Contributing authors: Diana Kim, Kaitlyn M. Baietto
Certain provisions of the Coronavirus/COVID-19 economic stimulus legislation are subject to the issuance of government regulations and other government action; thus, certain details regarding the legislation may be clarified or added.
On December 27, 2020, a new relief bill was passed into law intended to provide much-needed economic support to assist businesses in making it through this winter. The bill, known as the “Consolidated Appropriations Act, 2021” (Act), allocates over $284 billion in funding to the Small Business Administration (SBA)‒Business Loans Program Account, which covers several relief programs. One of the programs is the Paycheck Protection Program (PPP), which was first introduced under the CARES Act[1] earlier this year; a second is the PPP Second Draw Loans (Second Draw Loans), which were created via Title III of the Act titled the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (Economic Aid Act). The SBA is required to issue regulations to ensure this small business support is efficiently carried out by January 6, 2021.
The PPP, as revised by the Economic Aid Act, provides forgivable loans to small-business borrowers that will be available to (i) qualified first-time borrowers and (ii) second-time borrowers, but on a more limited basis. In either instance, eligibility for a PPP loan requires a business seeking relief to have been in operation as of February 15, 2020. Furthermore, the business must not have received a Shuttered Venue Operator grant.
This alert provides guidance on the following topics outlined in the Economic Aid Act:
- How have eligible expenses under the PPP been expanded for both initial PPP loans, new PPP loans, and Second Draw Loans?
- What are the clarifications and extensions of eligibility to certain types of businesses?
- Who is eligible to receive a Second Draw Loan?
- What are the terms of an initial PPP loan and a Second Draw Loan?
- How is forgiveness for a PPP loan (initial and Second Draw Loan) calculated and applied?
- What are the clarifications about the tax treatment of these PPP loans?
- What is the Shuttered Venue Operator grant program?
How have the eligible expenses under the PPP been expanded?
Importantly, the Economic Aid Act expands the eligible and forgivable uses of PPP funds to cover a wider variety of business expenses. Notably, these expanded uses also apply to the original PPP loan recipients, unless the borrower’s loan has already been forgiven. As of this writing, PPP loans will be forgivable when used to cover the following expenses:
- Operations Expenditures: Payments for any business software or cloud computing service, 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.
- Property Damage Costs: Costs related to property damage and vandalism or looting resulting from public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- Workers Protection Expenses: Any operating or capital expenditures 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 or guidance issued by a state or local government, during the period starting March 1, 2020, and ending on the date when the National Emergency declared by the President due to the coronavirus disease outbreak expires. Examples of such work protection expenses include the purchase, maintenance, or renovation of assets that create or expand an indoor, outdoor, or combined air pressure ventilation or filtration system, a physical barrier to ensure social distancing, an expansion of additional indoor or outdoor business space, and other kinds of personal protective equipment.
- Supplier Costs: Expenditures made by an entity to a supplier of goods for goods that are essential to the operations of the entity at the time they are purchased, and made pursuant to a contract or purchase order that was in effect at any time before the covered period with respect to the loan, or with respect to perishable goods, in effect before or at any time during the covered period with respect to the loan.
Additionally, the definition of payroll costs, on which 60 percent of the funds from PPP loans must be spent to qualify for full forgiveness, has been expanded to include the following:
- Group life insurance; and
- Disability, vision, and dental insurance benefits.
Clarifications and extensions of eligibility to certain types of businesses
The Economic Aid Act clarifies and extends eligibility to the following special categories of businesses:
- Seasonal Employer: An eligible recipient who does not operate for more than seven months in any calendar year and had gross receipts for any six months of a year that were not more than 33.33 percent of the other six months of that year.
- Housing Cooperative: A cooperative housing corporation that employs 300 or fewer employees and has only one class of stock outstanding, each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation, no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and 80 percent or more of the gross income of which for the taxable year in which the taxes and interest described in are paid or incurred is derived from tenant-stockholders.
- News Organizations:
- Federal Communications Commission license holders that employ 500 or fewer employees or the size standard set by the North American Industry Classification System (NAICS) per physical location.
- Any nonprofit organization or any organization of any college or university which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumentality of one or more governments or political subdivisions, as well as any corporation wholly owned by one or more such colleges or universities, that is a public broadcast entity.
- News Organizations are eligible to receive a covered loan during the covered period if:
- Such organization is majority owned or controlled by a business concern with the NAICS code 511110 or 5151, and
- Such organization makes a good faith certification that the proceeds of the loan will be used to support expenses associated with producing or distribution locally focused on emergency information.
- As long as the affiliated entities meet the same size requirements as for the FCC license holders, the affiliation rules are waived.
- If the business certifies that the loan will support locally focused or emergency content, the prohibition against publicly traded news organizations is waived.
- 501(c)(6) Organizations:
- Any organization that is described in section 501(c)(6) of the Internal Revenue Code (IRC) and that is exempt from taxation under section 501(a) thereof.
- Such organization shall be eligible to receive a covered loan if:
- The organization does not receive more than 15 percent of its receipts from lobbying activities,
- The lobbying activities of the organization are not more than 15 percent of the total activities of the organization,
- The costs of the lobbying activities of the organization were not more than $1 million during the most recent tax year that ended before February 15, 2020, and
- The organization employs 300 or fewer employees.
- Destination Marketing Organizations, meaning a nonprofit organization as follows:
- Described in section 501(c) of the IRC and exempt from tax under section 501(a) thereof, or a state, or a political subdivision of a state that engages in particular marketing and promotional activities.
- Such organization shall be eligible to receive a covered loan if:
- The organization does not receive more than 15 percent of its receipts from lobbying activities,
- The lobbying activities of the organization are not more than 15 percent of the total activities of the organization,
- The cost of the lobbying activities of the organization were not more than $1 million during the most recent tax year that ended before February 15, 2020, and
- The organization employs 300 or fewer employees.
- Small Business Debtors in Bankruptcy: Upon the issuance of a written determination by the Administrator, certain small business debtors who have filed for bankruptcy may receive court approval for a PPP loan so long as such loan is given a super-priority claim in the bankruptcy process.
Who is eligible to receive a Second Draw Loan?
Second-time borrowers may be eligible for a second loan of up to $2 million, referred to as a “Second Draw Loan.” Eligible entities for these second draw loans include businesses, certain nonprofit organizations, housing cooperatives, veterans’ organizations, Tribal businesses, sole proprietors, self-employed individuals, independent contractors, and small agricultural cooperatives that meet certain eligibility requirements.
Eligible entities must:
- Have 300 or fewer employees,
- Have used or will soon use the entire amount of their first PPP loan, and
- Demonstrate a drop in their gross receipts of at least 25 percent in any quarter of 2020 compared to the same quarter in 2019. Eligible entities that apply on or after January 1, 2021, may use Q4 of 2020 to demonstrate this revenue loss.
Prohibitions:
Entities prohibited from taking out a Second Draw Loan are as follows:
- Any individuals or entities involved in political or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public documents.
- Any entity affiliated with entities in the People’s Republic of China, including:
- Entities created or organized under the laws of or that have significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong.
- Entities that own or hold, directly or indirectly, 20 percent or more of the economic interest of such entity, including as equity shares or a capital or profit interest in a limited liability company or partnership.
- Entities that retain, as a member of the board of directors, a person who is a resident of the People’s Republic of China.
- Any person required to submit a registration statement under the Foreign Agents Registration Act, namely a person who is an agent of a foreign principal.
- Any eligible person or entity that receives a grant under section 24 of the Economic Aid to Hard Hit Small Businesses, Nonprofits, and Venues Act.
- Entities listed in 13 C.F.R. 120.110 and successor regulations, except for those entities in subsection (a) nonprofit businesses and (k) businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting.
What are the terms of a Second Draw Loan?
Generally, borrowers may receive a loan in an amount up to 2.5 times the average monthly payroll costs during the one-year period before the date of the loan, up to the maximum available amount of $2 million. This far lesser maximum loan amount is an important change from the CARES Act, which set the maximum amount at $10 million. The calculation of the loan amount is subject to a few exceptions, laid out below:
- Seasonal employers: The maximum amount of a covered loan is the lesser of $2 million or the product obtained by multiplying the average monthly payroll costs of the entity for any 12-week period between February 15, 2019, and February 15, 2020 by 2.5.
- New entities: The maximum amount of a covered loan made to an eligible entity that did not exist during the one-year period before February 15, 2020, is the lesser of $2 million or the product of multiplying average monthly payroll costs by 2.5.
- NAICS 72 Entities: The maximum amount of a covered loan is the lesser of $2 million or the product obtained by multiplying the average monthly payroll costs incurred or paid by the eligible entity during either the one-year period before the date of the loan or the calendar year 2019 by 3.5.
How is forgiveness for a PPP loan /Second Draw loan calculated and applied?
Similar to the original CARES Act, a loan is forgivable if the PPP funds are used during a specific time frame, again referred to as the “covered period” for eligible uses. Previously, borrowers had two options and had to choose between an eight- or 24-week “covered period.” The Economic Aid Act, however, provides greater flexibility to borrowers and allows them to choose their “covered period,” which commences on the date the funds are received and ends on a date the borrower designates as the end of the “covered period.” Notably, that end date must occur during the period between eight and 24 weeks after receipt of the funds.
In a welcomed revision, the bill simplifies the forgiveness application process for loans in amounts up to $150,000. Such loans may now be forgiven if the borrower signs and submits a single page certification to the lender detailing:
- A description of the number of employees the borrower was able to retain as a result of the covered loan,
- The estimated total amount of the loan spent on payroll costs, and
- The total loan amount.
The SBA must provide the certification form by January 20, 2021, and may not require additional materials unless necessary to verify revenue loss requirements or satisfy relevant statutory or regulatory requirements. In addition to this one-page certification, the borrower must attest that it accurately provided the necessary certification and complied with the PPP loan requirements. Borrowers are also required to retain all relevant records related to employment for four years and all other records for three years following the submission of the form. Therefore, if you received a PPP loan in an amount less than $150,000 and have not yet sought forgiveness, we recommend waiting until the simplified application becomes available in accordance with this paragraph to submit for forgiveness.
The amount of forgiveness is tied to the sum of costs incurred and expenditures made during the covered period. The costs and expenditures taken into account in this calculation include payroll costs, any payment of interest on any covered mortgage obligation, any covered operations expenditure, any covered property damage cost, any payment on any covered rent obligation, any covered utility payment, any covered supplier cost, and any covered worker protection expenditure. Similar to the original CARES Act, there are limits upon the total amount to be forgiven. And any forgiveness of loans shall still be subject to some reductions as set forth in the CARES Act.
What clarifications about the tax treatment of PPP loans are in the new relief bill?
Significantly, this bill provides long-awaited clarification regarding the tax treatment of the forgivable portions of the PPP loans (including existing PPP loans, new PPP loans, and Second Draw Loans). Under the CARES Act, it was clear that forgiven PPP loans would not count as taxable income to borrowers, but a subsequent Notice from the IRS declared that expenses paid for with these funds would not be deductible. Congress overrode this IRS decision, however, and borrowers will be allowed to deduct expenses that are paid with funds from PPP forgivable loans. Moreover, the bill provides that owners of partnerships and S corporations may receive an increase in a partner’s adjusted basis for amounts traceable to any tax exempt income from these forgiven loans.
What is the Shuttered Venue Operator grant program?
The Shuttered Venue Operator grant program provides relief to the following:
- Live venue operators and promoters,
- Theatrical producers,
- Live performing arts organizational operators,
- Relevant museum operators,
- Motion picture theatre operators, and
- Talent representatives.
Eligible Shuttered Venue Operators are those who were in business as of February 29, 2020, and experienced a 25 percent reduction in gross earned revenue from the previous year. Further, depending on the type of Shuttered Venue Operator, there are additional activity and venue requirements.
In what appears to be an effort to respond to the backlash against certain restaurant chains, there is a limit on the size and scope of the requesting individual or entity. Specifically, that individual or entity may not be, or be controlled or owned by, an individual or entity who is an issuer with securities listed on a national securities exchange. They also may not be in more than one country, in more than 10 states, and have more than 500 full-time employees as of February 29, 2020.
These Shuttered Venue Operator grants will be made in two stages. The first stage is the Priority stage, which consists of two 14-day periods. During the first 14-day period, the Administrator will make grants to those eligible individuals or entities with revenue from April 1, 2020, to December 31, 2020, that is 10 percent or less than the revenue of the same individual or entity during the same period in 2019. The second 14-day period is similar, except it is for the Administrator to make grants to those whose revenue from April 1, 2020, to December 31, 2020, was 30 percent or less than the revenue of the year prior. After that first 28-day period, the Administrator may make grants to any eligible individual or entity.
The grant amounts for Shuttered Venue Operators shall be the lesser of $10 million or 45 percent of the gross earned revenue of the eligible person or entity in 2019 if such person or entity was in business as of January 1, 2019. If the eligible person or entity was not in business as of January 1, 2019, it is the lesser of $10 million or the amount equal to the product obtained by multiplying the average monthly earned revenue for each full month during which such person or entity was in operation during 2019 by six. For a relevant museum operator, the grant may not be more than $10 million with respect to all museums operated by that operator. The amount for the supplemental grants is also limited to 50 percent of the grant received by the eligible person or entity initially. The total amount of grants received by any eligible person or entity shall not exceed $10 million.
To see our prior alerts and other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.
