On December 21, 2020, Congress introduced the Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act (the “Act”).  It is anticipated that the Act will quickly pass in both the Senate and the House and be signed into law. 

The Act has allocated over $300 billion to go to businesses.  Of that, $284 billion would go to additional Paycheck Protection Program (“PPP”) funding and $20 billion would go to the Small Business Administration’s Economic Injury Disaster Loan (“EIDL”) program.  Another $15 billion would go to zoos, theaters, museums, and other eligible venues under the new grants for Shuttered Venue Operators, which we will summarize separately in the coming days.   

The Act contains several provisions related to the PPP and other business relief, including a second round of loans for certain eligible borrowers.  Additionally, the Act expands the SBA’s current debt relief program and EIDL program.  Below is a high-level summary of many (but not all) relevant provisions.  We will continue to monitor the bill and anticipated guidance and make updates as appropriate. 

Deductibility of Expenses Paid with PPP Funds
The Act clarifies that the PPP loan is not income to the borrower and that the borrower may deduct permissible expenses paid using PPP loan funds.  This new rule applies to all borrowers, even those who previously received PPP loans.  The Act provides that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”

Changes to Existing PPP Loan Program
The Act reopens applications for the original PPP loans and sets aside $35 billion for businesses who had not yet borrowed.  Additionally, the Act provides several changes to the existing program.  However, the updated rules do not apply to businesses who have already applied for forgiveness.

Additional Eligible Expenses: The Act provides four new permitted uses of PPP funds.  Funds spent on these new permitted uses are also eligible for forgiveness:

  1. “covered operations expenditures” - a payment for any business software or cloud computing service that facilitates business operations, product or service deliveries, the processing of payments, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
  2. “covered property damage costs” - costs 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.
  3. “covered supplier costs” - an expenditure made by an entity to a supplier of goods that are:
    • Essential to the operations of the entity at the time at which the expenditure is made, or
    • Is made pursuant to a contract, order, or purchase order that was either (i) in effect at any time before the covered period with respect to the loan, or (ii) with respect to perishable goods, in effect before or at any time during the period.
  4. “covered worker protection expenditures” - operating or capital expenditures that are required 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 CDC, or OSHA, during the period beginning on March 1, 2020, and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. These costs 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 indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance.

Covered Period: Updated, such that the “covered period” begins on the date of the origination of the loan and ends on a date selected by the borrower that occurs during the 4-month period that starts 8 weeks after loan disbursement and ends 24 weeks after loan disbursement.

Additional Insurance Benefits as Eligible Expenses: The Act provides that “group life, disability, vision or dental insurance” all comprise “benefits” for purposes of forgivable uses and calculating loan amount.

Amendments to Existing PPP Loan Amounts 
The Act requires that the SBA issue guidance to lenders within 17 days to provide a process for borrowers who returned all or part of their PPP loans to reapply for the maximum allowable amount so long as they have not started the forgiveness process.  The Act also allows borrowers that would have received an increased loan amount due to changes in interim financial rules issued by the SBA or as a result of the Act to reapply for the difference in their final loan amount and the maximum allowable amount.

Simplified Forgiveness Application for Borrowers with Less than $150,000
Borrowers who have an outstanding PPP loan of less than $150,000 are now only required to submit a one-page online or paper form application and are only subject to audit if they commit fraud or use the proceeds of their PPP loan for improper purposes.  Pursuant to the Act, the SBA has 24 days to provide a streamlined certification for borrower’s in this category.

Additional Eligibility Buckets
The Act expanded the eligibility of certain business concerns to receive PPP loan funds.  Under the Act, most Section 501(c)(6) organizations (i.e., trade groups, chamber of commerce groups, and certain destination marketing companies), would be eligible to apply for PPP loans, provided the organization doesn’t receive more than 15% of receipts from lobbying activities, the lobbying activities of the organization do not comprise more than 15% of its total activities, and the organization has 300 employees or fewer. In addition, housing cooperatives, newspapers, broadcasters, and radio stations would now potentially qualify.

Additionally, the Act amends certain provisions of the Bankruptcy Code and provides that a debtor in possession or a trustee that is authorized to operate the business of a debt is entitled to obtain a PPP loan and such loan shall be treated as debt to the extent the loan is not forgiven. 

Second Draw PPP Loans
In addition to reopening and expanding the first tranche of PPP loans, the Act creates a second tranche of loans available to certain eligible businesses.  These second tranche loans are targeted to provide relief for the hardest hit businesses that can demonstrate a decrease in revenue because of COVID.

