PPP loans of $2 million or more, has been allocated an additional $50 million under the Appropriations Act for auditing and fraud mitigation purposes. The Appropriations Act also requires the SBA to develop a “forgiveness audit plan” setting forth policies and procedures for conducting loan forgiveness reviews and loan audits and describing the metrics it will use to determine which loans to audit. The SBA must submit its forgiveness audit plan to Congress within 45 days after enactment of the Appropriations Act and thereafter must provide monthly reports on its forgiveness review and audit activities. In addition to ensuring satisfaction of the requirements for PPP second draw loans (including with respect to certification of financial need, use of funds, and loan forgiveness), borrowers should remember to review the SBA forgiveness audit plan when it is released for guidance on risk areas for PPP loans and SBA audits.

Other Highlights

In addition to the matters noted above, the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” includes numerous other amendments and supplements to the PPP, many of which will provide welcome relief for borrowers and PPP lenders alike, including:

  • Express hold harmless provisions for PPP lenders relying on borrower certifications and documentation submitted by borrowers.
  • Establishment of new loan calculation provisions for farmers and ranchers.
  • New definitions of a seasonal employer.
  • Expanded eligibility for housing cooperatives, news organizations, certain 501(c)(6) and similar entities not previously eligible for PPP loans under the CARES Act to obtain a new PPP first draw loan of up to $10 million.
  • Express provisions permitting PPP loans to entities engaged in bankruptcy proceedings.
  • Clarification of certain terms affecting PPP loans, including calculation of interest rates.
  • Modifications to other SBA loan programs, including the Economic Injury Disaster Loans (EIDL) and the repeal of CARES Act provisions that required PPP borrowers to deduct the amount of EIDL advances from their PPP forgiveness amount.

In response to the “Save Our Stages” lobbying efforts of recent months, the act also includes the establishment of a $15 billion grant program that would provide grants of up to $10 million to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, and talent representatives that can demonstrate a 25% reduction in gross revenues as a result of the COVID-19 pandemic. Grants received under this program must be used for substantially the same types of eligible expenses as under a PPP loan. Notably, however, this program will be administered as a grant program (rather than being in the form of a forgivable loan like the PPP), and any remaining funds at the end of the applicable grant period—December 31, 2021 in most instances—will be returned to the SBA.

The Bass, Berry & Sims CARES Act Task Force continues to monitor developments related to the unprecedented governmental assistance programs enacted in response to the COVID-19 pandemic. If you have questions about the PPP and your business, please contact a member of the task force or your relationship attorney at the firm.

Related Professionals
Related Services
Firm Publication

On December 21, the United States Congress passed the Consolidated Appropriations Act, 2021, to fund annual appropriations and, through its “Additional Coronavirus Response and Relief” provisions, to supply a second round of economic stimulus benefits to industries, businesses and individuals impacted by the COVID-19 pandemic. The Appropriations Act became effective upon signing by President Trump on December 27.

Included within the additional COVID-19 relief package is the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” that will extend the previously expired Paycheck Protection Program (PPP) through March 31, 2021 and will make available to certain eligible companies that have previously obtained a PPP loan under the March 27 Coronavirus Aid, Relief, and Economic Security (CARES) Act an additional forgivable PPP loan called a “PPP second draw loan.” More than 5 million companies, nonprofits and individuals obtained PPP loans exceeding $500 billion under the CARES Act earlier this year. Forgivable PPP second draw loans will provide direct relief of up to $2 million per borrower to smaller businesses and nonprofits in industries hit hard by the virus and by the mandated and recommended preventive measures to stem the spread of COVID-19. After the Small Business Administration (SBA) adopts implementing regulations, second draw PPP loans will be available from participating lenders until March 31, 2021. Most banks and financial institutions that participated as PPP first draw loan lenders are expected to continue their PPP lender engagement.

Except for limited circumstances, the Appropriations Act narrows the scope of participation and magnitude of funding for second draw PPP loans compared to the original PPP loans in three significant ways:

  1. First, the maximum loan amount available to a business or nonprofit decreased from $10 million to $2 million per borrower.
  2. Second, subject to certain exceptions, the maximum workforce size for an eligible borrower is reduced from 500 to 300 employees.
  3. Third, a business or nonprofit must demonstrate a 25% loss of revenue during at least one quarter of 2020 compared to the corresponding quarter of 2019.

This content provides an overview of: eligibility requirements for a PPP second draw loan, loan amounts, use of loan proceeds, forgiveness of the PPP second draw loan, and clarification regarding tax deductibility of expended loan proceeds.

