New SBA Guidance Released: Interim Final Rules on the Revived Paycheck Protection Program
January 8, 2021
On January 6, 2021, the Small Business Administration ("SBA") released new guidance on the Paycheck Protection Program ("PPP"), recently revived through March 31, 2021 by the Economic Aid to Hard-Hit Businesses, Nonprofits, and Venues Act ("Economic Aid Act"):
- An Interim Final Rule ("Consolidated IFR") consolidating all of the rules applicable to PPP loans.
- An Interim Final Rule ("Second Draw IFR") on loans ("Second Draw PPP Loans") guaranteed by SBA to borrowers that previously received loans ("First Draw PPP Loans") under the PPP.
The majority of the Consolidated IFR restates the previously released rules and guidance applicable to the PPP. However, the Consolidated IFR also clarifies the changes made to the PPP by the passage of the Economic Aid Act, as we highlighted in our previous legal alert: Coronavirus Relief Under the Consolidated Appropriations Act, 2021. Key changes made by the Economic Aid Act include deeming exchange-listed publicly held companies ineligible for PPP loans, deeming farmers and ranchers as eligible, and applying the "per location" employee headcount already applicable to restaurant and hotel businesses to certain news organizations.
SECOND DRAW PPP LOANS
Clarifications to Second Draw PPP Loans. Generally, Second Draw PPP Loans are subject to the same terms, conditions, and requirements as First Draw PPP Loans. However, borrowers seeking to obtain a Second Draw PPP Loan should be aware of several key considerations outlined in this alert. Supplementing the eligibility requirements in the Economic Aid Act (outlined in our previous legal alert: Coronavirus Relief Under the Consolidated Appropriations Act, 2021), the Second Draw IFR clarifies:
- For the requirement that an eligible borrower must have used (or will use) the "full amount" of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan is (or will be) disbursed, the Second Draw IFR clarifies the calculation of the "full amount" includes any increase on a First Draw PPP Loan made pursuant to the Economic Aid Act.
- For the requirement that an eligible borrower must have experienced a reduction in gross receipts of 25% or greater in at least one quarter in 2020 as compared to the corresponding quarter in 2019, the Second Draw IFR deems a borrower that was in business all four quarters of 2019 to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in calendar year 2020 compared to calendar year 2019 if the borrower submits copies of its annual tax forms.
- The following entities are not eligible for a Second Draw PPP Loan: (a) any entity that previously received a Second Draw PPP Loan, and; (b) any entity that has permanently closed.
- Borrowers may use calendar year 2020 for calculating its payroll costs, in addition to calendar year 2019 and the twelve-month period prior to when the loan is made.
- A borrower that is a hotel or restaurant and also constitutes a seasonal business may calculate its average payroll costs based on the applicable methodology (i.e., by virtue of its status as a seasonal business), but is still eligible for the 3.5 multiplier applicable to hotel and restaurant businesses.
- Businesses that are part of a single corporate group may receive no more than $4,000,000 of Second Draw PPP Loans in the aggregate, which is less than the $20,000,000 maximum amount for corporate groups relating to First Draw PPP Loans.
Loans to Borrowers with Unresolved First Draw PPP Loans. If a lender submits an application for a guaranty of a Second Draw Loan for a borrower whose First Draw PPP Loan is under review (an "Unresolved Borrower"), the lender will not receive an SBA loan number until the issue related to the First Draw PPP Loan is resolved. SBA will set aside available appropriations to fund Second Draw PPP Loans applied for by Unresolved Borrowers.
Gross Receipts. "Gross receipts" for the purpose of calculating the revenue reduction is defined as all revenue in whatever form received or accrued (in accordance with the entity's accounting method) from whatever source, including the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered "total income" plus "cost of goods sold," and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms. Gross receipts do not include the following:
- 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.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern. In addition, the amount of any forgiven First Draw PPP Loan is not included toward the borrower's gross receipts.
Certifications. On the Second Draw PPP Loan application, an authorized representative of the borrower must make all of the certifications required to obtain a First Draw PPP Loan, except the certification that the borrower has not and will not receive another loan under the PPP is replaced with a certification that the borrower has not and will not receive another Second Draw PPP Loan. Importantly, this means that a borrower applying for a Second Draw PPP Loan will once again need to certify that current (presumably at the time of the Second Draw application) economic uncertainty makes the loan request necessary to support its ongoing operations.
In addition, the application will need to make additional certifications specific to Second Draw PPP Loans as required by the Economic Aid Act (e.g., it experienced a 25% reduction in gross receipts, it has received a First Draw PPP Loan, which has been or will be used by the date the Second Draw PPP Loan is disbursed). The new Second Draw applications are expected to be available very soon.
We Can Help
Please contact Maslon's Corporate & Securities Group if you have questions or need assistance applying for a loan under the revived Paycheck Protection Program.