Eligibility:

  • Any business concern, nonprofit organization, housing cooperative, veterans organization, Tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative that:
    • Employs not more than 300 employees; and
    • Has gross receipts during the first, second, third (or only with respect to an application submitted after January 1, 2021), fourth quarter in 2020 that demonstrate not less than a 25% reduction from the gross receipts of the entity during the same quarter in 2019. Specific rules are provided for borrowers not in existence for all of 2019 or which apply for a loan in 2021.
  • Additional limitations for businesses that are otherwise prohibited from SBA loans (see CFR 120.11 of title 13) or businesses primarily engaged in political or lobbying activities.
  • Businesses are also prohibited from applying for a Second Draw PPP loan if, (i) they have significant operations in China or Hong Kong, (ii) any individual in China or Hong Kong holds, directly or indirectly, 20% of the economic interest of the business concern, including equity shares or profit interests, or (iii) a member of the businesses board of directors is a resident of China.
  • Public companies are prohibited.
  • Eligible entities must have been in existence as of February 15, 2020.
  • Borrowers will need to certify that the second PPP loan is “necessary to support the on-going operations of the applicant.”

Maximum Loan Amount:

  • The maximum loan amount for a second draw PPP loan is determined by multiplying the average total monthly payment for payroll costs paid during either (i) the 1-year period before the date on which the loan is made, or (ii) the calendar year 2019, by 2.5 (or in the case of an NAICS 72 entity, 3.5). Specific computational rules are provided for borrowers not in existence for all of 2019.
  • Maximum amount of loan is $2,000,000.
  • Additional computational rules are provided for seasonable employers.

Forgiveness:  The second tranche of loans follows the existing forgiveness provisions, including reductions in total eligible forgiveness for reductions in workforce or salary amounts over the chosen covered period.  Non-payroll costs cannot exceed 40% of the total amount forgiven.  Under the Act, however, the final forgiveness amount will no longer be reduced by any outstanding EIDL grant received.  We anticipate that the SBA will issue additional guidance around forgiveness for this second batch of loans as the specifics are worked out.

Set Asides for Certain PPP Borrowers:  The Act includes set asides of funds to support first and second time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, loans made by community lenders, and loans made to businesses in low-income or moderate-income neighborhoods.

Extension of Existing SBA Debt Relief Program
The Act extends the principal and interest payments made by the SBA for borrowers with existing SBA loans (not including PPP or EIDL).  The SBA will now make payments of principal and interest on existing loans for a minimum of an additional 6-month period beginning with the next payment due.  Additional repayment may be available to borrowers under certain existing SBA programs or borrowers that fall under certain NAICS classifications.  No single monthly payment will be reimbursed in excess of $9,000.  The Act provides that the SBA must mail a letter to each applicable borrower that includes an overview of the assistance provided, the rights of the borrower to receive the assistance, and how to seek assistance with borrowers that have not yet received such assistance.

Expanded EIDL Program for Hardest Hit Businesses
The Act replenishes the EIDL Advance fund, which allows eligible businesses (discussed in further below) to apply for an advance that does not need to be repaid of up to $1,000 per employee, limited to $10,000 total.  Businesses who received prior grant amounts under the EIDL program are eligible to reapply, however the amount will be limited to the difference between $10,000 and the amount of the previously received grant.  Under the Act, the EIDL Advance will no longer reduce your PPP loan forgiveness.  Borrowers who already submitted their PPP forgiveness application and took a reduction for an EIDL Advance may be able to go back and amend their forgiveness application to remove this amount.

Borrowers must have substantial economic injury to be eligible and must be an eligible entity that is (i) located in a low-income community, (ii) has suffered an economic loss of greater than 30% and (iii) employs not more than 300 employees.

Economic loss means (a) the amount by which the gross receipts of the entity declined during an 8-week period between March 2, 2020, and December 31, 2021, relative to a comparable 8-week period immediately preceding March 2, 2020, or during 2019; or (b) if the covered entity is a seasonal business concern, such other amount determined appropriate by the SBA.

These are loans that must be repaid.  Loans have a 30-year term with 3% interest. 

Forgiveness Audit Plan
Not later than 45 days after the date of enactment of the Act, the SBA must submit to the Senate an audit plan that details (i) the policies and procedures of the SBA for conducting forgiveness reviews and audits and (ii) the metrics the SBA will use to determine which loans will be audited.  We will continue to follow these specifics as they develop.

Conclusion
Pursuant to the Act, the SBA has 10 days after the date of enactment to file additional guidance on several of the changes and open points.  We anticipate that similar to the first PPP round this guidance will continue to follow in the weeks ahead.  Businesses and other entities that are interested in applying for the second tranche of funding should reach out to their existing PPP lender for information on when applications may become available.  Simultaneously, potential second round borrowers should re-gather documentations covering their eligibility, including the new revenue test.


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