New Guidance Issued On Next Round Of PPP Loans: An Overview For Small Businesses
On January 6, 2021, the Small Business Administration (SBA) issued new guidance on which businesses are eligible and how to apply for the new round of Paycheck Protection Program (PPP) funds authorized in the new Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) signed into law on December 27, 2020.
The main takeaway is that any business that did not receive a PPP loan previously, or those businesses that experienced a 25% reduction in revenue in one quarter of 2020 over 2019, can apply for this new round of PPP. Even more helpful, businesses, sole proprietors, and independent contractors applying for loans of $150,000 or less and based on the same calculation as round one—2.5 times one month of 2019 payroll—do not have to submit new documentation if applying through the same lender. The new regulations do give lenders the ability to request additional documentation from borrowers if they deem it necessary.
Terms and conditions of PPP loans: round two
More businesses now eligible
The Economic Aid Act also expanded the list of businesses that are now eligible to receive PPP loans. These new groups include 501c(6) organizations like chambers of commerce, nonprofits and religious entities, and local news organizations. These loans are also capped at $2 million.
In addition, the new law earmarked $15 billion in straight grants that do not need to be repaid for live entertainment venues, which were some of the hardest hit businesses due to Covid shutdowns. These businesses include theaters, museums, and zoos. It also includes businesses that represent performers. It is important to note that the main activity of a business must be live entertainment, so a restaurant that provides a nightly singer, for example, would not be eligible.
The SBA also issued Guidance on Accessing Capital for Minority, Underserved, Veteran, and Women-Owned Business Concerns in an effort to address the main criticism of the initial PPP. This criticism, harsh at times, was that small business of less than 10 employees, women- and minority-owned businesses, and those in economically disadvantaged areas, were shut out of the program while large businesses, chains, and publicly traded companies received funding.
The guidance outlines that the SBA will only accept loan applications from community financial institutions for at least two days after the loan portal reopens, and that it will engage in community and public outreach along with a media campaign to promote the program and encourage these groups to apply.
The SBA also outlines the businesses that were not eligible to apply for the new round of PPP, including the following:
• Lobbying firms or those engaged in political or advocacy activities,
• Businesses based in or tied to the People’s Republic of China,
• Businesses lobbying or engaging in public relations for foreign clients and required to register their activities under the Foreign Agents Registration Act,
• Live entertainment venues receiving grants under the Economic Aid Act,
• Businesses in which the president, the vice president, the head of an executive department, or a member of Congress, or the spouse of such person owns, controls, or holds at least 20% of any class of equity; and
• A publicly traded company.
New forgiveness rules
Writ large, the new PPP round has the same requirements for having the loan forgiven and turned into a grant. Borrowers still have to use 60% of the funds on payroll and 40% on expenses over a 24-week period. In a positive development, borrowers of loans of $150,000 or less can “check the box,” self-certifying they used funds according to regulations, making the application process much simpler.
In addition, the Economic Aid Act expanded the list of expenses from the original short list of rent, utilities, mortgages, and interest on existing debt, to include essential supplier costs, personal protection equipment, and operational expenses such as software, accounting, and cloud computing.
One of the biggest issues with the first round of PPP was the unintended tax consequences. While it was clear that a forgiven PPP loan would not be considered income, Treasury guidance did not permit normally deductible expenses paid for by PPP funds to be deductible. By incurring this tax burden, the government was, in fact, taxing PPP grants. Due to effective lobbying by every business group in Washington, the new law fixed this problem and now expenses paid for by PPP funds are deductible.
Finally, businesses that received PPP loans were not eligible to also take the Employee Retention Tax Credit. This program allows employers to deduct up to $14,000 per employee on tax withholdings. Now businesses are able to get PPP loans and avail themselves of the tax credit, providing they can show a reduction of revenue of 25% or more in a quarter of 2020 over 2019. The tax credit is available in Q1 and Q2 of 2021 and is both refundable, meaning the IRS will send employers checks, and advanceable, meaning employers can apply for the credit in advance of paying their employees.