Eligibility for a PPP Second Draw Loan

A company or nonprofit must satisfy the following conditions of eligibility:

Prior PPP Loan

The borrower must be a prior PPP borrower that has used or will use the full amount of their first PPP loan on or before the expected date of disbursement of the PPP second draw loan.

One Loan per Borrower

Only one PPP second draw loan may be obtained per business or nonprofit, regardless of the number of locations where its workforce is employed.

Size of Workforce Cap

The borrower may not have more than 300 employees. The limitation to 300 employees is a reduction from the 500-employee limitation that applied to first draw PPP loans. However, business concerns that have more than one physical location and are 72 NAICS-coded companies (Accommodation and Food Services) may employ not more than 300 employees per physical location and retain eligibility. Selective additional exceptions under the CARES Act that allowed companies with certain designated NAICS codes to satisfy larger alternative “size of business” workforce number for eligibility will not apply to PPP second draw loans.

Effect of SBA Affiliation Rules

Comparably to PPP “first draw” loans, long-standing SBA affiliation rules apply to PPP second draw loans for purposes of determining compliance with the number of employees eligibility cap. Accordingly, an entity that is under common control with one or more other companies (e.g., controlled by a corporate parent or by a common private equity sponsor) that in the aggregate combined with such other affiliated entities have a workforce exceeding 300 employees will generally not be eligible to receive a PPP second draw loan. However, the same waiver created under the CARES Act for certain PPP first draw borrowers from the application of the SBA affiliation rules that would otherwise treat multiple “affiliated” entities as a single borrower for purposes of counting the number of permitted maximum employees toward the size of workforce eligibility cap also applies to a PPP second draw loan. Accordingly, the employees of affiliates of any of the following categorized entities would not be counted toward the size of workforce cap:

  • A business operating within one of 15 specified 721 or 722 NAICS code subsectors.
  • A business operating as a franchise that is assigned a franchise identifier code by the SBA.
  • A business that receives financial assistance from a Small Business Investment Company (SBIC).
Loss of Revenue

The business or nonprofit must have suffered a 25% reduction in gross receipts in any quarter of 2020 compared to the corresponding 2019 quarter. For businesses that were not in operation in Q1, Q2, Q3, and Q4 of 2019, the legislation provides similar applicable timelines. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Certification of Financial Need

The borrower must certify its economic “need” for the loan, as similarly applied to initial PPP loans, that “… current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business or nonprofit. A potential PPP second draw borrower must consider whether it satisfies this condition of “current” need in addition to satisfying the 25% revenue reduction from comparable quarters of 2020 compared to 2019.

No Publicly Traded Companies

The business may not be a publicly traded company. (This can be viewed as Congress’ political response to the fierce criticism that arose in certain quarters when the participation of certain public companies as PPP borrowers under the CARES Act became known.) Additional ineligible entities include: entities involved in political and lobbying activities, entities affiliated with entities in the People’s Republic of China, registrants under the Foreign Agents Registration Act, and entities that receive a grant under the parallel Shuttered Venue Operator Grant program established under the Appropriations Act.

Pre-COVID-19 Operations

The business or nonprofit must have been in operation on February 15, 2020.

Eligibility of Religious Organizations

The Appropriations Act effectively codifies SBA and Treasury regulations adopted in April 2020 expressly designating religious organizations such as churches, synagogues and mosques as eligible PPP borrowers, and prohibits the application of SBA regulations otherwise forbidding organizations principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs from obtaining SBA loans.

Loan Amounts

Formula Based on Monthly Payroll

In general, borrowers may receive a loan of up to a maximum amount that is the lesser of (1) 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year 2019 or (2) $2 million, with the following exceptions:

  • Eligible entities that did not exist during the one-year period prior to February 15, 2020 may receive loans of up to 2.5 times the sum of average monthly payroll costs not to exceed $2 million.
  • Seasonal employers may calculate their maximum loan amount, not to exceed $2 million, based on a 12-week period beginning February 15, 2019 through February 15, 2020.
  • Entities in industries assigned to NAICS code 72 may receive loans of up to 3.5 times the average monthly payroll costs (subject to the $2 million cap).
$2 Million Cap

The loan amount of a PPP second draw loan is capped at $2 million per borrower, regardless of the number of the borrower’s locations. Initial PPP loan borrowers under the CARES Act were allowed to borrow up to $10 million and certain franchises, hotel and restaurant companies were allowed to borrow up to $10 million per location as a result of the application of affiliation waivers for such industries.

