On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021 (the Act). The Act is wide-sweeping in its breadth at over 5,500 pages and provides the annual funding for the federal government.

Importantly, for many small businesses, the Act contains several important rules providing further relief for those affected by the COVID-19 pandemic, including revisions to the Paycheck Protection Program (PPP). For purposes of this alert, we will highlight some of the PPP provisions we believe will be of interest to employers.

Additional Funding

The Act allocates an additional $284,450,000,000 to the PPP above what had previously been allocated to loans that were approved on or before the termination of the first PPP round on August 8, 2020.

Changes to the PPP

Title III of the Act (Title III) titled the “Economic Aid to Hard-Hit Small Businesses, Non-Profits and Venues Act,” makes significant changes to the PPP enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Title III expands the permitted uses of PPP loan proceeds to include additional expenses. Further to payroll expenses, covered utilities, mortgage interest expenses and covered rent already permitted under the CARES Act, the Act provides for the following:

• Covered operations expenditures – payment for software, human resources and accounting needs;
• Covered property damage costs – costs related to property damage suffered by the borrower as a result of vandalism or looting due to protesting during 2020 not otherwise covered by insurance;
• Covered supplier costs – expenditures made pursuant to a contract for goods in effect prior to the PPP loan covered period that are essential to the operations of the entity; and
• Covered worker protection expenditures – expenditures for personal protective equipment and other equipment needed to help a borrower comply with federal health and safety guidelines related to the COVID-19 pandemic during the period between March 1, 2020 and the date on which COVID-19 no longer qualifies for federal emergency status.

Changes to Covered Period

Currently, the covered period for a PPP loan is 24 weeks (or 8 weeks for borrowers who received their loans prior to June 5, 2020 and elect to use an 8-week covered period), subject to a borrower’s right to apply for forgiveness prior to the end of the 24-week period. Title III allows borrowers to select any covered period length between 8 weeks and 24 weeks after loan origination.

Simplified Forgiveness Application for Certain Borrowers

Title III significantly simplifies the loan forgiveness application and documentation process for many borrowers. Specifically, loans up to $150,000 shall be forgiven in full if the borrower submits a certification – not expected to exceed one page – that provides minimal information (such as the number of employees retained as a result of the PPP loan, estimated amount of loan spent on payroll expenses and total loan value) and agrees to retain relevant records for a period of four years (employment records) or three years (all other records).

Loans over $150,000 would be subject to the U.S. Small Business Administration’s (SBA) current loan forgiveness procedures and would remain subject to SBA audit, including the requirement to retain all records for a period of 6 years post-forgiveness. We note that there does not appear to be any changes to the requirement for a borrower to submit a necessity certification for loans over $2 million (SBA Forms 3509 and 3510).

Economic Injury Disaster Loans Advances

The $10,000 Economic Injury Disaster Loans (EIDL) advance that prospective borrowers were permitted to obtain from the SBA – regardless of whether they ultimately received an EIDL – will no longer reduce the amount of PPP loan forgiveness. We note that at this time all EIDL advances have been fully allocated.

Group Insurance Payments Includable as Payroll Costs

Title III clarifies that employer-provided group insurance benefits other than healthcare benefits (e.g., group life, dental, vision or disability) fall within the definition of forgivable payroll costs.

PPP Loan Cap

Title III caps any future PPP loan disbursements at $2 million.

Second PPP Loan Availability

Importantly, Title III allows eligible entities to obtain a second PPP loan, referred to as a “second draw.”

Generally, the second draw loan amount is calculated in the same manner as the first round of PPP loans (i.e., up to 2.5x average total monthly payroll costs for 2019 or the one year prior to the loan) subject to a cap of $2 million. Special rules apply to entities that are assigned a NAICS code beginning with 72 (accommodation and food services) – these entities can borrow up to 3.5x their average monthly payroll costs, subject to a cap of $2 million.

To qualify as an eligible entity, a prospective PPP borrower must:

• Employ not more than 300 employees (NOTE: the threshold for the first round of loans was not more than 500 employees); and
• Demonstrate at least a 25% reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter (NOTE: the first round required borrowers only to certify that “current economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant,” without having to demonstrate a specific reduction in receipts.

As with the first round, borrowers must aggregate their employees with those of their affiliates to determine whether they exceed the 300-employee threshold.

Additional Entities Eligible for PPP Loans

Section 318 of the Act provides that entities that are tax-exempt under section 501(c)(6) of the Internal Revenue Code (business leagues, chambers of commerce, real estate boards, boards of trade, professional football leagues which are not organized for profit and destination marketing organizations) are eligible for PPP loans if they meet the following rules:

• Have 300 or fewer employees
• Do not receive more than 15% of receipts from lobbying
• Lobbying activities do not comprise more than 15% of total activities and the cost of lobbying activities does not exceed $1 million

Ineligible Entities

The Act provides that entities with certain relationships to the People’s Republic of China or the Special Administrative Region of Hong Kong, including those with 20% owners from those countries, or those created, organized or having significant operations in these areas, or having directors who are residents of the People’s Republic of China are ineligible for PPP loans.

In response to the public outcry that resulted from a number of publicly-traded companies obtaining a PPP loan, the Act provides that publicly-traded companies (i.e., an entity that is an issuer, the securities of which are listed on an exchange registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. §78f)) are not eligible for a second draw.

Loan Forgiveness

As with the first round, PPP loans are not automatically forgiven, the borrower must submit an application for forgiveness and submit certain documentation. Borrowers are eligible for loan forgiveness equal to the sum of their payroll costs, covered mortgage, rent, utility payments, covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures incurred before the end of the covered period, subject to reduction if the borrower reduced their employee headcount or the salary of those earning less than $100,000 per year by more than 25%. The requirement that the borrower must spend a minimum of 60% of the loan proceeds on payroll costs for full forgiveness continues to apply.

Flexibility to Increase Loan Amounts

PPP borrowers who are eligible for an increased PPP loan amount as a result of any interim final rule that allows for loan increases may submit a request for an increase in the covered loan amount, even if the initial covered loan amount has been fully disbursed or the lender of the initial covered loan has submitted a Form 1502 to the SBA.

Additionally, an eligible recipient that returned all or part of an original covered loan or did not accept the full amount of an original covered loan may reapply or request a modification of an existing loan, as applicable.

Next Steps

The Act generally requires the SBA to promulgate rules within 10 days of enactment of the law, though certain provisions permit the SBA up to 24 days to issue rules. However, we note that the CARES Act and subsequent laws had similar requirements, with the SBA not meeting those deadlines.

Tarter Krinsky & Drogin’s COVID-19 Response Team will continue to monitor developments, including the anticipated Interim Final Rules from the SBA as well as guidance from the U.S. Department of the Treasury.

As with the first round of PPP loans, the available funding will be allocated on a “first-come, first-serve” basis and we anticipate that the currently allocated funds will not be sufficient to fully meet demand.

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