Small Business Administration (SBA) Announces Paycheck Protection Program (PPP) to Reopen Week of January 11, Issues Updated Rules, Regulations and Guidance in Consultation with Treasury Department (Treasury)

On January 8, 2021, in a top-line overview of “first draw” PPP loans, the U.S. Small Business Administration (SBA) announced that it would be reopening its Paycheck Protection Program (PPP) loan portal for “first draw” PPP loans on January 11, initially only for loans originated by community financial institutions (CFIs), and shortly thereafter for other lenders.  In a top-line overview of “second draw” PPP loans, SBA announced that it would open its PPP loan portal for “second draw” PPP loans on January 13, initially only for loans originated by CFIs, and shortly thereafter for other lenders.  Additional summary details regarding the reopening of the PPP are included in a joint press release issued by SBA and the U.S. Treasury Department (Treasury).

As noted in the press release, late on January 6, 2021, SBA, in consultation with Treasury, issued two new interim final rules (IFRs) relating to the PPP, as updated and amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) enacted into law on December 27, 2020.

SBA’s first IFR consolidates the most important aspects of its already existing PPP rulemaking (including 23 previous IFRs) into a single-reference point and more user-friendly format, with updates reflecting changes required by the Economic Aid Act.  The first IFR is not intended to substantively alter or affect PPP rules that were not amended by the Economic Aid Act.  The second IFR goes on to highlight key differences between so-called “first draw” and “second draw” PPP loans.

SBA also issued guidance on accessing capital for minority, underserved, veteran and women-owned businesses.  In this document, SBA summarizes some of the key PPP “set asides” included in the Economic Aid Act and communicates numerous actions that it will take to facilitate PPP lending to the nation’s smallest businesses and underserved communities.  The most notable of these actions is that SBA will accept PPP loan applications only from CFIs for at least the first two days when the PPP loan portal reopens during the week of January 11, 2021.

For the most part, the two IFRs implement the amendments to the PPP required by the Economic Aid Act (previously summarized here and discussed here) in a relatively straightforward manner.  Unlike the initial rollout of the PPP in March and April 2020, there were comparatively few surprises or additional requirements included in the IFRs.  SBA has indicated it will be updating its Frequently Asked Questions (FAQs) to conform to the PPP amendments in the Economic Aid Act and the updated IFRs.  SBA also stated it would be issuing an updated, consolidated IFR relating to loan forgiveness and loan review processes and procedures.

The following are among the most noteworthy initial takeaways applicable to all PPP loans under the newly-released IFRs:

• Confirms the final day to apply for and receive a PPP loan (whether “first draw” or “second draw”) is March 31, 2021.
• Affirms that the key terms of PPP loans remain unchanged (e.g., 1.00% interest rate, unsecured obligation/no collateral, no personal guarantees required, etc.)
• States that borrowers will generally be able to calculate their maximum loan amount based on their “payroll costs” during the course of one of three 12-month periods: calendar year 2019, calendar year 2020 or the 12-month period prior to the loan date.
  • Borrowers who used calendar year 2019 to calculate the size of their “first draw” PPP loan may want to consider using the same period to calculate the size of their “second draw” loan, since they will not be required to provide their lender with the same, duplicate substantiating payroll documentation for the “second draw” PPP loan (assuming they use the same lender).
• Implements the provisions of the Economic Aid Act allowing forgiveness of the following new categories of expenses: covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures. This expansion of forgivable expenses is retroactive to even those PPP loans pre-dating the enactment of the Economic Aid Act, except with respect to PPP loans for which SBA has already remitted a forgiveness payment to the lender.
• Provides examples of situations in which “first draw” PPP borrowers will be able to request an increase in their original PPP loan amount (e.g., borrower returned eligible loan funds or did not request its maximum loan amount). Also, indicates that SBA will be providing additional guidance to implement processes for these increased loan requests.
• Affirms that businesses that have “permanently closed” are ineligible to receive any further PPP loans.

In addition, the following points are worth noting for “second draw” PPP loans only:

• Confirms that “second draw” PPP loans will generally be subject to the same terms, rules, guidance and FAQs as “first draw” PPP loans, except where the Economic Aid Act, IFRs, FAQs or other SBA/Treasury rulemaking or guidance provide otherwise.
• Establishes “gross receipts” definition for purposes of assessing “second draw” loan eligibility against the 25% quarterly “gross receipts” reduction test included in the Economic Aid Act. Specifically, “gross receipts” will have the same meaning as applicable in the context of SBA’s size regulations and will include all revenue in whatever form received or accrued (in accordance with the borrower’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
  • Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
  • Gross receipts do not include the following: taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
  • Forgiven PPP loans do not count as “gross receipts” for this purpose.
  • All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from “gross receipts.”
• Provides that borrowers may satisfy the 25% decline in “gross receipts” test by comparing full calendar year 2020 to full calendar year 2019, since this approach may be significantly easier from an administrative perspective for certain eligible borrowers who do not normally prepare quarterly financial information. However, a borrower must have been operating in all four quarters of 2019 and must be prepared to provide its 2020 annual tax returns to take advantage of this modification to the general eligibility criteria.
• Imposes a $4 million aggregate cap on all “second draw” loans to borrowers that are part of a single corporate group, regardless of affiliation waivers and exemptions. This aggregate cap is in addition to the $2 million cap on any individual borrower’s “second draw” PPP loan.
• Borrowers whose initial PPP loan forgiveness applications have “unresolved issues” (e.g., a “need” certification review) will not receive a second draw loan until SBA has made a final determination as to the unresolved issue relating to the “first draw” loan. However, SBA states it will work to resolve these issues “expeditiously” and that funds will be set aside to fund these “second draw” PPP loan applications while the “unresolved issues” remain under review (subject to available appropriations).

In light of the above developments, prospective PPP borrowers (whether first-time or second-time) should work with their advisors to document their eligibility and gather the substantiating documentation that must be submitted with their loan applications.  Most notably, prospective “second draw” PPP borrowers will want to affirm their calculation of receipts/revenues (for purposes of satisfying the 25% quarterly decline test) aligns with the definition of “gross receipts” adopted by SBA (described above).  Borrowers requesting “second draw” PPP loans in excess of $150,000 will be required to substantiate this reduction in “gross receipts” at the time they apply for the new loan.  So, it is critical to have this and other eligibility issues resolved and documented as soon as possible.

Miller Johnson will continue to monitor developments relating to the relaunch of the PPP and other stimulus/relief measures that may be available to support small business concerns and other employers.