January 5, 2021

U.S. Paycheck Protection Program Restarts: Summary Of Key Updates

On December 27, 2020, the President signed into law the “Consolidated Appropriations Act, 2021” (H.R. 133) (or the “2021 CAA”), which modifies and reopens the U.S. Small Business Administration’s Paycheck Protection Program initially created under the CARES Act. The reopened Paycheck Protection Program is available through March 31, 2021 and, in addition to being available for first-time program applicants, makes an additional second (or “second-draw”) PPP loan available for certain small and hard-hit existing PPP borrowers.

Below is a summary of the key updates this bill makes with respect to Paycheck Protection Program (or “PPP”) loans. Clients seeking to review the statute directly should look to Title III of Division N of the 2021 CAA (referred to as the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act) generally, but for the tax matters noted below should consult Section 276 of Title II of Division N.

Key Changes Applicable To All PPP Loans

Tax Matters The 2021 CAA:
  • Clarifies that forgiveness of existing or new PPP loans will not result in taxable income to the borrower; and
  • Overturns previous IRS guidance by providing that businesses are permitted to deduct expenses paid with the proceeds of forgiven PPP loans, and no tax attribute will be reduced or basis increase denied, as a result of the exclusion of forgiven PPP loans from taxable income.
Eligibility Criteria

PPP loans continue to be available to generally the same prospective borrowers as before, through March 31, 2021, subject to these new exceptions.

  • Businesses that were not in operation on or prior to Feb 15, 2020 are ineligible for PPP loans.
  • Businesses that received one of the new grants for shuttered venue operators provided for separately under the 2021 CAA are not eligible for PPP loans.
  • Publicly traded companies are no longer eligible for PPP loans.

In addition, the 2021 CAA amends the Bankruptcy Code to allow bankruptcy courts to permit debtors in chapter 11 subchapter V (small business reorganization) cases to obtain PPP loans on an expedited basis and, to the extent not forgiven, for such loans to be given “superpriority” status in the bankruptcy case.

Requests of Increases of PPP Loan Amounts

For borrowers that did not obtain the maximum size of the PPP loan they would have been eligible for, the 2021 CAA mandates that the SBA publish guidelines (within 17 days) to allow them either to re-apply for PPP loans or to apply for a top-up increase to their existing PPP loan. This right applies specifically to:

i.   Borrowers that received and returned PPP loans.
ii.  Borrower that only accepted a portion of the full amount of the PPP loan they were approved for; and
iii. Borrowers that would have been eligible for a larger loan than initially received had they applied at a later time (as a result of any SBA interim final rules providing for PPP loan increases).

Seasonal Businesses

The 2021 CAA now defines seasonable employers for purposes of the PPP to be those that (a) do not operate for more than seven months in any calendar year, or (b) during the preceding calendar year had gross receipts for any six months that were 1/3 or less of their receipts for the other six months.

The 2021 CAA further provides that seasonal businesses applying for new PPP loans can now choose to use their average payroll for any 12-week period between February 15, 2019 and February 15, 2020 as the baseline for determining their PPP loan size, rather than having to choose from one of two fixed testing periods as was the case under the original CARES Act.

Use and Forgiveness of Loan Proceeds Borrowers of both new and existing PPP loans that have yet to be forgiven benefit from an expanded list of permitted uses and forgiveness-eligible uses of PPP funds.

Under the original CARES Act, PPP loans could be spent for the below-listed purposes, of which items 1 through 4 were forgiveness-eligible purposes:

1. “Payroll costs”, as defined under the CARES Act (“PPP Payroll Costs”;
2. Mortgage interest;
3. Rent;
4. Utilities;
5. Costs related to group paid sick, medical or family leave and insurance premiums;
6. Interest service for debt; and
7. Employee compensation in excess of what constitutes PPP Payroll Costs.

The 2021 CAA clarifies that group health care benefits (an element of PPP Payroll Costs) includes group life, disability, vision and dental insurance benefits, which clarification applies to any PPP loan.

