This post is co-authored by Ellen Wood, Chris Hysinger, Jennifer Lennarz, and Regina Walters.
Paycheck Protection Program (PPP) Updates – Key Components and Considerations
In January of 2021, the U.S. Small Business Administration (SBA) resumed and expanded its Paycheck Protection Program (PPP) as part of the Consolidated Appropriations Act (CAA). This opens up new funds to businesses that meet certain criteria to keep employees working as the economic impacts of the pandemic persist. This is welcome news for many still struggling business owners though the process and parameters of the new PPP are again unclear in some respects, and can be overwhelming to busy owners trying to hold things together.
Eligibility for this round has tightened. Key gating factors and criteria are outlined below. The entirety of the updated PPP and its changes are too numerous to be described here in full. Comprehensive details can found on the SBA website. Given the complexities, changes, and some remaining ambiguous issues involved, remember you can always reach out to vcfo to discuss your circumstances with PPP-experienced financial experts at any point in the process.
First Draw PPP Loans
Some businesses missed out on the first PPP wave of loans. Others were unable to fully utilize funds they were eligible to borrow. The CAA provides some options for those entities.
The SBA’s First Draw Borrower Application Form shows the information that will be required upon submission when applying for a first loan of up to $10 million. New emphasis has been placed on assisting eligible borrowers in underserved and disadvantaged communities. A minimum of $15 billion was set aside for First Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods who missed out on a loan in the first program. Other key question include:
Who Can Apply for a First Draw PPP Loan?
Generally, entities with 500 or fewer employees (including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors) can apply. Those with more than 500 employees may also qualify if they operate in certain industries.
When Can Businesses Apply for a First Draw PPP loan?
Applications for a First Draw PPP loan will be accepted through March 31, 2021. A list of participating lenders and the full terms of these loans can be found here.
Can First Draw PPP Borrowers Qualify for Full Loan Forgiveness?
Yes. Borrowers can qualify for full loan forgiveness if during the 8- to 24-week covered period following loan payout employee and compensation levels are maintained, loan proceeds are spent on payroll costs and other eligible expenses, and 60% or more of the proceeds are spent on eligible payroll costs.
Borrowers of a first loan who were unable to fully utilize available funds have a couple of ways they can optimize after the fact. PPP borrowers that didn’t receive loan forgiveness by December 27, 2020 for their first loan have the opportunity to reapply for a First Draw PPP Loan if some or all of their initial First Draw PPP Loan funds were returned, and due to changed circumstances, an applicant would now like to request them again. In some cases, a business can also ask to modify their First Draw PPP loan amount if they previously didn’t accept the total amount they were eligible for.
Second Draw PPP Loans
More applicants will be interested in the opportunity for a Second draw PPP loan provided in the CAA. Again, these loans must be primarily used to cover payroll (including benefits), but can also be used for rent, utilities, interest on mortgages, and costs associated with protecting workers from COVID-19. For most borrowers, the maximum amount of a PPP Loan is 2.5 times the average payroll costs in 2019 or 2020 (up to $2 million). Other key questions include:
Who Qualifies for a Second Draw PPP Loan?
Generally, entities that qualify for a Second Draw PPP Loan are those who have 300 or fewer employees, previously received a First Draw PPP Loan, used the full amount of the First Draw PPP Loan only on eligible expenses, and can show at least a 25% loss in gross receipts across either comparable quarters in 2019 and 2020, or between 2020 and 2019 on an annual basis.
When and How Can Businesses Apply for a Second Draw PPP loan?
Applications for a Second Draw PPP loan will also be accepted through March 31, 2021. The required information is similar to the first draw requirements and is outlined on the SBA’s PPP Second Draw Borrower Application Form.
Can Second Draw PPP Borrowers Qualify for Full Loan Forgiveness?
Yes. Borrowers can qualify for full loan forgiveness if, during the 8- to 24-week covered period following loan disbursement, employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan, funds are spent on payroll costs and other eligible expenses, and 60% or more of the proceeds are spent on eligible payroll costs. If less than 60% of the proceeds are used for eligible payroll costs, the maximum forgiveness will be eligible payroll divided by .6.
As part of the CAA, loans forgiven are not considered taxable income, and expenses paid for with PPP will be deductible.
Additional PPP Considerations and Components
The CAA also expanded on tax allowances and credits that businesses can utilize in addition to a PPP. One of the highlights of the new program is an update and expansion of Employee Retention tax credits. The credits were opened up to employers who received PPP loans and were extended through June 2021. Additionally, these credits were increased to 70% of qualified wages paid (up to $10,000 for each employee) for each of the first two quarters in 2021. This is expected to significantly boost cash flow for many businesses.
A key component of PPP eligibility is demonstrating economic necessity. There is not a perfectly clear definition of what fulfills this definition, but the SBA has now incorporated a questionnaire that aims to shed light on this item through a two-part assessment covering business activity and liquidity. For borrowers whose loan amount exceeds $2 million they will be required to submit this questionnaire to the SBA via their lender at the time they apply for forgiveness. Business leaders should be thorough in preparing this documentation and mindful of deadlines associated with its submission so that their approval will not be adversely affected.
Doing What is Right for Your Business
The resumption and expansion of the PPP is great news for still-struggling businesses. The devil is again in the details, which business leaders must weigh before determining whether a PPP Loan is right for them. Getting the counsel of PPP-experienced professionals can short cut the research and alleviate many of the pains associated with the process.
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