Additional Relief For Businesses: First Draw PPP Loans and Changes to the Forgiveness Rules

On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Relief Act”) became law. The Relief Act includes a package consisting of $900 billion in aid to small businesses and individuals impacted by COVID-19.  Title III of the Relief Act, the Economic Aid Act to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) includes updated guidance for existing PPP loans taken out in 2020 (“First Draw PPP Loans”) and also authorizes a second round of PPP loans in 2021 for Borrowers who took a First Draw PPP Loan in 2020 (“Second Draw PPP Loans”).

On January 6, 2021, the Small Business Administration (SBA) released two Interim Final Rules (IFR) that provide guidance on the new PPP regulations as follows:

• Business Loan Program Temporary Changes; PPP as Amended by Economic Aid Act
• Business Loan Program Temporary Changes; PPP Second Draw Loans

On January 11, 2021, Anchin issued an Alert summarizing the Rules and Regulations for Second Draw PPP Loans. The focus of this Alert is to summarize the rules and regulations for Borrowers who either will be applying for their First Draw PPP Loan or who want to amend their existing PPP loan by applying for additional funding.  In addition, we will outline some changes to PPP loan forgiveness.

PPP Has Reopened as of January 11, 2021

On January 8, 2021, the SBA in consultation with the Treasury Department announced that the PPP will re-open the week of January 11 for new Borrowers and certain existing PPP borrowers. To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday January 11, 2021, and Second Draw PPP Loans on Wednesday January 13, 2021. The PPP will open to all participating lenders shortly thereafter.  In the meantime, we have noted that some lenders are enabling Borrowers to pre-register, so be sure to check with your lender as to what is currently available to you. The last day to apply for a First or Second Draw PPP loan is March 31, 2021.

Eligibility Requirements for Borrowers to Receive a First Draw PPP Loan

For those entities that have not yet taken a PPP Loan, the eligibility requirements for a First Draw PPP Loan generally remain unchanged, except for the addition of certain types of entities.  However, a Borrower now has the option to use its 2019 or 2020 payroll to determine its maximum loan amount.

Borrowers are eligible, if they, together with any Affiliates (if applicable), meet one of the following requirements:

• An entity that employs no more than 500 employees; [1]
  
• A small business concern under the applicable revenue-based size standard established by SBA in 13 C.F.R. 121.201 or under the SBA alternative size standard; [2]
  
• An independent contractor, eligible self-employed individual, or sole proprietor;
• A housing cooperative, an eligible section 501(c)(6) organization, or an eligible destination marketing organization, that employs no more than 300 employees; or
• A news organization that is majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151 (cumulatively, “News Organization”), that employs no more than 500 employees (or, if applicable, the size standard in number of employees established by SBA in 13 C.F.R. 121.201 for its industry) per location.

Other requirements include:

• The entity was in operation on February 15, 2020, and either had employees for whom salaries and payroll taxes were paid, or paid independent contractors, as reported on a Form 1099-MISC or was an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.
• In determining its total number of employees, a Borrower must include employees from all its domestic and foreign affiliates, except in circumstances where the SBA’s affiliation rules expressly do not apply. [3]

Entities that are Ineligible for a PPP Loan

An Entity is ineligible to receive a PPP loan if, for example, it is:

• An entity engaged in illegal activities
• A Household employer
• An entity whose equity is owned 20% or more by an individual who is incarcerated
• An entity that will receive a grant under the Shuttered Venue Operator Grant Program under Section 324 of the Economic Aid Act
• An entity owned or controlled by the President, Vice-President, the head of an Executive department or a Member of Congress or the spouse of any of the aforementioned individuals
• An issuer whose securities are listed in a national securities exchange (i.e., publicly-traded stock)
• An entity whose business is permanently closed
• The business is currently a debtor in a bankruptcy proceeding
• A Hedge fund or private equity firm

Calculating the Maximum First Draw PPP Loan Amount

In general, the maximum loan amount for a First Draw PPP Loan is equal to the lesser of two and a half months of the Borrower’s average monthly payroll costs, or $10 million.

• A Borrower’s average monthly payroll costs may be based on calendar year 2019 or 2020 (at Borrower’s discretion). [4]
  
• In calculating Payroll Costs (as defined below) [5], a Borrower must subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the time period during which the payments are made.
• For Partnerships, the loan is calculated by multiplying the sum of (1) and (2) by (3) below:

1. 1. Net earnings from self-employment of individual general partners in 2019 or 2020 as reported on Form 1065 K-1 reduced by Section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by .9235, that is not more than $100,000, divided by 12; and
   2. Average monthly payments for employee payroll costs incurred or paid during the same year elected by the Borrower (2019 or 2020).
   3. 2.5

• Specific rules are also provided for calculating the eligible loan amount for seasonal employers, Borrowers that did not exist during certain parts or all of 2019, farmers, and Form 1040 Schedule C filers.

Businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of First Draw PPP Loans in the aggregate.

Submitting an Application for a First Draw PPP Loan

An Applicant must submit SBA Form 2483-Revised January 8, 2021 (PPP Borrower Application Form) to the lender. (This form is available on the SBA website.)

