On Sunday December 27, 2020, as part of an omnibus spending package in the Consolidated Appropriations Act, 2021, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”). The Act is designed to provide much anticipated support to small businesses hard-hit by the pandemic.
This client alert highlights several of the Act’s provisions relating to continuation of the Paycheck Protection Program established under the CARES Act (“PPP”).
Continuing the Paycheck Protection Program
Increased funding and extended commitment and covered period for new PPP loans. The Act extends the PPP through March 31, 2021 with direct appropriations for PPP of $284.24 billion. With respect to eligible borrowers who have not obtained a PPP loan, as well as second draw PPP loans described below, the Act extends the covered period to obtain a new PPP loan until March 31, 2021.
Additional eligible expenses. The Act provides for several additional eligible expenses in connection with the use of PPP loan proceeds and forgiveness, including “covered operations expenditures,” “covered property damage costs,” “covered supplier costs,” and “covered worker protection expenditures” (as such terms are defined in the Act). So long as the borrower has not received forgiveness under its original PPP loan, this amendment applies as if included in the CARES Act.
Deductible business expenses paid for with a forgiven PPP loan are deductible. In sister legislation providing tax relief, which was enacted with the Act, PPP loan forgiveness provisions were amended to clarify that, for purposes of the Internal Revenue Code, “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” [with respect to PPP loan forgiveness]. This amendment is effective for tax years ending after the date of enactment of the CARES Act.
Selection of covered period for forgiveness. The Act amends the term “covered period” for purposes of forgiveness to mean the period beginning on the date of origination of the PPP loan and ending on a date selected by the borrower anytime between 8 weeks and 24 weeks following origination. This amendment is designed to give the borrower the flexibility to choose its covered period for purposes of forgiveness using these parameters, and no longer be limited to a fixed 24-week period (or 8-week period if its PPP loan was disbursed prior to June 5, 2020).
Simplified forgiveness applications for PPP loans up to $150,000. In the case of PPP loans of not more than $150,000, the Act provides that the forgiveness application will be a one-page SBA form on which the borrower will only be required to provide certain information relating to the use and amount of the PPP loan, certify as to the accuracy of such information and attest to compliance with the PPP loan requirements. The borrower will not have to submit any other documentation at the time of application but will be required to retain relevant records for specified periods in case of a permitted lender request or an audit. This amendment is effective as if made in the CARES Act.
Payment of other group insurance as payroll costs. The Act clarifies that payments with respect to other group insurance (including group life, disability, vision or dental insurance) should be included as payroll costs. This amendment is effective as if included in the CARES Act.
Businesses not in operation on February 15, 2020. The Act clarifies that businesses and organizations that were not in operation on February 15, 2020 are not eligible for any initial or second draw PPP loans.
Paycheck Protection Program Second Draw Loans. The Act entitles eligible borrowers who (i) have used up their original PPP loan, (ii) employ not more than 300 employees and (iii) had at least a 25% reduction in gross receipts during any quarter in 2020 as compared to the corresponding quarter in 2019, to draw a second PPP loan up to a maximum of $2 million (as described below) on a substantially similar basis as the initial PPP loan, subject to certain modifications set forth in the Act.
The maximum amount of the second PPP loan is the lesser of (1) 2.5 x average monthly payroll (based at the borrower’s election on either the immediately preceding 1-year period or calendar year 2019) or (2) $2 million (the calculation is adjusted for seasonal employers). Eligible entities assigned an NAICS code beginning with 72 (the accommodations and food services industry) will use a 3.5 multiplier in calculating their maximum loan amount. Business concerns assigned an NAICS code beginning with 72 and having more than one physical location may also be eligible for a second PPP loan, if they have no more than 300 employees per physical location and meet the revenue reduction requirements. The waiver of the SBA affiliation rules applicable to initial PPP loans are also adjusted for second PPP loans to apply only to smaller employers with no more than 300 employees.
A second PPP loan will be eligible for forgiveness in the same manner as the initial PPP loan, with respect to eligible expenses as amended by this Act, based on the lesser of (i) the amount of eligible expenses paid or incurred during the “covered period” and (ii) the amount of the second PPP loan used for payroll costs during the covered period divided by 0.60.
The term “covered period” for purposes of forgiveness with respect to a second PPP loan is to have the same meaning as amended by the Act and described above. In connection with applying for forgiveness of a covered loan, the Act extends the safe harbor date to restore reductions in employees/salaries, and the date with respect to the exemption based on employee availability, from December 31, 2020 to the end of the covered period.
The tax relief legislation also provides that forgiveness of a second PPP loan is excluded from gross income in the same manner as the initial PPP loan, and that otherwise deductible business expenses paid for with the proceeds of a forgiven second PPP loan are allowed to be deducted.
Increased ability of borrowers to request an increase in their PPP loan amount. With respect to those covered loans for which the borrower has not received forgiveness as of the date of enactment of the Act, the SBA may allow, by regulation, borrowers to increase the amounts of their PPP loans in those cases where the borrower returned amounts disbursed or did not accept the full amount approved.
Grants for shuttered venue operators. The Act establishes a grant program for eligible live venue operators or promotors, theatrical producers, live performing arts organization operators, motion picture theater operators, museum operators or talent representatives who were fully operational on February 29, 2020 and who had a reduction in gross revenues during any quarter in 2020 of at least 25 percent as compared to the corresponding quarter in 2019. The Act prohibits any venue receiving a grant under this program from receiving an initial or second draw PPP loan.
News organizations eligible for PPP loans. The Act expands the eligibility for PPP loans to certain business concerns and nonprofit organizations which are individual news stations, newspapers or public broadcasting organizations.
501(c)(6) and destination marketing organizations eligible for PPP loans. The Act expands the eligibility for PPP loans to certain 501(c)(6) organizations and nonprofit destination marketing organizations.
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