On December 27, 2020, President Trump signed the Consolidated Appropriations Act, a consolidated government spending and coronavirus relief bill. The coronavirus relief provisions — including important changes to the Paycheck Protection Program (“PPP”) — are found within the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (the “Act”). In addition to creating “Second Draw” PPP loans, the Act expands the set of expenses eligible for forgiveness, provides favorable tax treatment for borrowers, and changes other aspects of the PPP.

Second Draw PPP Loans

The Act provides funding of $284.45 billion, extends the PPP until March 31, 2021, and allows new borrowers to apply for PPP loans. The Act also creates Second Draw PPP loans which are available to borrowers who previously received PPP loans. Second Draw loans cannot exceed $2 million.

To qualify for a Second Draw loan, a borrower must have 300 or fewer employees (together with its affiliates) and a decline in gross revenue of at least 25% in any 2020 quarter compared with the same quarter in 2019. The borrower must have used the full amount from its first PPP loan before the date on which a Second Draw loan would be disbursed to it. Some entities are prohibited from receiving Second Draw PPP loans, including lobbying organizations and entities with certain connections to China.

Publicly traded companies are no longer eligible for initial or Second Draw PPP loans. The Small Business Administration (“SBA”) is required to publish regulations governing the new aspects of the PPP by January 6, 2021.

Expansion of Forgivable Expenses

The Act expands the set of expenses paid with PPP funds that are eligible for loan forgiveness. Originally, forgivable expenses were limited to payroll, rent or lease payments, mortgage interest, and utilities.  Forgivable costs have now been expanded to include:

• “Covered worker protection expenditures” such as costs of facility modification and personal protective equipment;
• “Covered operations expenditures” including business software or cloud computing services for accounting, inventory tracking and other needs;
• “Covered supplier costs” including payments to suppliers for goods that are essential to operations at the time of purchase, so long as they are purchased under a contract or purchase order in effect before the covered period or, for perishable goods, in effect before or during the covered period; and
• “Covered property damage costs” resulting from public disturbances in 2020 that were not covered by insurance.

These changes are retroactive, and current PPP borrowers with loans not yet forgiven can include these additional expenses, possibly increasing their forgiveness amounts.

The Act reaffirms that borrowers must spend at least 60% of the forgiven amount of loans on payroll costs. It also clarifies that eligible payroll costs include group life, disability, vision and dental benefits.

Flexible Covered Period

Like the original PPP loans, new loans will have a “covered period” during which funds must be spent on eligible costs to be forgiven. Rather than imposing a strict eight- or twenty-four-week covered period as under the original PPP, the Act allows borrowers to select a covered period ending between eight and twenty-four weeks after receipt of loan funds.

SBA Audits of PPP Loans

The Act appropriates $50 million to the Small Business Administration (“SBA”) for PPP auditing and fraud mitigation. It also requires the SBA to develop an audit plan by February 10, 2021 (within 45 days of enactment of the Act). The audit plan must set out the policies and procedures that the SBA will use to conduct both its reviews of lenders’ forgiveness decisions and its audits of PPP loans, including borrowers’ certifications that the loans were necessary to support ongoing operations. The SBA audit plan must explain how the SBA will determine which loans to audit. Going forward, the SBA is required to report to Congress monthly on its audits of PPP loans.

Streamlined Forgiveness for Loans Under $150,000

The Act creates a streamlined forgiveness process for loans under $150,000. To receive loan forgiveness, a borrower with such a loan is required to submit a one-page certification providing:

• The number of employees the borrower was able to retain as a result of the PPP loan,
• The estimated total amount of the loan spent on payroll costs, and
• The total loan amount.

The borrower must also confirm in writing that the borrower complied with PPP requirements and must retain certain records for up to four years. These smaller loans are subject to audit by the SBA.

The SBA must provide the simplified forgiveness application by January 20, 2021 (24 days from enactment), and borrowers with PPP loans under $150,000 should wait until it is available to apply for forgiveness.

Tax Treatment

The Act essentially overturns an IRS ruling by allowing deductions for (otherwise deductible) expenses paid with the proceeds of a PPP loan that is forgiven. The Act clarifies that gross income does not include any amount from the forgiveness of a PPP loan.