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NEW LAW MAKES CHANGES TO EXISTING PPP LOANS AND CREATES SECOND WAVE OF FUNDING FOR BUSINESSES IMPACTED BY THE PANDEMIC

The recently-signed Consolidated Appropriations Act made some sweeping changes to the Paycheck Protection Program (“PPP”) that was created earlier this year as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, including the creation of a Second Draw program for businesses still struggling from the pandemic. Below is a review of changes impacting the existing program along with a look at the requirements related to the additional wave of loans to come.

 

CHANGES TO THE EXISTING PROGRAM

  • The most notable and highly-anticipated change to the existing PPP was Congressional clarification that not only would proceeds from forgiven PPP loans not be taxable income, but business would also be allowed to deduct the expenses they paid from those funds. This provision overrode the IRS interpretation released over the summer that expenses paid from tax-exempt income were non-deductible under the existing tax code.
  • The law also expanded the definition of eligible expenses allowed for forgiveness to include funds spent by businesses in reaction to the pandemic in order to continue operating and also comply with new requirements issued by the CDC and other government regulatory agencies. This includes:
    • Software or cloud computing services that enabled remote business operations
    • Operating supplies or capital projects to adapt to safety measures required under various regulations and made after March 1, 2020, including protective equipment, drive-thru windows, expansion of indoor/outdoor spaces, health screening equipment, etc.
    • Payments for property damage, vandalism, or looting resulting from public disturbances during 2020 that were not otherwise covered by insurance
  • Borrowers can also self-select their covered periods under the loan to be any period of time between 8 weeks from date of funds disbursement up to 24 weeks from that date. This is a change from requiring an either/or choice between 8 or 24 weeks.
  • Another much-discussed change is a simplified forgiveness application process for PPP borrowers with loans under $150,000. The SBA has been directed to draft a single-page certification form that would only require borrowers provide the following details:
    • Total loan value received,
    • Estimated amount of the loan proceeds that were spent on payroll costs,
    • The number of employees the borrower was able to retain because they received the loan, and
    • Attestations from the borrower that they provided accurate information, complied with all requirements of the program, and agree to retain their records for up to 4 years
  • For PPP borrowers who also received an advance grant under the Economic Injury Disaster Loan (“EIDL”) program, the new law states that PPP loan forgiveness no longer has to be reduced by the amount of the EIDL grants.
  • Additional funding has been provided to allow for new PPP loans for first-time borrowers.
  • If you initially received a PPP loan and then returned some or all of the money or otherwise did not accept all of the money you initially qualified for, the SBA is to issue guidance on how to reapply to receive the unclaimed/returned proceeds.

 

CREATION OF THE SECOND DRAW PROGRAM

  • Those who received loans under the first round of PPP may get another loan under the Second Draw program even if they have not yet repaid or received forgiveness for the first loan, so long as they stipulate that they have or will spend all of the original loan funds on eligible expenses prior to receiving the second loan.
  • In order to be eligible for a Second Draw loan, you must meet the following criteria:
    • Be a business concern, nonprofit organization, religious organization, veterans organization, self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative in existence before February 15, 2020.
      • A business concern cannot be a publicly traded company nor can it be primarily engaged in political or lobbying activities, including advocacy for public policy.
      • An eligible entity cannot have an affiliation with, including operations in, key employee or board members who are, or be owned, directly or indirectly, by anyone in China.
    • Entities must have 300 or fewer employees (for restaurants and hospitality businesses with more than one location, each location must have fewer than 300 employees to qualify).
    • The business must have had at least a 25% decline in gross receipts in any single quarter of 2020 compared to the gross receipts for that same quarter in 2019.
      • For a business that started during the third or fourth quarter of 2019, you can compare any quarter in 2020 against either quarter in 2019 for a 25% reduction in gross receipts.
      • New businesses that started in 2020 prior to February 15th must be able to show a 25% reduction in gross receipts in any subsequent quarter compared to first quarter gross receipts..
    • The business cannot have received a grant under the Shuttered Venue Operator Grant program.
  • Second Draw loans are capped at the lessor of $2 million or 2.5 times the average monthly payroll costs for either calendar year 2019 or the 12 months immediately preceding application for the loan.
    • For businesses that fall under the NAICS code category 72 (broadly, restaurants and hospitality businesses), you can apply for 3.5 times the average monthly payroll costs.
    • For seasonal businesses, you can multiple 2.5 times the payroll costs for any 12-week period of your choosing that falls between February 15, 2019 and February 15, 2020.
  • Second Draw loans are eligible for full forgiveness provided that:
    • The funds are used to pay eligible expenses under the new expanded definition,
    • At least 60% of the funds are used to cover payroll costs, and
    • For loans under $150,000, an eligible borrower need only certify on paper that they meet the 25% gross receipts reduction criteria when applying for their loan. However, in order to qualify for forgiveness, those borrowers will need to provide documentation to substantiate the gross receipt reduction.

 

If you have any questions about how changes to these programs might impact your business, or you’re interested in seeing if you qualify for a PPP loan under the new rules, please call our offices at (770) 532-9131. You may also want to reach out to your lender to see when they expect to begin accepting new loan applications.