Update December 23, 2020: The President has signaled he will not sign the stimulus bill without larger direct payments to Americans. If that effort is successful and he signs the bill, the SBA has ten days to issue regulations. That means it is unlikely small business owners will be able to apply for the new PPP loans until January 2021.
As of December 22, 12:30 a.m. ET, the House and Senate have passed the stimulus bill that includes additional PPP loans. The bill is headed to President Trump for his signature.
More PPP loans, EIDL grants, Pandemic Unemployment benefits and other small business relief are coming soon. Here we do our best to explain the legislation that includes a new round of Paycheck Protection Program (PPP) loans. The total budgeted amount for these new PPP loans is just over $284 billion. As with the first round of PPP, businesses may be eligible for full forgiveness of these loans if proceeds are spent properly within a specific time period.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
As you read this, keep in mind that for the most part, the changes included in this legislation apply to all PPP loans except those already forgiven. In addition, the way the legislation is written, most provisions take effect immediately after the legislation is enacted, as if they were in the CARES Act that was passed March 27, 2020.
Please note this is based on our initial understanding of the new law. Treasury and the SBA will no doubt clarify certain provisions with guidance as they did multiple times with the first round of PPP.
What kinds of PPP loans will be available?
At the high level, there appears to be funding for three categories of PPP loans in this legislation:
- New PPP loans for businesses that qualify under the CARES Act but did not apply the first time around
- Second draw PPP loans for businesses that obtained a PPP loan but need additional funding
- Additional funding for businesses that returned their first PPP loan or did not get the full amount for which they qualified
Who is eligible for the second draw PPP loans?
Many small businesses and independent contractors may be eligible for the second draw PPP loans even if you received funds in the first round of PPP.
First, similar to the first rounds of PPP, eligible small businesses may include:
- Small businesses, nonprofit organizations, veterans organizations, Tribal business concerns, and small agricultural cooperatives that meet the SBA size standards.
- Sole proprietors, self employed individuals or independent contractors.
- New: Certain small news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible.
In addition, this round of assistance is meant to target smaller businesses impacted by COVID-19. As a result, applicants who qualify generally must also meet the following criteria:
- The business may not have more than 300 employees and
- The business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to previous quarters (more details below)
Any business that got a first PPP loan must have used, or plan to use, their full PPP loan already received.
Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.
Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with at least 20% ownership by China. (Note the CARES Act did make an exception for certain non-profits and agricultural cooperatives, for example, which are not normally eligible for SBA 7(a) loans.) Publicly traded companies are not eligible to receive the new PPP loans.
How is the 25% reduction in revenues calculated?
Business owners will compare gross receipts of the business before expenses are subtracted. They will compare those for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25%.
Note that in all the examples in this section only loan applicants that apply for a loan after January 1, 2021 may use the fourth quarter for comparison purposes. Since it’s unlikely these loans will be available before January 1, 2021 this will likely be a moot point.
What if you weren’t in business all of 2019? Stick with us. This sounds more complicated than really is:
First, remember a business must have been in operation by Feb. 15, 2020 to be eligible.
If you were not in business during the first or second quarter of 2019 but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
If you were not in business during the first, second or third quarter of 2019, but you were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020 to determine whether gross receipts were reduced by at least 25%.
Reminder the first quarter runs January 1 – March 31, the second quarter runs from April 1 – June 30, the third quarter runs from July 1- Sept 30 and the fourth quarter runs from October 1 – December 31st.
Note that according to the legislation, for loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss. We won’t know exactly what the SBA will consider acceptable until it provides guidance.
Also note that for nonprofits and veteran’s organizations, the term gross receipts has the same definition as gross receipts under section 6033 of the Internal Revenue Code of 1986.
How much can I get with a second draw PPP loan?
The maximum loan amount is $2 million (down from $10 million in the CARES Act). In all the examples below, the loan amount caps out at $2 million. An eligible entity may receive only one second draw loan.
As before, a business may qualify for up to 2.5 times average monthly payroll costs. (To get the average gross monthly payroll cost you’ll total each month’s payroll costs and divide by 12.)
