New Paycheck Protection Program (PPP) Guidelines from the SBA and Treasury

January 20, 2021

The Small Business Administration and U.S. Treasury has issued guidelines for the new PPP that includes several major changes.

The guidelines for the reconstituted Paycheck Protection Program (PPP) included two interim final rules (IFRs).

The 82-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260.
The 42-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.

The SBA also released a three-page “Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns.

Basic take-aways from the changes:

Business expenses paid for with proceeds from PPP loans are now tax-deductible. Deductions for business meal deductions are expanded.
Small businesses with 300 or fewer employees with a sustained 25% revenue loss in any quarter of 2020 are eligible to receive a second forgivable PPP loan. The employee retention credit is extended and expanded.
Additional financial support is available for live entertainment venue operators, independent movie theaters and museums affected by the health crisis.
Extends the six-month SBA program under Section 1112 of the CARES Act that covers the payment of principal, interest and certain fees of qualified borrowers.
Extends (from December 31) unemployment benefit programs, including the Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation and Federal Pandemic Unemployment Compensation programs.
Expands Federal supplemental insurance benefits to an additional 11 weeks but are set at a lower level of $300/week (versus $600/week under the CARES Act).
$2 billion in funding is available for nursing homes and other assisted living facilities to support testing for and tracing of Covid infections.
Borrowers with PPP loans less than $150,000 can use a simpler application process.
Qualified individuals can receive additional Economic Stimulus Payments of $600/person.

The PPP re-opens the week of Jan. 11 exclusively to community financial institutions. They are allowed to make first-draw PPP loans on starting Jan. 11 and second-draw PPP loans starting Jan. 13.

The PPP will open to all participating lenders at an unspecified date shortly thereafter and remain open through March 31.

The new PPP makes $284.5 billion available, including $35 billion for first-time loans

Major change: second draw loans

One of the biggest changes is that Congress made funding available to businesses that had previously received a PPP loan. Borrowers are eligible for a second-draw PPP loan of up to $2 million if they have:

300 or fewer employees
Used or will use the full amount of their first PPP loan on or before the expected date for the second PPP loan to be disbursed to the borrower. The borrower must have spent the full amount of the first PPP loan on eligible expenses.
Saw a revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019, calculated by comparing gross receipts in any 2020 quarter with an applicable quarter in 2019.
A borrower operating for all four quarters of 2019 may submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019.

The Interim Final Rules (IFR) define gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source. That includes the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Forgiven first-draw PPP loans are not included in the 2020 gross receipts.

First Draw Loans

First-draw PPP loans are available to borrowers that were in operation on Feb. 15, 2020. Eligible groups are:

Businesses with 500 or fewer employees eligible for other SBA 7(a) loans.
Sole proprietors, independent contractors, and eligible self-employed individuals.
Not-for-profits, including churches.
Accommodation and food services operations (with North American Industry Classification System (NAICS) codes starting with 72) and fewer than 500 employees per physical location.
501(c)(6) business leagues, such as chambers of commerce and visitors’ bureaus.
Destination marketing organizations with 300 or fewer employees that do not receive more than 15% of receipts from lobbying. The lobbying activities may comprise no more than 15% of the organization’s total activities and cost no more than $1 million during the most recent tax year that ended prior to Feb. 15. 2020.
News organizations that are majority-owned or controlled by an NAICS code 511110 or 5151 business, or not-for-profit public broadcasting entities with a trade or business under NAICS code 511110 or 5151. They may have no more than 500 employees per location.
Sports leagues are not eligible.

Change Restricts Eligibility

The new guidelines include this change: publicly traded companies and businesses controlled, either directly or indirectly, by the president, vice president, head of executive departments, and members of Congress (or their spouses as defined by applicable common law) are not eligible for PPP loans.

PPP applicants must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable:

Payroll records;
Payroll tax filings;
Form 1099-MISC, Miscellaneous Income;
Form 1040, Schedule C, Profit or Loss From Business, or
Schedule F, Profit or Loss From Farming; income and expenses from a sole proprietorship; or bank records.

Maximum PPP Loan Amounts

First- and second-time PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs (with a cap per employee of $100,000 annualized) in 2019, 2020, or the year prior to the loan.

PPP borrowers with NAICS codes starting with 72 (such as hotels and restaurants) can receive up to 3.5 times their average monthly payroll costs on second-draw loans.

