Revisions to Paycheck Protection Program (PPP), Second Round of Loans and Clarity on Tax Deductions among PPP-Related Updates in Latest Federal Stimulus Bill
On December 21, 2020, each of the U.S. House of Representatives and Senate approved a $900 billion stimulus and appropriations bill, which (among many other measures and appropriations) includes important revisions to the Paycheck Protection Program (PPP) administered by the U.S. Small Business Administration (SBA) with support from the Treasury Department (Treasury).
Critically, the latest stimulus package authorizes a second round of PPP loans for eligible borrowers and expands the categories of forgivable expenses. Certain of the PPP-related provisions also facilitate forgiveness of existing PPP loans and seek to clarify ambiguities included in the original PPP legislation, rules and regulations. The new law also supersedes recent IRS guidance that would have disallowed federal tax deductions for expenses funded by forgiven PPP loans.
The legislation is expected to be signed into law by the President soon. The enactment of the law will trigger a number of deadlines for SBA and Treasury to issue additional rulemaking to implement the latest PPP changes, with most of the new rules due within a matter of weeks. It is not immediately clear when SBA and PPP lenders will be in a position to accept and process new PPP loan applications, as the numerous forms and official SBA/Treasury guidance will need to be updated to reflect the revised program rules before new loans can be originated.
This client alert provides an executive summary of the most important and broadly applicable aspects of the latest PPP legislation. This alert also briefly notes several related developments that, while not technically part of the PPP, are potentially relevant to small businesses, non-profits, museums, theaters and other small business concerns.
As we continue to review the new stimulus legislation and forthcoming rulemaking, we will publish further alerts addressing more specific issues and ongoing developments. We have also scheduled a webinar for 8:00am Eastern Time on Monday, December 28, 2020, during which we will review and discuss the major changes to the PPP and answer questions from webinar participants. We hope you will join us by registering at the link below.
Reopening PPP, Second Round of Loans for Eligible Borrowers
The stimulus legislation appropriates just over $284 billion for new PPP loans originated through March 31, 2021, including a second round of PPP loans (referred to in the legislation as “second draw” loans) for certain eligible borrowers. However, the legislation also changes the scope of eligible borrowers. Second draw loans will only be available to eligible entities with 300 or fewer employees that can demonstrate a quarterly decline in gross receipts of at least 25% (generally on a year-over-year basis, subject to limited exceptions for seasonal borrowers, new businesses, etc.). Additionally, entities that received a first draw PPP loan must have used the full amount of their initial PPP loan prior to the disbursement of the second draw loan.
For most borrowers, the amount of a second draw PPP loan will be calculated in generally the same manner as the first draw loan (average monthly payroll costs multiplied by 2.5). However, second draw loans will be capped at a maximum of $2 million (reduced from a $10 million cap on first draw loans). For borrowers with an NAICS code beginning with 72 (generally, restaurants and hotels), the 2.5X multiplier is increased to 3.5X, resulting in larger second draw loans for these particularly hard-hit businesses. All second draw PPP loans remain subject to the $2 million cap, however.
The updated PPP will make certain “destination marketing organizations” (e.g., regional convention organizers/promoters) and IRC Section 501(c)(6) entities (e.g., chambers of commerce) eligible for PPP loans, as long as they satisfy certain size-based eligibility requirements (generally 300 or fewer employees) and limitations on political and lobbying activities, expenditures and receipts.
The new legislation also opens up the PPP to certain eligible broadcasting stations, newspapers and public broadcasting organizations that can certify that the PPP loan proceeds will be “used to support expenses at the component [of the eligible borrower] that produces or distributes locally focused or emergency information.” These potential borrowers may also benefit or become eligible on a location-by-location basis through the application of limited affiliation waivers.
Specifically excluded from the pool of eligible borrowers are (i) publicly-traded companies, (ii) entities and individuals primarily engaged in political or public policy lobbying activities, (iii) entities that have 20% or greater equity ownership by Chinese- or Hong Kong-based entities or individuals and (iv) entities with any board member who is a resident of the People’s Republic of China.
In addition, borrowers who receive a “shuttered venue operator grant” under the new stimulus package (see below) will be ineligible to receive a second draw PPP loan. Before applying for a PPP loan, those who may be eligible for a “shuttered venue operator grant” should carefully consider which program best suits their needs.
Subject to remaining appropriations being available, PPP loans (whether first draw or second draw loans) will be available through March 31, 2021.