You can arrive at this figure either by one of two methods— your choice (except businesses with a NAICS code beginning in 72 – see below):
- Multiply average gross monthly payroll cost for the 1-year period before the date the loan is made by 2.5 or
- Multiply average gross monthly payroll cost for 2019 by 2.5.
New businesses (that were not in business for the 1-year period preceding February 15, 2020) will use a slightly different formula to arrive at the average monthly payroll costs. They will divide the payroll costs paid or incurred by the date they apply by the number of months in which those costs were incurred and multiply the result by 2.5. Again, new businesses must have been in business by February 15, 2020 in order to be eligible.
Seasonal businesses may apply based on the average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020.
Businesses with a NAICS code beginning in 72 (generally hospitality businesses) may receive up to 3.5 times average monthly payroll cost using their choice of these two methods:
- Multiply average gross monthly payroll cost for the 1-year period before the loan is made by 3.5 or
- Multiply average gross monthly payroll cost for 2019 by 3.5.
Note that all of these methods allow the business to use payroll costs incurred or paid during the applicable time period. (You may incur a payroll cost but not actually pay it until the pay period.)
There is also a separate calculation for farmers and ranchers.
What counts as payroll?
Payroll is the same as defined in the CARES Act with one new addition (noted below):
- Salary, wages, commissions or similar compensation,
- Payment of cash tips or equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips),
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of employee benefits including insurance premiums (employer cost);
- Payment of any retirement benefit (employer cost);
- Payment of State or local tax assessed on the compensation of employees.
- New: group benefits are defined to include group life, disability, vision, or dental insurance
It does not include:
- The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
- Any compensation of an employee whose principal place of residence is outside the United States;
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
Self-employed? This legislation does not appear to change the way the self-employed individuals who do not file formal payroll will qualify under the CARES Act. At the same time, it is not specified. Presumably independent contractors and the self-employed will still qualify based on 2.5 months of net profit on the Schedule C tax form. Until the SBA releases guidance it’s unclear what time period will be used for the calculation.
Can I reapply for a loan if I returned my first one?
You may. If you returned all or part of your PPP loan, you may apply for an “amount equal to the difference between the amount retained and the maximum amount applicable.” Or, if you did not accept the full amount you may request a modification to allow you to borrow the full amount for which your business is eligible. (The SBA Administrator has 17 days after this legislation becomes law to issue rules or guidelines for those who want to reapply or apply for additional funding from their first PPP loan.)
Is there loan forgiveness for the new second draw PPP loans?
Yes! As with the first round of PPP, these loans may be entirely forgiven if spent for the proper purposes (primarily payroll) during the proper time period. Currently there are three PPP loan forgiveness applications:
Borrowers can continue to use those forms for PPP loans they received earlier in 2020, unless and until new applications are released. However, for the new PPP 2.0 loans, we expect Treasury and the SBA to release new loan forgiveness applications.
In addition, there will now be a simplified (but not automatic) forgiveness for loans of $150,000 or less.
What if I didn’t get a PPP loan before?
There is funding available for first-time PPP loans on the same terms as the original PPP loans. Read details of those loans here.
How does the simplified PPP forgiveness work?
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act creates simplified forgiveness for loans of $150,000 or less. The SBA Administrator will have 24 days after the law is enacted to release a new one-page forgiveness application for loans of $150,000 or less— which includes all PPP loans, both under the first round and the new ones.
It will require the borrower to:
- Describe the number of employees retained due to the PPP loan,
- The estimated amount of the loan proceeds spent on payroll, and
- The total amount of the loan
The borrower will have to certify they have complied with the requirements of the loan and retain records to prove compliance. (Employment related records must be retained for four years while others must be retained for three years.)
Again, it’s worth noting that even though the form will be simplified, funds must still be spent properly to qualify for forgiveness and the SBA may audit these applications. That means it will continue to be very important to keep documentation of how you spent these funds in case your loan is audited.
We recommend considering opening a separate bank account to deposit your PPP funds and track expenditures.
How must I spend the money?
Similar to the first round of PPP, this program is primarily intended to keep employees (including the business owner or independent contractor) on payroll and to pay other specific expenses.
To obtain full forgiveness, borrowers will need to spend at least 60% of loan proceeds funding on payroll (compensation of up to $100,000 per employee plus payment of certain group benefits which are now defined to also include group life, disability, vision, or dental insurance).