The maximum for a first-draw PPP loan is $10 million, the same as in the original PPP. Applicants must provide a Form 941, Employer’s Quarterly Federal Tax Return, (or other forms with similar information. Also state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (the one used to calculate the loan amount), or equivalent payroll processor records. They must document any retirement and health insurance contributions.

Eligible costs

PPP borrowers can have their first- and second-draw loans forgiven if the funds are used on eligible costs. The costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities.

The following costs are also now eligible:

Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
Payments to suppliers that are essential at the time of purchase to the recipient’s current operations.
Covered operating costs, including 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 or tracking of supplies, inventory, records, and expenses.

PPP borrowers have to spend no less than 60% of the funds on payroll over a covered period between eight or 24 weeks to be eligible for forgiveness.

Simpler forgiveness

Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length. The certification must include a description of the number of employees the borrower retained because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.

The SBA is required to create the simplified form by Jan. 20. The form may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.

Minority, underserved, veteran, and women-owned businesses

The Economic Aid Act provided set-asides for new and smaller borrowers, for borrowers in low- and moderate-income communities, and for community and smaller lenders. The set-asides include:

$15 billion across first- and second-draw PPP loans for lending by community financial institutions;
$15 billion across first- and second-draw PPP loans for lending by insured depository institutions, credit unions, and Farm Credit System institutions with consolidated assets of less than $10 billion;
$35 billion for new first-draw PPP borrowers; and
$15 billion and $25 billion for first-draw and second-draw PPP loans for borrowers with a maximum of 10 employees or for loans of less than $250,000 to borrowers in low- or moderate-income neighborhoods.
The SBA has determined that at least 25% of each of those set-asides will go to each one of the groups: loans to borrowers with a maximum of 10 employees and loans of less than $250,000 to borrowers in low- or moderate-income neighborhoods.

The SBA announced in a three-page guidance that it will take a number of steps to ensure increased access to the PPP for minority, underserved, veteran, and women-owned business concerns. The SBA said it will accept PPP loan applications only from community financial institutions for at least the first two days when the PPP loan portal reopens. To increase access the SBA said it would:

Direct Lender Match borrower inquiries to small lenders that can aid traditionally underserved communities;
Match small businesses through Lender Match with Certified Development Companies (CDCs), Farm Credit System lenders, microloan intermediaries, and traditional smaller asset size lenders;
Set aside dedicated hours to process and assist the smallest PPP lenders with their PPP loans;
Strongly encourage community development financial institutions and minority-, women-, veteran-, and military-owned lenders to apply to become PPP lenders. SBA said it would give full and prompt consideration to these applications to become PPP lenders consistent with program guidelines, including in cases where the lender does not meet all of the requirements listed on the updated SBA Form 3507;
Work with the Board of Governors of the Federal Reserve System on the PPP Liquidity Facility to enable PPP lenders, including nonbank lenders, to pledge PPP loans to the Federal Reserve as collateral for Federal Reserve borrowings to enhance lender liquidity and enable PPP lenders to expand their lending capacity;
Promote awareness of these policies and procedures via traditional media methods, SBA social media accounts, and guidance to lenders before the formal opening of the SBA’s loan systems;
Work with federal partners. including the Department of Agriculture, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Farm Credit Administration, and the National Credit Union Administration, to share the guidance with PPP lenders, borrowers, and the broader public.

Who is not eligible?

The following businesses are not eligible for a loan under PPP2:

Under Title 13, Section 120.110, certain businesses are not eligible for SBA business loans or PPP2 loans except for:
- non-profit business and Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting, which have been allowed under the Act.
Any business primarily engaged in political or lobbying activities, research, or engaging in advocacy for public policy or pollical strategy.
Any business that receives a “Shuttered Venue Operator Grant” under the Act.
Certain entities that are 20% or more owned, directly or indirectly, by entities organized under the People’s Republic of China or Special Administrative Region of Hong Kong.
Entities that retain a member of the board of directors with a person who is a resident of the People’s Republic of China.
Agents representing the interests of foreign powers in a "political or quasi-political capacity" that are registered under the Foreign Registration Act of 1938.
A business that did not receive a loan under the original PPP loan. They may still apply for a first draw. Also, those that did receive a PPP loan must have used or will use the full amount of the loan received under the original PPP on or before disbursement of PPP2.

PPP2 Loan applicants must still make good faith certification that:

The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient.
Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. (It appears that the bill has not updated certification to included newly eligible costs.)

Eligible entities are only entitled to one PPP2 loan.