The 2021 CAA further adds four new purposes for which PPP loans can be spent, all of which are also forgiveness-eligible purposes, which are:

8. Covered operations expenditures: Costs of software or cloud services that facilitate business operations, of product or service delivery, of processing, payment or tracking of payroll expenses, of human resources, sales and billing functions, or of accounting or tracking of supplies, inventory, records and expenses;
9. Covered property damage costs: To the extent not covered by insurance, costs related to property damage and vandalism or looting due to public disturbances occurring during 2020;
10. Covered supplier costs: Costs of supplies that are essential to the borrower’s operations, to the extent contracted before or, in the case of perishable goods only, during, the applicable covered period (or forgiveness spending window as we refer to such period) for the PPP loan; and
11. Covered worker protection expenditures: Costs of implementation of worker protection requirements or guidance established by HHS, the CDS or OSHA (or equivalent state- and local-level agencies) on or after March 1, 2020.

NOTE: Borrowers should continue to bear in mind that a minimum of 60% of PPP loan proceeds are still required to be used to pay PPP Payroll Costs, and these additional forgiveness-eligible expenditures will be counted toward the remaining 40% of PPP loan proceeds used (along with covered mortgage obligations, covered rent obligations and covered utility payments).

Re-hire exemption Forgiveness of PPP loans is generally subject to reduction to the extent a borrower has reduced headcount during its forgiveness spending window as compared to a prior period.

Under the CARES Act, exceptions to this reduction existed for:

a) Employees that had departed between February 15, 2020 and April 26, 2020 to the extent they were actually re-hired or replaced prior to December 31, 2021 or the borrower demonstrates that despite good faith efforts it was unable to re-hire or replace them; and
b) An inability to return to pre-February 15, 2020 business activity levels due to compliance with COVID-19-related worker or customer safety requirements during the period beginning March 1, 2020 and ending December 31, 2020.

These exceptions continue to apply for all PPP loans, but the 2021 CAA provides that for new PPP loans made following its enactment, the applicable periods for such exceptions extend beyond December 31, 2020 through the end of the forgiveness spending window for that loan.

Forgiveness Spending Window

PPP loans are eligible for forgiveness based on the amount of PPP loan proceeds spent on certain forgiveness-eligible purposes during the specified “covered period” (which we call the “forgiveness spending window” in order to distinguish it from the separate “covered period” referenced in the calculation of the initial PPP loan size).

Under the original PPP program, that forgiveness spending window opened the date the PPP loan was made and closed 24-weeks (or for certain borrowers, 8 weeks) later. The re-authorized PPP under the 2021 CAA offers a more flexible standard. Borrowers of new PPP loans begin their forgiveness-spending window on the date the PPP loan is made and end it on a date of their choosing at any time between 8 and 24 weeks thereafter.

Simplified Forgiveness Application

The 2021 CAA mandates that, for PPP loans of $150,000 or less, the SBA implement a simplified forgiveness application consisting of:

a) a certification, not greater than one page in length, limited to a description of the number of employees the borrower was able to retain because of the PPP loan, the estimated amount of the PPP loan spent on PPP Payroll Costs, and the total loan value;
b) an attestation that the required certifications are correct and that the borrower complied with Paycheck Protection Program requirements; and
c) an obligation to retain records (4 years for employment records and 3 years for other records) that “prove compliance” with the requirements under the Paycheck Protection Program, although the simplified application should not require any additional application or submission of supporting documentation (other than in connection with the reduced revenue requirement for second-draw PPP loans described below).

This simplified application will be applicable to all PPP loans, regardless of when borrowed, and is required to be published by the SBA within 24 days. (The SBA had previously published a short-form forgiveness application, SBA Form 3508S, that was only available for borrowers with loans of $50,000 or less and a separate modified forgiveness application, SBA Form 3508EZ, that required less supporting documentation for borrowers meeting certain specific conditions relating to payroll and headcount.)

Forgiveness Audit Plan & Reports

The 2021 CAA mandates that, within 45 days, the SBA publish (i) policies and procedures for conducting review and audits of PPP loans and (ii) the criteria to be used in determining which PPP loans will be audited.

Commencing within 30 days following delivery of the audit plan, the SBA is required to provide monthly reports to Congress on the status of all audits, including details of any changes to the plan established initially pursuant to the above.

Further Updates

The 2021 CAA includes additional clarifications and changes with respect to PPP loans including:

  • Clarifying that the interest rates charged in respect of PPP loans are to be non-compounding and non-adjustable.
  • Repealing the requirement that the amount of forgiveness for any PPP loan be reduced by the amount of any EIDL grant received.


Key Terms Of New Second-Draw PPP Loans

Eligibility Criteria

In order for an existing PPP borrower to be eligible for a second-draw PPP loan, a prospective borrower must initially meet three key eligibility criteria.