Borrowers may spend up to 40% on other qualified expenses, during the covered period. This list of eligible non-payroll expenses has been expanded to include:
- Mortgage interest
- Covered operations expenditure
- Covered property damage cost
- Covered supplier cost
- Covered worker protection expenditure
Covered operations expenditures means “payment 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 or tracking of supplies, inventory, records and expenses”
Covered property damage cost means “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation;”
Covered supplier cost means “an expenditure made by an entity to a supplier of goods for the supply of goods that:
- Are essential to the operations of the entity at the time at which the expenditure is made; and
- is made pursuant to a contract, order, or purchase order— ‘‘(i) in effect at any time before the covered period with respect to the applicable covered loan; or ‘(ii) with respect to perishable goods, in effect before or at any time during the covered period”
Covered worker protection expenditure means “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 Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et 8 seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; may include the purchase, maintenance, or renovation of assets that create or expand
- a drive-through window facility;
- an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
- a physical barrier such as a sneeze guard;
- an expansion of additional indoor, outdoor, or combined business space;
- an onsite or offsite health screening capability; or
- other assets relating to the compliance with the requirements or guidance described in subparagraph (A) as determined by the (SBA) Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; the purchase of—
- covered materials described in section 328.103(a) of title 44, Code 16 of Federal Regulations, or any successor regulation;
- particulate filtering face piece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or
- other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of 4 Labor; and does not include residential real property or intangible property;’’
Note these approved expenditures apply to any PPP loan except those already forgiven.
The “covered period” is the specific period of time in which you must spend the funds. It starts when the PPP loan is originated. (That’s the date the funds are deposited to your bank account.) You can choose a covered period of 8 or 24 weeks to spend the funds.
What is a seasonal employer?
According to this bill, a seasonal employer is one that:
- “Does not operate for more than 7 months in any calendar year; or
- During the preceding calendar year, had gross receipts for any 6 months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other 6 months of that year’’.
Will an EIDL Grant be subtracted from my PPP for loan forgiveness?
No. The legislation repeals the requirement that an EIDL grant (advance) be deducted for purposes of PPP forgiveness. In addition, the SBA Administrator is required within 15 days of when this legislation is enacted to “ensure equal treatment” for borrowers whose loans have already been forgiven and who had their grants subtracted from the forgiven amount.
Where can I get one of the new PPP loans?
Not all lenders who offered PPP loans in the first round will participate this time around. Nav is matching borrowers to PPP lending partners who will be making these loans. Sign up for a free Nav account to be notified when these loans are available.
Keep in mind that the President must still sign the stimulus bill that includes these provisions and once he does, the SBA Administrator has ten days to issue regulations. At this time, we expect these loans to be available in early January.
What else do I need to know?
There are a few other details that are helpful to understand. As with the CARES Act:
- No credit check is required. A few PPP lenders did check applicant’s personal credit in the first round of PPP, so if this is of concern, be sure to ask before you apply.
- There is no personal guarantee.
- Normal SBA collateral requirements are waived.
What other help is available for my small business?
In addition to the new PPP loans, the Act authorizes the following relief:
- Another $20 billion in new EIDL grants. (These appear to be significantly different than the previous EIDL grants and we will write about them separately.)
- Pandemic unemployment benefits for the self-employed and independent contractors will be extended.
- Payment relief for eligible SBA loans will be extended. That means the SBA will cover the payment on eligible SBA loans—including interest, for up to a total of $9000 per payment—for the next 3-8 months, depending on the borrower’s industry code and the type of loan.
- Funding ($12 billion) will be available for Community Development Institutions and Minority Development Institutions which in turn will help minority and low-income small business owners through a new Neighborhood Capital Investment program.
- Live venues, independent movie theaters, and cultural institutions may be eligible for $15 billion in dedicated grants. (Note that these organizations will have to choose between these grants and the new PPP loans – they can’t get both.)
- Landlords may benefit from the rental assistance program.
- Childcare businesses may be eligible for part of the $10 billion allocated for assistance.
We will continue to delve into this legislation and provide additional insights as received. Originally published by Nav.