The SBA and the U.S. Department of the Treasury have published two new Interim Final Rules (IFR1; IFR2) in connection with the passage of the Economic Aid Act and Consolidated Appropriations Act, 2021 ("Economic Aid Act"), which were enacted on December 27, 2020. IFR1 consolidates all of the interim final rules and related guidance issued to date and amends such consolidated rules and guidance based upon applicable provisions in the Economic Aid Act. IFR2 outlines certain rules related to Second Draw PPP Loans, which will be available to eligible existing PPP borrowers. The SBA indicated in IFR1 that it intends to issue a consolidated rule governing all aspects of PPP loan forgiveness.
Changes to Existing Rules and Guidance
The Economic Aid Act reauthorizes lending under the PPP Program, extends the application window for first-time PPP borrowers through March 31, 2021, authorizes an option for eligible existing PPP borrowers to apply for a second PPP loan ("Second Draw PPP Loan"), and modifies certain provisions related to forgiveness of existing and future PPP loans.
Updated Eligibility Requirements, Categories and Restrictions
- First-time PPP loan applicants that were in operation on February 15, 2020 are eligible.
- Housing cooperatives, Section 501(c)(6) organizations¹ and destination marketing organizations, each with 300 or fewer employees, are eligible.
- Seasonal businesses that were in operation for any 12-week period between February 15, 2019 and February 15, 2020 are eligible.
- Most publicly traded companies are explicitly excluded from eligibility.
Additional Forgivable Expenses
- "Covered Worker Protection Expenditures" – Operating or capital expenditures made to adapt business activities to comply with federal health and safety requirements or guidance issued by a state or local government between March 1, 2020 and the expiration of the COVID-19 national emergency. As examples, such expenditures may include the purchase, maintenance or renovation of facilities, air ventilation or filtration systems; physical barriers; health screening capability; and PPE.
- Costs related to property damage and/or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
- "Covered Supplier Costs" – Expenditures made by a borrower to a supplier for the supply of goods that are essential to the borrower’s operations at the time the
expenditure is made; are made pursuant to a contract, order or purchase order which, in each case, was in effect at any time before the covered period; or is related to perishable goods and in effect at any time during the covered period.
- "Covered Operations Expenditures" – Payments for any business software or cloud computing service that facilitates business operations, product or service delivery; the processing, payment or tracking of payroll expenses, human resources, sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses.
- Costs related to refinancing an SBA Economic Injury Disaster Loan (EIDL) that was made between January 31, 2020 and April 3, 2020.
These new categories of forgivable expenses retroactively apply to existing PPP borrowers so long as the SBA has not remitted a loan forgiveness payment to the existing PPP borrower’s lender prior to December 27, 2020. Note that the requirement that PPP borrowers use 60% of the PPP loan proceeds for payroll costs in order to be eligible for forgiveness still applies. The updated rules also remove the requirement that, for purposes of calculating a PPP borrower’s forgiveness amount, the SBA deduct EIDL advances received by the borrower. Now, any EIDL advance received by a PPP borrower will not reduce its forgiveness amount. Any previously deducted EIDL advance amounts will be remitted to the applicable lender with interest.
Forgiveness Covered Period
rules eliminate the "alternative covered period" concept because the loan forgiveness covered period has been revised from either an 8-week or 24-week period to a borrower-chosen period between 8 weeks to 24 weeks.
Increases to Existing PPP Loan Amounts²
The SBA outlined the circumstances under which an existing PPP borrower would be eligible for an increase and indicated that it will issue additional guidance on the process to reapply or request an increase to an existing PPP loan:
- A partnership that previously received a PPP loan that did not include partner compensation as part of its payroll costs and other eligible operating expenses.³
- Seasonal employers that would be eligible for an increased PPP loan amount based upon the expanded operating period, described above.
- A borrower that returned 100% of a PPP loan can reapply under the amended rules.
