New Coronavirus Relief Package includes Second Draw PPP Loans and Changes to Existing PPP LoansDecember 23, 2020
This alert was updated on December 28, 2020.
Late on December 27, 2020, President Trump signed into law a new coronavirus relief bill, which included changes to existing Paycheck Protection Program (“PPP”) loans issued under the CARES Act, and the ability for certain PPP borrowers to obtain an additional “second draw” PPP loan (the “New PPP Legislation”). Below is a summary of certain key features of the New PPP Legislation, under which Congress allocated approximately $284 billion for new PPP loans through March 31, 2021.
Changes to First Draw PPP Loans
The New PPP Legislation made several changes to the existing rules for an applicant’s first PPP loan (a “first draw loan”).
Tax Deductibility: As eagerly anticipated by many PPP borrowers, the New PPP Legislation provides that not only will forgiveness of a PPP loan not be included in a borrower’s gross income (as provided in the CARES Act), but that borrowers will not lose the deductibility of otherwise deductible expenses paid with PPP proceeds as a result of forgiveness of the loan. This change applies to all PPP loans, whether received before, on or after the enactment of the New PPP Legislation.
Permitted and Forgivable Expenses: The list of expenses that are permitted uses of PPP proceeds and that are eligible for forgiveness was expanded to include:
- Covered operations expenditures (certain business software cloud computing services);
- Covered property damage (related to vandalism or looting in 2020 and not covered by insurance);
- Covered supplier costs (for the supply of certain goods essential to the business); and
- Covered worker protection expenditures (related to adapting the business to CDC and other government requirements or guidance, including air filtration systems, health screening capabilities and PPE).
These changes apply to all PPP loans, except those that have already been forgiven as of the date enactment of the New PPP Legislation. The New PPP Legislation also confirmed that the definition of benefits that qualify as payroll costs includes group life, disability, vision and dental benefits.
Duration of Covered Period: Whereas under the instructions to the existing PPP loan forgiveness application, a borrower’s covered period is either 8 or 24 weeks, under the New PPP Legislation, a borrower may not choose a covered period in duration of anywhere in between (a borrower’s covered period still begins on the date of loan disbursement).
Eligibility: From and after the date of enactment of the New PPP Legislation, publicly traded companies are not eligible for PPP loans. On the other hand, the New PPP Legislation expands eligibility (subject to complex rules) to certain news organizations, housing cooperatives, 501(c)(6) organizations, destination marketing companies and farmers/ranchers. Venue operators who receive a grant under the new shuttered venue relief grant program will not be eligible for a PPP loan.
Simplified Application Process for Loans Not More than $150k: The New PPP Legislation codifies the use of a streamlined forgiveness process for borrowers of $150,000 or less. Borrowers of amounts over this threshold will still be required to submit all of the documentation set forth in the CARES Act.
Audit Plan and Rulemaking: The SBA is directed to issue regulations implementing the New Legislation within 10 days after its enactment, and to submit an audit plan to Congress outlining the policies and procedures for conducting PPP loan forgiveness reviews and audits (including the metrics the SBA will use to determine which loans to review) within 45 days of enactment.
PPP Second Draw Loans
The New PPP Legislation permits borrowers who have already received and spent a PPP loan to receive one additional PPP loan (a “second draw” loan), subject to new eligibility requirements and caps on maximum loan amounts. The summary below relates to applicants that are business concerns (as opposed to other types of entities, sole proprietors, etc.).
Eligibility: Second draw loans are available to business concerns that employ not more than 300 employees and can show a decline in gross receipts of at least 25% during any quarter in 2020 versus the same quarter in 2019. The SBA affiliate rules still apply with respect to determining eligibility, although the New PPP Legislation carries forward certain affiliate rule exceptions provided under the CARES Act.
Notwithstanding the foregoing, certain businesses are excluded from eligibility for a second draw loan, including businesses (1) that are otherwise not eligible for SBA loans pursuant to 13 CFR 120.110; (2) that are primarily engaged in lobbying activities; or (3) that are owned 20% or more, directly or indirectly by an entity organized under the laws of, or with significant business operations in, the People’s Republic of China or the Special Administrative Region of Hong Kong, or have a person who is a resident of the People’s Republic of China on its board of directors.
Maximum Loan Amount: Second draw loans are 2.5x average monthly payroll expenses (3.5x for businesses with a NAICS code beginning with 72), up to a maximum of $2 million (as opposed to $10 million for first draw PPP loans).
Permitted Uses and Forgiveness: Generally, the same terms, conditions and processes that apply to first draw loans apply to second draw loans with respect to use of PPP proceeds and forgiveness of the loans.
This summary does not include or address every provision of the New PPP Legislation, the Paycheck Protection Program under the CARES Act, or related SBA rules and guidance, which should be read in its entirety. Furthermore, the SBA is required to promulgate regulations for the implementation of the New PPP Legislation after its enactment and, as such, there is still uncertainty relating to details of implementation.
We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.