Today (March 25th), the Senate voted to pass the Paycheck Protection Program (PPP) Extension Act of 2021, by a vote of 52-48, without amendments. This Act, if signed by President Biden as expected, will extend the loan application period for the PPP program, which was originally set to expire on March 31st, through May 31st. Furthermore, the SBA will continue to process existing applications through June 30th.
The American Rescue Plan (ARP) expanded PPP eligibility to include additional and larger nonprofits as well as other organizations. Organizations who are still experiencing difficulties with payroll costs due to COVID-19 may wish to consider whether they are newly or again eligible for a forgivable loan.
The text of the PPP Extension Act is available here. Below is a brief primer for clients considering or reconsidering applying for the PPP. The SBA is expected to update its guidance to take into account ARP changes. Important current guidance includes:
- PPP General FAQs (here) – last updated March 12, 2021
- Calculating First Draw Loans (here) – last updated March 12, 2021
- Calculating Second Draw Loans (here) – last updated March 12, 2021
- PPP Loan Forgiveness FAQs (here) – last updated October 13, 2020
- Affiliation Rules (here) – last updated April 3, 2020
What is the PPP?
The Paycheck Protection Program (PPP) was originally established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The PPP provides up to two rounds (or “draws”) of forgivable loans to small businesses and nonprofits to help keep their workforce employed during the COVID-19 pandemic. According to the Small Business Administration (SBA) data report on March 14th, the program has approved more than 2.7 million loans over the past year, and only approximately $103 billion remains to be disbursed.
What are the terms for a PPP loan?
“First Draw” PPP participants (those borrowing from the PPP for the first time) can borrow a maximum of 2.5 times their average monthly payroll costs, up to $10 million. For borrowers seeking a “Second Draw” loan, the maximum loan amount is reduced to $2 million. In calculating aggregate payroll costs, cash compensation to any individual employee in excess of $100,000 annualized must be subtracted.
PPP loans have an interest rate of 1% and a maturity of five years (if issued after June 5, 2020). Loans are fully guaranteed by the SBA and do not require collateral or personal guarantees. Applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” SBA is making a safe harbor determination of good faith for borrowers who are:
- First Draw borrowers who receive less than $2 million total across all affiliates, unless they are Schedule C filers using gross income of more than $150,000 to calculate their loan amount;
- Second Draw borrowers of any kind due to their revenue loss certification.
Who is eligible to apply for a First Draw loan?
Originally, eligible entities included:
- Sole proprietors, independent contractors, and self-employed persons;
- Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard);
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) which:
- Has no more than 500 employees, or
- Meets the SBA industry size standard, if that standard is more than 500; or
- Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs fewer than 500 per location.
The American Rescue Plan (ARP) expanded eligibility for this program to larger nonprofits that employ fewer than 500 employees “per physical location.”
It also created an “additional covered nonprofit entity” category which expands eligibility to all nonprofit entities (other than 501(c)(3), 501(c)(4), 501(c)(6) and 501(c)(19) organizations), provided that:
- The nonprofit entity does not receive more than 15% of receipts from lobbying activities;
- Lobbying activities do not consist of more than 15% of the organization’s activities;
- The cost of lobbying does not exceed $1 million; and
- The entity does not employ more than 300 employees per physical location.
Who is eligible to apply for a Second Draw loan?
Eligible borrowers must have:
- Previously received a First Draw PPP loan, and have already used or will use the full amount only for authorized uses (however, the loan does not need to have been forgiven yet);
- Employ no more than 300 employees (or 300 per physical location for eligible nonprofits); and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 (i.e., second quarter of 2020 compared to second quarter of 2019).
“Gross receipts” are defined as in tax law. More information on the definition is available here.
What is the definition of “employees” for the purposes of business size?
An “employee” includes individuals employed on a full-time, part-time and other basis. It is not a full-time equivalency calculation. However, applicants must include the total number of employees across all affiliates according to the SBA affiliation rules (see here).
SBA suggests in its FAQ document that borrowers use either their (1) average employment over the time period used to calculate their loan amount; (2) the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application; or (3) the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months.
What can PPP loans be used for?
All PPP loans can be used to help fund payroll costs, including benefits, and may also be used to pay for:
- Mortgage interest;
- Rent;
- Utilities;
- Worker protection costs related to COVID-19;
- Uninsured property damage costs caused by looting or vandalism during 2020; and
- Certain supplier costs and expenses for operations.
What is the application process for a PPP loan?
Applicants cannot apply for a PPP loan directly with the SBA. Instead, applicants complete a PPP loan application (First Draw or Second Draw) and submit the application with supporting documentation to any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Applicants are encouraged to contact their existing lenders or lending institutions where their bank accounts are maintained, to check if they are participating. Many accept applications through their own online portals. SBA has a search tool to help identify local lenders.
Lenders may require any or all of the following information:
- Organizational documents for your business;
- 2019 and 2020 profit and loss statements to show revenue loss during 2020;
- 2019 and 2020 business tax returns;
- 2019 and 2020 IRS quarterly payroll tax reports;
- Gross wages, paid time off, vacation pay, and family medical leave pay for each employee;
- State and local taxes assessed on the employee’s compensation for each employee; or
- Documentation to support the total health, dental, vision, life, and disability insurance expenses and retirement expenses incurred as a part of payroll expenses.
What is the process for having a PPP loan forgiven?
Both First Draw and Second Draw PPP loans qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained;
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds are spent on payroll costs.
A loan forgiveness application is required. Existing PPP borrowers that did not receive loan forgiveness by December 27th may:
- Reapply for a First Draw PPP loan if they previously returned some or all of their First Draw PPP loan funds; or
- Under certain circumstances, request to modify their First Draw PPP loan amount if they previously did not accept the full amount for which they are eligible.
More information on PPP loan forgiveness can be found here.