Forgiven PPP Expenses Eligible for Federal Tax Deductions
Expenses that are otherwise deductible for federal income tax purposes will no longer be disallowed due to the fact that the expense was funded by a forgiven PPP loan. This aspect of the new legislation supersedes IRS guidance to the contrary released over the last several months. Specifically, the stimulus bill provides that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act. This provision applies to both first draw and second draw PPP loans.
Broadening of Forgivable Expenses
The scope of expenses eligible for forgiveness under the PPP has been broadened under the new legislation to include certain operating expenditures, property damage costs resulting from civil unrest, supplier costs and worker protection expenditures, in addition to the already eligible expenses of payroll costs and certain utilities, mortgage interest and rental obligation expenses. On the other hand, the legislation affirms that residential real property and intangible property are not forgivable expenses under the PPP. The new stimulus legislation maintains the 60% / 40% forgiveness split between payroll costs and non-payroll costs. That is, at least 60% of the amount of PPP forgiveness must be attributable to payroll costs, notwithstanding the overall expansion of forgivable expenses.
PPP Set-Asides
Of the aggregate $284 billion in PPP appropriations, the following amounts have been set aside for particular categories of lenders or borrowers:
- $15 billion for PPP loans made by community financial institutions
- $15 billion for PPP loans made by certain smaller financial institutions with $10 billion or less in consolidated assets
- $15 billion for first draw PPP loans and $25 billion for second draw PPP loans received by eligible borrowers (i) with 10 or fewer employees or (ii) located in “low-income” or “moderate-income” neighborhoods (for purposes of the Community Reinvestment Act of 1977), subject to a maximum loan amount of $250,000 in the case of clause (ii)
Audit Process Report to Congress
The legislation requires SBA to report to Congress, no later than 45 days after its enactment, the agency’s plans, policies and procedures for conducting forgiveness reviews and audits of PPP loans, including the metrics that SBA will use to determine which loans it will audit. SBA will then be required to report to Congress on its audit and review activities on a monthly basis going forward.
Simplified Forgiveness Process for Loans Below $150,000
A new, simplified forgiveness process will be created for PPP loans with an original principal amount below $150,000. For such loans, the borrower will need to sign and submit a one-page certification to be created by SBA, which will include estimated information about jobs retained as a result of the loan as well as the estimated amount of the loan spent on payroll costs. The borrower will also be required to attest that they have complied with the applicable rules of the PPP and retain PPP compliance records for a three- to four-year period. PPP borrowers with loans of this size may wish to consider delaying their loan forgiveness applications until SBA has released the new one-page certification/application required by the new law.
Shuttered Venue Operator Grants
The stimulus legislation also appropriates $15 billion to a new “shuttered venue operator grant” program to be administered by SBA. This program will provide grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, relevant museum operators, motion picture theater operators and talent representatives that meet specified requirements.
The eligibility criteria for these grants and the terms, conditions and administration of this program, which are independent of the PPP (though similar in some respects), is beyond the scope of this summary update. However, borrowers eligible for both PPP loans and “shuttered venue operator grants” will want to carefully consider which program best suits their needs. Miller Johnson will follow-up with a separate client alert specific to these shuttered venue grants and related considerations.
Other Changes and Clarifications
- The legislation confirms that “group life, disability, vision [and] dental insurance” costs all qualify as forgivable “payroll costs.”
- The stimulus bill no longer requires EIDL advances received by PPP loan recipients to be deducted from their PPP loan forgiveness amounts. SBA is directed to create a procedure to address loans that have already been submitted for forgiveness, including those where forgiveness has already been approved.
- The legislation also authorizes an additional $20 billion in targeted EIDL advances, which will generally be used to fund advances to the hardest hit businesses in low-income communities.
- The legislation fills a void created by the CARES Act by establishing a procedure for PPP loans to be made available to certain entities and individuals involved in bankruptcy proceedings. While the CARES Act did not establish bankruptcy as a basis for ineligibility, SBA and Treasury made these potential borrowers ineligible for PPP loans through administrative rulemaking when the PPP was first implemented.
- Additional government oversight and conflict-of-interest procedures and rules are included in the new legislation that prohibit new PPP loans to certain “covered entities” – generally otherwise eligible borrowers that have in excess of 20% ownership or control by senior executive department officials, members of Congress and/or their respective spouses. Additionally, a mandatory disclosure framework is now required for existing PPP loans that would have been prohibited under the new conflict of interest rules.
- The stimulus legislation also appropriates additional funds and makes other changes to facilitate SBA lending, including by extending the timeframes for debt relief programs for non-PPP loans guaranteed by SBA.