• An Applicant must submit the following documentation:
  • If not self-employed, Borrower must submit Form 941 and state quarterly wage unemployment insurance tax reporting forms from each quarter in either 2019 or 2020 (at Borrower’s choice) or equivalent payroll processor records, and
  • Evidence of any employer contributions for retirement and employee group health, life, disability, vision, and dental insurance for either 2019 or 2020
  • Partnerships should include Form 1065 K-1s (2019 or 2020)

• If an Applicant is self-employed with employees, the Applicant’s 2019 or 2020 Form 1040 Schedule C should be provided along with the same documents mentioned above to document payroll, health and retirement costs.

Certifications Required when Applying for a First Draw Loan:

• Borrowers also continue to be required to complete the certifications included in the PPP application (SBA Form 2483-Revised January 8, 2021), which include “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant” and at least 60% of the costs used for forgiveness will be from Covered Period payroll costs (as defined)

PPP First Draw Loan Terms:

• The interest rate will be 1% non-compounding interest
• Loan Maturity will be 5 years
• Payments of interest and principal will not be required if loan forgiveness application is filed within 10 months after the end of your loan forgiveness Covered Period
• SBA guarantees 100% of the loan
• No collateral will be required
• No personal guarantees will be required

Increases in First Draw PPP Loan

When PPP was first implemented in March 2020, it was unclear whether partnerships were permitted to include partner compensation in determining their maximum loan amount.  As a result, many partnership Borrowers did not include partner compensation (from partner’s Schedule K-1) in their loan applications.  Later in April 2020, SBA provided clarification that individual partner compensation was eligible to be included as a payroll cost when determining a Borrower’s PPP loan amount.  The current updated guidance from the SBA/Treasury states that a partnership Borrower that did not include partner compensation in determining its loan amount, may request an increase in its First Draw PPP Loan for partner compensation, subject to all other maximum loan limitations and documentation requirements.  This request should be made to the original lender, which will in turn make the request to the SBA.

In addition, the following Borrowers can reapply or request an increase in their PPP loan amount:

• A Borrower that had returned all of its PPP Loan proceeds may reapply for a PPP loan amount permitted under current rules.
• A Borrower that returned part of a PPP Loan may reapply for an amount equal to the difference between the amount previously approved and the amount retained by the Borrower.
• If a Borrower did not accept the full amount of a PPP Loan for which it was approved, the Borrower may request an increase in the loan amount up to the amount previously approved.

Requests for increase are only permitted if a Borrower did not receive loan forgiveness by December 27, 2020.  Requests for increase must be filed by March 31, 2021. The SBA is expected to issue additional guidance on the process for reapplying or requesting an increase for an initial PPP Loan.

PPP Loan Forgiveness

Total eligible costs must be comprised of at least 60% of payroll costs (compensation, health, retirement and state and local payroll taxes) over a Covered Period that can be from 8 weeks to 24 weeks at the Borrower’s discretion. Previously, the Covered Period was either 8 weeks or 24 weeks.

Costs eligible for forgiveness for both existing and future PPP loans include: payroll costs (compensation, health insurance, and retirement contributions) and nonpayroll costs including mortgage interest, rent and utilities. The Economic Aid Act added the following Covered Costs as eligible for forgiveness for both existing and future PPP loans (i.e., First Draw and Second Draw Loans): (i) worker protection expenditures, (ii) supplier costs, (iii) operations expenditures, and (iv) property damage costs.

In addition, the noncash compensation component of “payroll costs” has been expanded to include employer contributions for life and disability insurance. Previously, these costs included employer contributions for employee group health, dental, and vision insurance; employer contributions for employee retirement plans; and state and local taxes assessed on employers for employee compensation (primarily state unemployment such as SUI or SUTA).

The Anchin COVID-19 Resource Team continues to monitor ongoing updates to the PPP Program. To better understand how the changes impact your unique situation, please join our upcoming webinar providing the latest guidance on PPP and the refundable Employee Retention Credit. The webinar will take place on Friday, January 15, 2021 at 11 a.m. ET. In the meantime, contact your Anchin Relationship Partner or our Anchin COVID-19 Resource Team at [email protected] with any questions you may have

Disclaimer: Please note this is based on the information that is currently available and is subject to change. 

 [1] These entities include a business concern, a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act,

 [2] Under SBA’s alternative size standard, a business concern may qualify as a small business concern if it, together with any affiliates: (1) has a maximum tangible net worth of not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of application is not more than $5 million.

 [3] SBA’s affiliation rules are waived for (1) any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a NAICS code beginning with 72 (e.g., hotels and restaurants); (2) any business concern operating as a franchise; (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681); and (4)(a) any News Organization that employs not more than 500 employees, or the size standard established by the SBA, per physical location of such business concern that is assigned a NAICS code beginning with 511110 or 5151. SBA also applies affiliation exceptions to certain categories of entities. 13 C.F.R. 121.103(b).

 [4] If not self-employed or a sole proprietor, Borrower is permitted to use the precise 1-year period before the date on which the loan is made.

 [5] Payroll costs include, but are not limited to, compensation to employees whose principal residence is the United States in the form of salary, wages, commissions, cash tips, vacation pay, allowance for dismissal and employer payments for insurance premiums (group health care, group life, disability, vision or dental insurance) and retirement.