Pursuant to the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”), on January 11, 2021 the latest round of Paycheck Protection Program Loans rolled out, with priority being given by the Small Business Administration via Community Development Financial Institutions, Minority Depository Institutions, Certified Development Companies and Microloan Intermediaries (“Priority Lenders”), to their customers that did not receive a funding under the original Paycheck Protection Program. On January 13, 2021, the program will expand to the Priority Lenders and the customers seeking a second loan under the Economic Aid Act. The programs will be opened to all participating lenders shortly thereafter. The Paycheck Protection Program, which was originally established under the CARES Act, provides loans to eligible borrowers to pay payroll costs, including benefits during the covered period as set forth in the regulations. Funds may also be used to pay other certain specified expenses of the business.
The Economic Aid Act updates the Paycheck Protection Program to permit borrowers to set the loan’s covered period to be any length between 8 and 24 weeks. The loans are forgiven if during the 8 to 24 week covered period following loan disbursement, employee compensation levels are maintained, the loan proceeds are spent on payroll costs and other eligible expenses and at least 60% of the proceeds are used for payroll. The Economic Aid Act expands the Paycheck Protection Program eligibility to include eligible 501(c)(6) organizations, housing cooperatives and direct marketing organizations, and provides greater flexibility for businesses with seasonal employees.
Individuals and entities with 500 or fewer employees, except for SEC registered companies that did not obtain a PPP loan prior to August 8, 2021 may apply for a PPP loan for in an amount not to exceed $10 million (a “First Draw PPP Loan”). The amount of the First Draw PPP Loan is determined in accordance with the PPP rules (to see our prior blog post regarding eligibility requirements and program rules click here).
The Act also permits a second round of funding for certain borrowers who have already received a PPP loan (the “Second Draw PPP Loan”). The Second Draw PPP Loan is available for eligible entities with 300 or fewer employees, and loans are capped at a maximum of $2 million. The loan amount is calculated based on a formula of 2.5 times average monthly payrolls, except that businesses with NAICS code 72 (Accommodations and Food Services) will be eligible for up to 3.5 times average monthly payroll. As a condition to the Second Draw PPP Loan, the original PPP loan held by the borrower must have been used or will be used prior to disbursement of the Second Draw PPP Loan. In addition, the borrower must demonstrate at least a 25% reduction in gross receipts calculated based upon first, second or third quarters of 2020 as compared to 2019.
For Second Draw PPP Loans that are below $150,000, the Act simplifies the process for application and forgiveness. Additional supporting documentation is not required for the borrower certification for these smaller loans. Lender compensation under the Second Draw PPP has been modified to a tiered structure establishing the amount of lender fees based on the amount of the loan.
Both the First Draw PPP Loans and the Second Draw PPP Loans may be forgiven in accordance with the guidance for the original PPP loans and permitted expenses have been expanded under the Economic Aid Act to include certain operational expenses, property damage costs caused by looting or vandalism during 2020, supplier costs and worker protection expenditures.
The Act also corrects some problems that occurred with the original PPP loans, by exempting loan forgiveness under PPP from the inclusion in ordinary income of a borrower, permitting the borrower to choose the “covered period” for purpose of complying with the requirements for forgiveness, and extending the covered period for PPP through March 31, 2021.
Businesses and organizations that were not in operation on February 15, 2020 are not eligible for a PPP Loan. Loan applications must be made by March 31, 2021. As with the original PPP loans, the First Draw PPP Program and Second Draw Programs authorized under the Economic Aid Act are administered by lenders authorized through the Small Business Administration.