On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law. While the implementing regulations are not required to be issued by the SBA until January 6, 2021, the Act does provide insight into the new and revised programs.
The purpose of this article is to provide an overview of the Act to allow borrowers and lenders to take advantage of potential liquidity enhancements.
The Act provides $325 billion in funding for the following:
$284.45 billion to provide PPP Second Round PPP loan funding.
$20 billion for EIDL advances.
$3.5 billion for SBA 7(a) debt relief.
$2 billion for SBA lending enhancements.
$15 billion for grants for live venues, theaters, museums and zoos that have been shuttered.
PPP Second Round
The Act expands the permissible uses of PPP loan proceeds to include:
Additional group insurance expenditures, to include group insurance payments made for life, disability, vision and dental insurance.
Supplier cost expenditures include amounts paid to supplier of goods that are essential to the borrower’s operations and pursuant to a contract, order or purchase order in effect before the PPP loan is disbursed.
Covered worker protection expenditures are amounts spent to adapt the borrower’s business activities to be in compliance with governmental regulations subsequent to March 1, 2020. For example, maintenance or renovations of drive through windows, physical barriers such as sneeze guards, expanded indoor or outdoor space, health screening, etc.
Covered operations expenditures are costs for business software or cloud computing services that facilitate business operations. These include product or service delivery, payroll processing and tracking expenses, human resources, sales and billing functions, or accounting and tracking of supplies, inventory records and expenses.
Covered property damage costs are expenses related to property damage, vandalism or looting due to public disturbances that occurred during 2020 and were not covered by insurance or other compensation.
The Act impacts PPP forgiveness as follows:
The applicable covered period may be elected by the borrower to be any time period ending between 8 weeks and 24 weeks after the loan origination. The borrower must use the PPP loan proceeds on eligible expenses during the chosen applicable covered period for full loan forgiveness.
A simplified loan forgiveness process is established for PPP loans up to $150,000. This is a one page certification and is expected to be available by January 20, 2021.
EIDL advances will no longer be required to be subtracted from the PPP loan forgiveness calculation.
A borrower that has already received a forgiveness determination from the SBA may not refile its loan forgiveness application. It is unclear if a borrower may re-file its application if that application has not yet received a determination from the SBA. This is an area that should be monitored for further regulations with the January 6, 2021 regulation publishing.
How does a business qualify for PPP round 2?
To qualify for the second round of PPP loans a borrower:
Must have no more than 300 employees.
Must have suffered a 25% or more reduction to gross revenues comparing comparable quarters in 2019 and 2020.
A borrower may have received a first round PPP loan and qualify for a second round loan. Borrowers who did not receive a first round PPP loan may also qualify for a second round loan.
An area to watch for further regulatory guidance is qualification standards. It is unclear whether the NAICS classifications with employee count and revenue size standards are applicable OR the SBA’s alternative maximum tangible net worth and net income standards are applicable.
Trade organizations, chambers of commerce, nonprofits and government instrumentalities that engage in destination or tourism marketing may now be eligible for the second round PPP loans if they 1) have 300 or fewer employees, and 2) do not receive more than 15% of their revenue from lobbying.
Some local newspapers, and TV and radio stations may now be eligible for the second round PPP loans.
Other details
A borrower that returned all or part of its first round PPP loan may reapply.
Certain bankruptcy related entities may request permission from the Court for a second round loan and this second round loan will have a super priority position equal to administrative expenses.
Calculate the eligible amount
The amount of the second round PPP loan is the lesser of:
-2.5 times average monthly payroll costs measured
During the one year period before the date of disbursement of the second round PPP loan, OR
Calendar year 2019, OR
$2 million.
A borrower in NAICS code 72, which is accommodation and food services, may use the lesser of 3.5 times average monthly payroll or $2 million.
Which lenders are making PPP second round loans?
All lenders previously approved to originate PPP loans may participate in originating second round loans.
What else is important?
The SBA is required to issue a forgiveness audit plan, policies and procedures to Congress by February 10, 2021. This should help clarify the audit process for the larger loans.
The shuttered live venue operators may qualify for grants equal to 50% of their first grant, as long as the total grants do not exceed $10 million. For the first 14 days, the SBA will award grants to venue operators with at least a 90% decline in revenue between April 1, 2020 and December 31, 2020 compared to the same period in 2019. Then for 14 days the SBA will award grants to venue operators with at least a 70% decline in revenue over the period. Additionally $3 billion has been reserved for venue operators that do not quality under the two priority grant periods noted above. Live venue operators will need to be actively engaged in understanding their eligibility to take advantage of the grant programs.
Income Taxes
A borrower should consult with its tax professional to understand the implications of the change in allowing the deduction of business expenses funded with proceeds of a forgiven PPP loan.
Employer Tax Deferral Periods
The time period for deferring taxes has been extended to December 31, 2021. Additional clarification of repayment periods should be expected.
What does this mean?
First, the second round PPP loans are an important source of additional liquidity for borrowers. There are additional clarifications that will be issued, but borrowers should be able to use the guidelines listed previously to estimate eligibility.
Second, EIDL grants are available.
Third, employer tax deferrals have been extended.
Lastly, income tax impact clarifications and forgiveness process clarifications will be available in the next 45 days.
Contact us today to see how we can help your lender or business