Sweeping new changes to Paycheck Protection Program signed into law
As part of the new omnibus stimulus bill, Congress passed, and President Trump signed into law, the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (the “Act”) which makes substantial changes to the popular Paycheck Protection Program. The Act provides for nearly $300 billion in appropriations for PPP loans to eligible first-time borrowers, as well as certain borrowers who have already received a PPP loan (described in further detail below) until March 31, 2021.
Use of Proceeds
The Act permits PPP Borrowers to now use PPP loan proceeds, in addition to previously permitted payroll costs and certain lease, utility, and interest expenses on
(i) certain covered operations expenditures relating to business software or cloud computing services that are used in the borrower’s business,
(ii) property damage costs related to vandalism or looting that occurred due to public disturbances that occurred during 2020 that was not covered by insurance,
(iii) supplier costs to obtain goods that are essential to the operations of the borrower, and
(iv) worker protection expenditures that relate to maintenance of sanitation, social distancing, safety or similar requirements to comply with requirements or guidance issued by the government as part of the COVID-19 pandemic.
These amendments do not apply to loans that have already received a forgiveness determination prior to the enactment of the Act, in case a borrower thinks they might be able to go back and get more forgiven.
Eligibility and Second Draw Loans
The same affiliation rules apply for first-time borrowers as established under the CARES Act and associated regulations, except that debtors in bankruptcy may be eligible for a PPP Loan if approved by the bankruptcy court, and publicly-traded companies and entities that receive shuttered venue operator grants from the SBA are no longer eligible. Certain borrowers are also now eligible for a second PPP loan, although the eligibility criteria and loan amounts have changed. To be eligible, they must have fewer than 300 employees (down from 500), have used up all the proceeds of their first draw loan, and have had at least a twenty-five percent (25%) drop in “gross receipts” in a 2020 quarter compared to the same quarter from 2019. Lobbying firms are ineligible, as are businesses owned 20% or more by Chinese or Hong Kong-formed entities, and businesses that have substantial operations in such locations, or that have a resident of China as a board member. Businesses can borrow up to $2 million in second draw loans, based on the same formula as the previous round of taking 2.5 times the average monthly payroll cost of the business during (x) the one year period prior to the loan date or (y) 2019. Those in the food service and accommodation sectors (restaurants, hotels, bars and the like) can receive loans of up to 3.5 times their average monthly payroll, up to the same cap.
The Act explicitly permits expenses paid for with the proceeds of PPP loans to be deducted from the gross income of a borrower for federal tax purposes. Previously, the IRS had taken the position that, though forgiveness of a PPP loan would not be considered taxable cancellation of indebtedness income, expenses paid for using PPP loan proceeds could not be deducted like normal, arguing that to do so would be permitting double-dipping.
The Act permits PPP Borrowers to select the end of their covered period, so long as it is between 8 weeks and 24 weeks. Previously it had been either 8 weeks or 24 weeks only. This helpful change was called by many Borrowers who had expended their PPP Loan proceeds after 8 weeks, but well in advance of 24 weeks, but who had to continue to maintain employee levels and salaries for the full 24 weeks in order to ensure their forgiveness amount was not reduced.