Earlier this month, Congress passed the Consolidated Appropriations Act, 2021. Title III of the Act, called the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” reinstates and revamps the Paycheck Protection Program (PPP) originally established in the CARES Act passed by Congress this spring. The original PPP has been closed since August 8, but the new Act reopens the program and provides small businesses a second opportunity to participate.
President Trump signed the Consolidated Appropriations Act into law on Sunday, December 27. Under the Act, the Small Business Administration (SBA) now has until January 6, 20201 to establish regulations for the new round of PPP loans. Of the $900 billion appropriated for COVID-19 relief in the Act, $284 billion is designated for the new round of PPP loans. This provides a second opportunity for borrowers that may have missed the original wave of loans to participate in the program. Additionally, some borrowers drastically affected by the COVID-19 pandemic may be eligible for a “second draw” of PPP funds.
Participating in the PPP for the first time:
Potential borrowers that did not receive an original PPP loan in the first iteration of the program are eligible to apply for a loan before March 31, 2021. The basic structure and purpose of the initial PPP remains intact. For example, the amount of the loan is still based on 2.5x the borrower’s monthly payroll expenses and at least 60% of the funds must go toward payroll expenses for the loan to be eligible for full forgiveness. You can read our initial analysis of the PPP here.
There are, however, several significant changes between the terms for original PPP borrowers and the terms for borrowing a PPP loan under the new Act. Most of the changes are intended to reduce the ability for borrowers to exploit loans offered under the program, but some are also designed to provide more flexibility to borrowers to use the funds in a way that best helps them respond to the COVID-19 pandemic. There following are some highlights of the changes under the new Act and not an exhaustive list:
- Eligible borrower size reduced from 500 to 300 employees – In the initial PPP employers with 500 or fewer employees could apply for a PPP loan. That number has been reduced to 300 or fewer. Only larger businesses will be affected by this change.
- Cap on loan amount reduced from $10 million to $2 million – In the initial PPP borrowers could qualify for a $10 million loan. The new maximum dollar amount for a loan is $2 million. Again, only larger businesses will be affected by this change.
- Expanded acceptable uses of PPP funds – Original PPP loans could only be used toward payroll costs, contributions to healthcare benefits (paid sick, family medical leave and insurance benefits), employee salary and compensation, interest payments on a mortgage, rent, utilities, and other debts. Spending the funds for any non-approved purpose jeopardized the borrower’s eligibility for loan forgiveness. Under the new PPP, however, borrowers may also spend PPP funds on certain covered operational expenditures, supplier costs, worker protection expenditures, and property damage caused by vandalism or looting in 2020. This means that PPP funds can cover expenses like cloud computing, computer software, and PPE for employees and still be eligible for forgiveness.
- Covered period flexibility – Originally the time period to spend PPP funds and be eligible for forgiveness was 8 weeks. This left some borrowers struggling to spend funds in time as the loan amount was calculated based on 2.5x monthly payroll expenses (approximately 10 weeks). In the PPP Flexibility Act, congress added a 24-week covered period option so borrowers could choose between 8 weeks or 24 weeks. In the second round of PPP, however, borrowers may choose the length of the covered period. The covered period can anything between 8 weeks after loan origination and 24 weeks after loan origination.
- Simplified 1-page certification for forgiveness of any loan under $150K.
PPP Second Draw:
Borrowers that already received an initial PPP loan may also qualify for a second PPP loan or second draw. To be eligible for a second draw, the borrower must be able to demonstrate at least 25% reduction in gross receipts for any quarter in in 2020 relative to that same quarter in 2019. For example, if a business $20,000 in gross receipts in the third quarter of 2019, but only $15,000 in gross receipts during the third quarter of 2020, that business would be eligible for a second draw of PPP funds, provided it meets the other eligibility requirements. Generally, second draw PPP loans are treated the same way as the borrower’s original PPP loan except for the new limits and expanded fund uses highlighted above.
John Litzler directs the Church Law division of Christian Unity Ministries in San Antonio. He is a graduate of the University of Texas and Baylor Law school. He is a member of the SSHS class of 2004.
The information provided in this article is for educational purposes only and is not comprehensive in scope. It provides general information and a general understanding of the law, and do not provide specific legal advice. There is no attorney/client relationship between you or your business and the author. This information should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Information provided in this article is subject to change.