Numerous changes have been made to the Paycheck Protection Program (PPP) in recent months, primarily stemming from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) signed into law in December 2020 as part of the overall Consolidated Appropriations Act, 2021, and related administrative rules and guidance issued by the Small Business Administration (SBA). In this article, we address frequently asked questions and guidance regarding the initial PPP loans taken out by Borrowers (First Draw Loans).
Are there new entities eligible to receive PPP loans?
Under the Interim Final Rule for the Paycheck Protection Program as amended by the Economic Aid Act, certain additional entities are eligible for First Draw Loans, including: housing cooperatives, certain 501(c)(6) organizations, certain destination marketing organizations that employ no more than 300 employees, and Federal Communications Commission license holders and newspapers that employ no more than 500 employees.
Are there changes to entities prohibited from receiving a PPP loan?
The new laws and rules outline new prohibited Borrowers. Some of these additional prohibited Borrowers include but are not limited to:
- Entities that are an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f)
- An entity that received a Shuttered Venue Operator Grant
- An entity that was not in business on February 15, 2020
- An entity that has permanently closed
- The President, Vice President, head of an Executive Department, or member of Congress; or spouse of such person directly or indirectly holding a controlling interest in a business
Importantly, even Borrowers who received their First Draw Loans prior to December 27, 2020, will now be required to disclose to the SBA if they fell into any of the new prohibited categories at the time the Borrower submitted its original First Draw Loan Application. Borrowers that received a PPP loan prior to December 27, 2020, must fill out the Borrower’s Disclosure Form of Certain Controlling Interests and submit it to the PPP Lender.
What about those who have declared bankruptcy?
The SBA, through prior PPP rules and guidance and as reiterated in the Interim Final Rule with respect to PPP as amended by the Economic Aid Act, has taken the stance that an Applicant or owner of an Applicant that is the debtor in a bankruptcy proceeding, either at the time of Application, or at any time prior to disbursement of the loan, is ineligible to receive a PPP loan. While the Economic Aid Act did contain provisions allowing for certain categories of debtors to be eligible for PPP loans if the SBA consented and deemed them eligible, no such move has been made by the SBA to date, and therefore, the bankruptcy exclusion rules still apply. It is notable that the SBA’s stance on excluding Borrowers in bankruptcy from obtaining PPP loans has prompted significant litigation in which courts are currently split - some have upheld the SBA’s viewpoint, while others have ruled it unenforceable.
If the Applicant or owner of the Applicant becomes the debtor in a bankruptcy proceeding after submitting an Application, the Applicant or owner of the Applicant must notify its PPP Lender and request the PPP Application be cancelled. If the Applicant or owner of the Applicant does not request cancellation, it is considered by the SBA to be an unauthorized use of PPP funds.
The bankruptcy provision is reflected in the form of a certification on the Borrower Application Form, and the SBA has made clear that Lenders may rely on the Borrower’s certification and representation concerning the Applicant’s or owner of the Applicant’s involvement in a bankruptcy proceeding.
What is the Covered Period for First Draw Loans?
The covered period for purposes of determining loan forgiveness (Covered Period) for First Draw Loans is the period of time beginning on the date that the Lender disburses the PPP loan proceeds and ending on any date selected by the Borrower that occurs during the period (i) beginning on the date that is eight weeks after the date of disbursement, and (ii) ending on the date that is 24 weeks after the date of disbursement. Interest continues to accrue during the Covered Period. Generally speaking, all expenses eligible for forgiveness (Covered Expenses) must be paid or incurred by Borrower during the Covered Period.
Are there new Covered Expenses that are eligible for forgiveness?
Yes. It is important to note that these new Covered Expenses are effective as if they were originally included in the CARES Act. In other words, Borrowers who received their First Draw Loan prior to December 27, 2020, can also include these new Covered Expenses in their forgiveness Applications, as long as they have not already received loan forgiveness.
Additional Covered Expenses include:
- Covered Operations Expenditure – this includes payment for business software or cloud computing services that facilitate business operations, product or service delivery; processing, payment or tracking of payroll expenses; human resources, sales and billing functions; and accounting or tracking of supplies, inventory, records and expenses.
- Covered Property Damage Cost – this means costs related to damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
- Covered Supplier Cost – this includes expenditures made by a Borrower to a supplier of goods that are essential to the operations of the Borrower at the time the expenditure is made and is made pursuant to a contract, order or purchase order that was (i) in effect at any time before the covered period with respect to the applicable covered loan or (ii) with respect to perishable goods, was in effect before or at any time during the Covered Period with respect to the applicable loan.