- A borrower that returned a portion of a PPP loan can reapply for an amount equal to the difference between the amount the borrower retained and the amount previously approved.
- A borrower that did not accept the full PPP loan amount for which it was approved can request an increase up to the amount previously approved.
Second Draw PPP Loans
As part of the passage of the new legislation, certain eligible existing PPP borrowers now have the option of applying for a Second Draw PPP Loan. These PPP loans are generally subject to the same terms, conditions and procedures as initial PPP loans ("First Draw PPP Loans"), but are subject to the new rules outlined above, narrower eligibility requirements, and a lower maximum loan amount (individually and by single corporate group).
Narrower Eligibility Requirements
A borrower is eligible for a Second Draw PPP Loan if it: (1) received a First Draw PPP Loan and has
used or will use the full amount (including any increase) of proceeds from that loan on eligible expenses on or before the date on which the Second Draw PPP Loan will be disbursed; (2) has 300 employees or less; and (3) experienced a revenue reduction in 2020 relative to 2019 (as further described below). A borrower that applied for a First Draw PPP Loan that remains under review by the SBA can apply for Second Draw PPP Loan but will not receive an SBA loan number until its eligibility for the First Draw PPP Loan is confirmed. The guidance explicitly provides that borrowers are only eligible for one Second Draw PPP Loan, and businesses that have permanently closed are not eligible for a Second Draw PPP Loan; businesses that have temporarily closed are eligible.
In order to be eligible for a Second Draw PPP Loan, an applicant must have
experienced a revenue reduction of 25% or greater in 2020 relative to 2019. A prospective borrower can determine its revenue reduction (if any) by comparing its quarterly gross receipts in 2020 for the corresponding 2019 quarters. If the prospective borrower was operating in all four quarters of 2020, it can use annual tax returns to substantiate a revenue reduction. This option was included with the stated intent to reduce the burden on applicants that may not have quarterly revenue information readily available.
A prospective borrower that did not experience a 25% annual decline in revenue, or that was not in operation in all four quarters of 2019, may still meet the requirement and should calculate its revenue comparison on a quarterly rather than annual basis. Note that the forgiveness
amount of the borrower’s First Draw PPP Loan is excluded from the borrower’s gross receipts for purposes of calculating any revenue reduction.
Maximum Second Draw PPP Loan Amount
The maximum amount of a Second Draw PPP Loan is the lesser of 2.5 months of a borrower’s average monthly payroll costs or $2 million. Applicants that are part of a single corporate group can receive a maximum amount of $4 million in the aggregate.
Calculation of Payroll Costs
With respect to Second Draw PPP Loans, a borrower can use either the 12-month period prior to when the Second Draw PPP Loan was disbursed or calendar year 2019 to calculate payroll costs for purposes of determining its Second Draw PPP Loan amount. This change is intended to simplify payroll cost calculations and the documentation required to substantiate
such costs given that payroll records are commonly created and retained on a calendar year basis.
Generally, the same requirements (which vary by lender) apply with respect to documentation required to substantiate a borrower’s loan amount. No additional documentation will be required if the applicant uses calendar year 2019 figures to determine its First Draw PPP Loan amount and Second Draw PPP Loan amount and uses the same lender for both. For Second Draw PPP Loans of more than $150,000, applicants will need to provide documentation to substantiate a revenue reduction of 25% or greater.
Applicants for Second Draw PPP Loans of less than $150,000 will not need to substantiate a revenue reduction at the time they apply but will
need to provide documentation to substantiate the revenue reduction when they apply for forgiveness.
¹Section 501(c)(6) organizations and destination marketing organizations’ eligibility is subject to certain additional requirements related to lobbying activities of the organization.
²Note that any increased loan amount cannot exceed the maximum loan amount ($10 million for an individual borrower or $20 million for a corporate group).
³Income of general active partners may be included as a payroll cost, up to $100,000 on an annualized basis and prorated for the period during which the payments are made or incurred.