First: The borrower – together with the borrower’s affiliates (as determined under the SBA’s affiliation rules) – must have 300 or fewer employees or, in the case of businesses with a NAICS code beginning with 72 (accommodation and food service) at the time of the loan, 300 or fewer employees per physical location. Exemptions from affiliation continue to apply for NAICS 72 companies, franchises and businesses that have received investments pursuant to the Small Business Investment Act.

Second: The borrower must have seen decreased year-over-year gross receipts (the “reduced-revenue requirement”). Generally, this is established by demonstrating a reduction of at least 25% in gross receipts during any fiscal quarter of 2020 as compared to the same quarter in 2019, but for businesses that only began operating in late 2019 or early 2020 there are alternate comparisons available.

Third: The borrower must have received its initial PPP loan and have used it fully, or if it has not fully used those loan proceeds at the time of application for a second-draw, will fully use its initial PPP loan, on or prior to the expected funding date of its second-draw PPP loan.

Prospective borrowers satisfying the above criteria may (still) not be eligible for a second-draw PPP, notably if:

a) They are in lines of business that are not generally eligible for SBA lending (other than non-profits and religious organizations);
b) They are primarily engaged in lobbying activities;
c) Any business organized under the laws of China or Hong Kong, or having significant operations in China or Hong Kong, owns 20% or more of the prospective borrower;
d) Their board of directors includes a member that is a resident of China; or
e) They have received one of the new grants for shuttered venue operators provided for separately under the 2021 CAA.

Loan Size

A second-draw PPP loan cannot exceed the lesser of $2 million and a formula-based amount, equal to:

  • Generally, 2.5 times average monthly payroll for calendar year 2019 or the 1-year period before the second-draw is made;
  • For businesses with a NAICS code beginning with 72 at the time of the loan, 3.5 times average monthly payroll for either calendar year 2019 or the 1-year period before the second-draw is made;
  • For seasonal businesses, 2.5 times the average monthly payroll for any 12-week period between February 15, 2019 and February 15, 2020; and
  • For businesses that began operating after February 15, 2019, 2.5 times average monthly payroll over the life of the business.
Application Considerations

The reduced-revenue requirement for second-draw PPP loans is in addition to certain existing, requisite certification, including the nebulous “necessity” certification.

Second-draw PPP borrowers should also be prepared to produce documentation evidencing compliance with the reduced-revenue requirement regardless of the size of their loan. The 2021 CAA provides that such supporting materials must be provided prior to applying for forgiveness of loans of $150,000 or less using the new simplified application form described above, even if those materials are not required at the time of the application for such loans.

Forgiveness of Second-Draw Loans Generally, forgiveness is available on the same terms and with the same potential forgiveness spending windows, as provided for initial PPP loans (all as updated by the 2021 CAA), including the requirement that at least 60% of the second-draw PPP loan amount forgiven must have been expended on PPP Payroll Costs.


Highlights For Lenders

Hold Harmless A lender may rely on borrower certifications and documentation, and no enforcement action will be taken for lenders that act in good faith in reliance on borrower certifications and documentation.
Simplified Forgiveness Application As noted above, the 2021 CAA mandates that, for PPP loans of $150,000 or less, the SBA implement a simplified forgiveness application not greater than one page in length and that requires little to no supporting documentation. This application will be applicable to all PPP loans, regardless of when borrowed, and is required to be published by the SBA within 24 days.
Second-Draw PPP Loan Fees The SBA will reimburse lenders based on loan size: for loans up to $50,000, an amount equal to the lesser of 50% of the balance of the financing outstanding at the time of disbursement of the loan or $2,500; 5% for a loan up $350,000; and 3% for a loan greater than $350,000.
SBA Rulemaking Except where other specific deadlines are noted, the SBA must issue rules within 10 days to effectuate the changes to PPP contemplated by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.

$284.5 billion appropriation to the PPP loan program, including:

  • $15 billion for community development financial institutions and minority depository institutions
  • $15 billion for institutions with consolidated assets of $10 billion or less
  • $40 billion ($15 billion of new PPP loans, and $25 billion of second-draw PPP loans) for:
    • Businesses with not more than 10 employees, or
    • Loans of under $250,000 to recipients located in low- or moderate-income neighborhoods
  • $35 billion for new (first-time) PPP borrowers


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