- Covered Worker Protection Expenditure – this includes expenditures made to facilitate the adaptation of business activities of an entity to comply with the requirements established or guidance issued by DHHS, the CDC or OSHA, or any equivalent requirements established or guidance issued by a state or local government, during the period beginning on March 1, 2020, and ending the date on which the national emergency declared by the president with respect to COVID-19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. Qualifying expenditures include air ventilation or filtration systems, physical barriers, onsite or offsite health screening capabilities, and certain types of personal protective equipment.
Are there new prohibited expenses?
Yes. PPP loan proceeds may not be used for (i) lobbying activities; (ii) lobbying expenditures related to state or local elections; or (iii) to influence the enactment of legislation, appropriations, regulation, administrative action, or Executive Order proposed or pending before Congress, or any state government, state legislature, or local legislature or legislative body. It appears that this new prohibited expense under the Economic Aid Act only applies to PPP loans made on or after December 27, 2020, and is not retroactive to earlier PPP loans.
What are the changes for a seasonal employer?
A Borrower is considered a seasonal employer if it does not operate for more than seven months in any calendar year, or during the preceding calendar year it had gross receipts for any six months of that year that were not more than 33.33 percent of the gross receipts for the other six months of that year. A seasonal employer must determine its maximum loan amount by using the employer’s average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning on February 15, 2019, and ending on February 15, 2020.
Even if a seasonal employer was dormant or not operating on February 15, 2020, it may still be eligible and considered in operation as of February 15, 2020, if the business was in operation for any 12-week period between February 15, 2019, and February 15, 2020.
If a seasonal employer that received a PPP loan prior to December 27, 2020, is eligible for a higher maximum loan amount under the new rules, the Borrower can work with the Lender to submit a request to the SBA to increase the PPP loan amount. This is possible even if the loan has been fully disbursed and even if the Lender’s first SBA Form 1502 report to the SBA on the PPP loan has already been submitted; however, the increased loan amount cannot exceed the maximum PPP loan amount. The Borrower must provide the Lender with the required documentation to support the calculation increase. Any increase request must be submitted on or before March 31, 2021, and is subject to the availability of PPP funds.
How Do I Calculate the Loan Amount for First Draw PPP Loans?
Generally speaking, the maximum loan amount for First Draw Loans is the lesser of $10 million or an amount calculated using the payroll-based formula. PPP loans that were approved in 2020 used the 2019 or the one-year period before the date on which the loan was made to calculate payroll costs with respect to calculating the maximum loan amounts. Borrowers applying for PPP loans in 2021 who are not self-employed are permitted to use the one-year period before the date on which the loan is made to calculate payroll costs if choosing to not use 2019 or 2020.
The SBA has provided helpful instructions on calculating maximum loan amounts for different types of Borrowers, which can be accessed here. Note, however that since these instructions were published, the rules have been changed to allow sole proprietors, independent contractors and self-employed individuals to use gross income, rather than net income, when calculating the eligible loan amount.
Can I Apply for a PPP Loan Increase?
Certain existing Borrowers may reapply for or request an increase to a PPP loan if: (i) a Borrower returned all of a PPP loan, the Borrower may reapply for a PPP loan in an amount the Borrower is eligible for under the current rules; (ii) a Borrower returned part of a PPP loan, the Borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved; (iii) a Borrower did not accept the full amount of the PPP loan for which it was approved, the Borrower may request an increase in the amount of the loan up to the amount previously approved. In order to reapply or request a PPP increase, the SBA must not have remitted the loan forgiveness payment to the Lender on the loan.
Are there any other procedural changes to the Application process?
The SBA has begun reviewing all PPP loan Applications more thoroughly and performing background checks those individuals who own more than 20 percent of a Borrower. This is standard practice in other SBA loan programs but had not generally been done in reviewing earlier PPP Applications. Note that these changes have increased the processing time for many Applications and sometimes result in holds or flags that must be cleared before the Application can be approved. In the event a Borrower is notified by their Lender of such a flag, the Borrower should work closely with its Lenders (as well as its accountants and legal counsel, as necessary) to provide any additional information necessary to clear the hold.
How long do I have to apply for a PPP loan?
PPP loan Application deadlines are extended through the sooner of March 31, 2021, or until funds run out. Note, however, that due to a statement released by the Biden administration on February 22, 2021, the Application process was closed until March 11, 2021 to applicants except those for-profit and nonprofit businesses with fewer than 20 employees.
Below are useful links to necessary forms. Forms and additional guidance can be found on the SBA and Department of Treasury’s websites. We have also included links below to our other articles in this series.
- IFR on PPP as Amended by Economic Aid Act
- Revised First Draw Loan Borrower Application Form
- Interim Final Rule on Loan Amount Calculation and Eligibility