On December 27, 2020, President Trump signed the new coronavirus relief bill that included The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act). The Economic Aid Act reopens the Paycheck Protection Program (PPP) application window for initial borrowers until March 31, 2021, and adds an additional $284.5 billion to the PPP, with $35 billion set aside for first-time borrowers with 500 or fewer employees and $15 billion for first-time borrowers with 10 or fewer employees and businesses in distressed areas.
Who is Eligible?
Eligible borrowers for a PPP loan include the following:
- A small business concern under the applicable revenue-based size standard established by the Small Business Administration (SBA) in 13 CFR 121.201 for its particular industry or under the SBA alternative size standards
- Independent contractors, eligible self-employed individuals, or sole proprietors
- A business concern, a tax-exempt nonprofit organization, a tax-exempt veterans organization, or a tribal business concern with no more than the greater of 500 employees employed or, if applicable, the size standard in number of employees established by the SBA
- A housing cooperative, an eligible section 501(c)(6) organization, or an eligible destination marketing organization that employs no more than 300 employees
- A news organization that is majority owned or controlled by a NAICS code 511110 or 5151 business or nonprofit public broadcasting entity, that employs no more than 500 employees (or, if applicable, the size standard in number of employees established by the SBA) per location
In addition, a borrower must have been in operation on February 15, 2020, and either had employees for whom salaries and payroll taxes were paid, paid independent contractors as reported on Form 1099-MISC, or had been an eligible self-employed individual, independent contractor, or sole proprietorship with no employees. A borrower must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount. Seasonal businesses will be considered to have been 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.
It is important to note that a self-employed borrower must have filed or will file a Form 1040 Schedule C for 2019. If a self-employed individual was not in operation in 2019 but was in operation on February 15, 2020, a Form 1040, Schedule C must have been filed for 2020. If a self-employed individual has not yet filed a 2020 return, Schedule C must be filled out. Partners in a partnership may not submit separate PPP loan applications as self-employed individuals but rather are included in the partnership’s application. SBA guidance issued on January 6, 2021, provides additional information on eligibility requirements for news organizations with more than one physical location, hospitals owned by governmental entities, businesses that receive revenue from legal gaming, electric cooperatives that are exempt from federal income taxation, telephone cooperatives that are exempt from federal income taxation, housing cooperatives, nonprofit and tax-exempt news organizations, destination marketing organizations, and 501(c)(6) organizations.
Calculating the Maximum Borrowing Amount
Under the PPP, the maximum loan amount for first draw PPP loans is the lesser of $10 million or an amount calculated using an authorized payroll-based formula. PPP loans approved in 2020 used 2019 or the one-year period prior to the date on which the loan is made to calculate payroll costs. A borrower applying for a PPP loan in 2021 can elect to use either payroll in 2019 or 2020. A borrower who is not self-employed is also permitted to use the exact one-year period immediately before the date on which the loan is made to calculate payroll costs if the borrower chooses not to use 2019 or 2020.
A step-by-step illustration of the calculation for the maximum loan amount is available in the recently released SBA guidance. The guidance provides additional information on calculating the maximum loan amount for income from self-employment, seasonal employers, farmers and ranchers, and partnerships.
It is important to note that payroll costs consist of compensation to employees in the form of (1) salary, wages, commissions, or similar compensation; (2) cash tips or the equivalent (either based on past records or, in the absence of past records, good-faith employer estimate); (3) payment for vacation, parental, family, medical, or sick leave; (4) allowance for separation or dismissal; (5) payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; (6) payment of state and local taxes assessed on compensation of employees; and (7) for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
Excluded from payroll costs are (1) any compensation of an employee whose principal place of residence is outside the United States; (2) the compensation of an individual employee in excess or $100,000 on an annualized basis, as prorated for the period during which payments are made or the obligation to make the payments is incurred; (3) federal employment taxes imposed or withheld during the applicable period, including the employee’s and employer’s share of Federal Insurance Contributions Act and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and (4) qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Terms of the Loan
On the PPP borrower application, an authorized representative of the applicant must certify in good faith to several certifications. It is important to note, however, that any PPP borrower, together with its affiliates, that received a PPP loan with an original principal amount of less than $2 million, will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
The interest rate of a PPP loan is 1 percent, calculated on a noncompounding, nonadjustable basis. The loan matures in five years. The SBA guarantees 100 percent of the PPP loan and there is no collateral or personal guarantees required.
A borrower who submits to their lender a loan forgiveness application within 10 months after the end of their “loan forgiveness covered period” will not have to make any payments of principal or interest on the loan before the date on which the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed). Loan forgiveness covered period is defined as the period beginning on the date the lender disburses the PPP loan 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. If a loan forgiveness application is not submitted within 10 months, a borrower must begin paying principal and interest after that period.
No eligible borrower may receive more than one first draw PPP loan; thus, it is important for a borrower to consider applying for the maximum amount. Borrowers who received a PPP loan in 2020 will be considered to have received a first draw PPP loan and, if they meet the eligibility requirements for a second draw PPP loan, can apply for a second draw PPP loan (see our legal alert regarding second draw PPP loans). Additionally, a borrower cannot take multiple draws from a PPP loan, as a lender is required to make a one-time, full disbursement.
Additional Eligible Expenses
In addition to the expenses already permissible, PPP funds may now also be spent on the following:
- Covered operations expenditures that include payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting for, or tracking of, supplies, inventory, records, and expenses
- Covered property damage that includes costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation
- Covered supplier costs that include expenses to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time at which the expenditure is made and (2) are made pursuant to a contract or purchase order in effect at any time before the covered period (with respect to perishable goods, the contract or purchase order must be in effect before or at any time during the covered period)
- Covered worker protection expenditures that include an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the US Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (or equivalent guidance issued by state or local government) during the period beginning on March 1, 2020, and ending on the date that the currently declared national emergency expires, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. Examples include a drive through window facility; an indoor, outdoor, or combined air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; expansion of additional indoor, outdoor, or combined business space; onsite or offsite health screening capability; other assets relating to compliance; and PPE
At least 60 percent of the PPP loan proceeds must be used for payroll costs and a borrower will be required to document the proceeds used for payroll costs in order to determine the amount of forgiveness. Although retroactive to previously disbursed PPP loans, it is important to note that the expansion of permissible uses of PPP funds will not apply to PPP loans for which a borrower has received forgiveness prior to December 22, 2020.
Loan Increases
The following borrowers can reapply or request an increase in their PPP loan amount on or before March 31, 2021:
- If a borrower returned all of a PPP loan, the borrower may reapply for an amount the borrower is eligible for.
- If a borrower returned all of a PPP loan, the borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
- If a borrower did not accept the full amount for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.
Loan Forgiveness
A borrower is eligible for loan forgiveness up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment so long as the borrower used all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained or, if not, an applicable safe harbor exemption applies. To receive full loan forgiveness, a borrower must use at least 60 percent of the PPP loan for payroll costs, and not more than 40 percent of the loan forgiveness amount may be attributable to nonpayroll costs.
An eligible borrower that received a loan of $150,000 or less is not required to submit any loan forgiveness application or documentation in addition to the certification and information requirements. With respect to employment records, records must be retained for four years following the submission of the loan forgiveness application. All other records must be retained for three years following the submission of the loan forgiveness application.
Under the Economic Aid Act, the EIDL advance amount will not reduce the amount of forgiveness to which the borrower is entitled.
If you have any questions regarding this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Samantha Podlas, associate, at spodlas@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.