Use of Loan Proceeds

The Appropriations Act expands the categories of allowable and forgivable uses of PPP initial and second draw loan proceeds beyond the CARES Act original categories of payroll costs, rent, scheduled interest payments on mortgage debt or other pre-existing debt, and utilities, to include the following:

  • Covered operations expenditures: Payment for any software, cloud computing, and other human resources and accounting needs.
  • Covered property damage costs: Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
  • Covered supplier costs: Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
  • Covered worker protection expenditure: Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. Investments may include the purchase, renovation or maintenance of assets that create or expand: drive through window facilities, air pressure ventilation or filtration systems, physical barriers, expansion of additional business space, or onsite or offsite health screening capability.

PPP first draw borrowers may retroactively utilize the expanded categories of forgivable expenses with respect to their PPP first draw loan if the forgiveness process for that prior PPP loan has not already been completed.

The Appropriations Act also clarifies that payroll costs include expenses for group life, disability, vision or dental insurance.

As a result, initial PPP borrowers who have not yet applied for forgiveness, or that have pending forgiveness applications, should assess whether they will be eligible for a higher forgiveness amount under these new rules.

Forgiveness of the PPP Second Draw Loan

Borrowers of a PPP second draw loan that maintain certain employee retention requirements are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the “covered period.” The minimum 60% allocation to payroll costs and maximum 40% allocation to non-payroll costs that have applied to prior PPP loans to attain full forgiveness will continue to apply to PPP second draw loans.

The Appropriations Act allows for flexibility in the “covered period” by allowing the borrower to designate a covered period of between 8- and 24-weeks ending at a point of the borrower’s choosing between the 8th and 24th week after the origination date of a covered loan.

Tax Deductibility of Expended Loan Proceeds

The Appropriations Act clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. It also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This provision is applicable to both the initial PPP first draw loans and PPP second draw loans.

Implementation

The Appropriations Act requires the SBA Administrator to establish regulations to carry out the provisions of the new PPP second draw loan program no later than 10 days after enactment of the Appropriations Act. The SBA has so far declined to comment on when it would open up the PPP portal.

SBA Audits

The SBA, which is already immersed in auditing original PPP loans of $2 million or more, has been allocated an additional $50 million under the Appropriations Act for auditing and fraud mitigation purposes. The Appropriations Act also requires the SBA to develop a “forgiveness audit plan” setting forth policies and procedures for conducting loan forgiveness reviews and loan audits and describing the metrics it will use to determine which loans to audit. The SBA must submit its forgiveness audit plan to Congress within 45 days after enactment of the Appropriations Act and thereafter must provide monthly reports on its forgiveness review and audit activities. In addition to ensuring satisfaction of the requirements for PPP second draw loans (including with respect to certification of financial need, use of funds, and loan forgiveness), borrowers should remember to review the SBA forgiveness audit plan when it is released for guidance on risk areas for PPP loans and SBA audits.

Other Highlights

In addition to the matters noted above, the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” includes numerous other amendments and supplements to the PPP, many of which will provide welcome relief for borrowers and PPP lenders alike, including:

  • Express hold harmless provisions for PPP lenders relying on borrower certifications and documentation submitted by borrowers.
  • Establishment of new loan calculation provisions for farmers and ranchers.
  • New definitions of a seasonal employer.
  • Expanded eligibility for housing cooperatives, news organizations, certain 501(c)(6) and similar entities not previously eligible for PPP loans under the CARES Act to obtain a new PPP first draw loan of up to $10 million.
  • Express provisions permitting PPP loans to entities engaged in bankruptcy proceedings.
  • Clarification of certain terms affecting PPP loans, including calculation of interest rates.
  • Modifications to other SBA loan programs, including the Economic Injury Disaster Loans (EIDL) and the repeal of CARES Act provisions that required PPP borrowers to deduct the amount of EIDL advances from their PPP forgiveness amount.

In response to the “Save Our Stages” lobbying efforts of recent months, the act also includes the establishment of a $15 billion grant program that would provide grants of up to $10 million to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, and talent representatives that can demonstrate a 25% reduction in gross revenues as a result of the COVID-19 pandemic. Grants received under this program must be used for substantially the same types of eligible expenses as under a PPP loan. Notably, however, this program will be administered as a grant program (rather than being in the form of a forgivable loan like the PPP), and any remaining funds at the end of the applicable grant period—December 31, 2021 in most instances—will be returned to the SBA.

The Bass, Berry & Sims CARES Act Task Force continues to monitor developments related to the unprecedented governmental assistance programs enacted in response to the COVID-19 pandemic. If you have questions about the PPP and your business, please contact a member of the task force or your relationship attorney at the firm.

In Case You Missed It: