On December 27, 2020, the Consolidated Appropriations Act 2021 (CAA), also referred to as the Economic Aid Act or Omnibus Bill, was signed into law, providing new COVID 19 relief options for individuals and small businesses, including a second round of Paycheck Protection Program (PPP) loans. Interested borrowers have been awaiting guidance, which the SBA and Department of the Treasury have begun to release.
Two Interim Final Rules (IFRs) were released on January 6. The first, titled "Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act,” combines guidance from several previous IFRs with new provisions in the CAA. A second IFR, “Interim Final Rule on Second Draw Loans,” provides guidance on eligibility and loan details for the new round of loans. Highlights of that second IFR include:
Eligibility criteria. In general, eligible entities must employ 300 or fewer employees, have received a First Draw PPP loan that they have used or will use to pay eligible expenses, and must have experienced a gross receipts reduction of 25 percent or greater in at least one 2020 quarter compared to the same quarter in 2019. Other eligibility criteria may also apply.
Defining gross receipts. For eligible nonprofits, veterans, nonprofit news, 501(c), or destination marketing organizations, gross receipts are defined in section 6033 of the Internal Revenue Code of 1986. For other entities, the IFR defines gross receipts per the SBA definition in 13 C.F.R. 121.104, and notes that it includes “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” Exclusions include “taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.” Additionally, proceeds from forgiven PPP loans are excluded from the definition of gross receipts.
Determining the loan amount. Eligible borrowers may generally borrow up to two-and-a-half months of their average monthly payroll cost, up to $2 million. Businesses that are entities of a corporate group are limited in aggregate to $4 million of Second Draw Loans. Those with a NAICS code beginning with 72 (generally hospitality industry organizations) at the time of disbursement can calculate their loan amount by using three-and-a-half months of their average monthly payroll cost. Average payroll costs can be based on 2019, 2020, or for borrowers who are not self-employed, a sole proprietor, or an independent contractor, the precise one-year period before the date on which the loan is made.
Other loan details. Second Draw PPP loans will carry a 1 percent interest rate and five-year maturity, with no collateral or personal guarantees required. Loans will be available on a first-come, first-served basis and can be funded through the sooner of March 31, 2020, or when funding is depleted.
In addition to the new guidance, the SBA also released two new applications and instructions for new First Draw and Second Draw Loans.
For First Draw Loans, the application and instructions can be found at: https://home.treasury.gov/system/files/136/PPP Borrower Application Form.pdf.
For Second Draw Loans, the application and instructions can be found at: https://home.treasury.gov/system/files/136/PPP Second Draw Borrower Application Form.pdf.
As with previous PPP loan applications, many lenders will require borrowers to submit their applications through online portals. Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) are authorized to begin accepting applications the week of January 11 with larger banks to follow.
Take Action Now.
The PPP provisions in this legislation, as well as in other economic and tax relief provisions, are complex and must be used specifically. Interested parties should take immediate action to review their business and financing needs as some options are time-sensitive.
Many of the factors determining whether your business qualifies for these loans or should apply for the new round of PPP funding are organization-specific. There are also legal implications for applying and using PPP funds. We encourage interested parties to consult with their legal counsel regarding questions on eligibility under the terms of this latest round of legislation.
We recognize that the effects of the COVID-19 pandemic on businesses are ongoing and we remain committed to supporting you. If you would like assistance with evaluating your opportunity to participate in COVID-19 tax and/or economic relief measures, please contact your HBK Advisor.