WHAT YOU NEED TO KNOW ABOUT THE LATEST ROUND OF PPP LOANS
Following months of negotiation, on December 21, 2020, Congress passed the Consolidated Appropriations Act of 2021. The mammoth bill, which stretches to over 5,500 pages, expands on the relief provided by the CARES Act and includes many provisions aimed to provide additional relief for those impacted by COVID-19 and to stimulate the economy. This update focuses on an important component of the new Act, the extension of the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration. The changes to the PPP program authorizes a new round of loans, and contains changes impacting both new and existing borrowers.
As you recall, the initial round of PPP loans authorized by the CARES Act quickly ran out of funding, while a second round of loans was available until August 8, 2020. The new Act expands the program again, providing approximately $284 billion for a third round of PPP loans which may be applied for until March 31, 2021. Borrowers who have already received a PPP loan can apply for a second loan of up to $300 million as long as they have 300 employees or less and can show gross receipts in any calendar quarter of 2020 that are at least 25% less than the same quarter in 2019. However, borrowers whose primary business is accommodations and food service that have no more than 300 employees in any physical location are also eligible for these “second draw” loans. In addition, existing borrowers who returned a portion of the funds but have not yet applied for forgiveness may reapply to receive the maximum allocation.
Eligibility for the new PPP loans has been expanded to include certain 501(c)(6) organizations that were ineligible under the first round of PPP loans. This includes local chambers of commerce, housing cooperatives, and some news stations. The new Act also confirms that churches and religious organizations are eligible borrowers.
Under the first round of PPP loans authorized by the CARES Act, the amount of the loan was based on 2.5x the borrower’s average monthly payroll costs in 2019, up to a maximum of $10 million. The new loans cap the loan amount at the lesser of (1) 2.5x the borrower’s average monthly payroll costs for the one-year period prior to the loan or calendar year 2019, or (2) $2 million. However, borrowers in the accommodation or food service industries may use a multiplier of 3.5x payroll costs, rather than 2.5x.
The new legislation has also expanded the expenses which qualify for forgiveness. In addition to employment related expenses and mortgage interest, rent, and utilities, borrowers may now also apply for forgiveness for certain “covered operations expenditures,” “covered property damage costs,” “covered supplier costs,” and “covered worker protections expenditures.” These expenses include, among other things, certain operational expenses, such as investments in personal protective equipment, and administrative costs such as cloud computing, software, payroll processing, human resources, and accounting or tracking of supplies, inventory, records and expenses, and for certain property damages related to damage and vandalism or looting due to public disturbances in 2020 not covered by insurance. Borrowers with existing PPP loans who have not yet applied for forgiveness may also include these costs in their forgiveness applications. However, just as in the first round of loans, at least 60% of the PPP loan proceeds must be spent on eligible payroll expenses in order to obtain maximum loan forgiveness.
It will be a relief for smaller borrowers to learn that the new Act now provides for a simplified forgiveness application for loans of $150,000 or less. The new forgiveness application form must not be longer than one page and will eliminate the need for the borrower to submit most supporting documentation with the forgiveness application, as long as the borrower submits a certification to the lender. In addition, the new Act now provides that a borrower’s PPP forgiveness no longer has to be reduced by the amount of any advances received by the borrower under an Economic Injury Disaster Loan.
Finally, the new Act also provided some important guidance regarding the impact of PPP loans on the borrower’s ability to deduct certain business expenses. While the CARES Act provided that a forgiven PPP loan was non-taxable, the IRS took the position that a taxpayer could not also deduct expenses used to qualify for forgiveness, reasoning that to do otherwise would allow borrowers to “double dip” by both receiving a tax-free loan and claiming a deduction for the expenses paid for with the loan. The new Act provides that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied” as a result of a forgiven PPP loan, whether existing or new. This legislatively overturns the IRS’s position, allowing businesses to deduct expenses even if they were paid for using PPP loan proceeds. This tax treatment will apply to all PPP loans, regardless of whether or not the loan was received prior to or after the passage of the new Act.
clarification regarding loan certifications from the sba
On May 13, 2020, the Small Business Administration (SBA) issued new guidance to address the confusion created by its previous guidance which suggested that the recipients of Paycheck Protection Program (PPP) loans would need to revisit their applications to determine whether they would still be able to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers who deemed themselves unable to make the certification in good faith had until May 14th to return the funds without consequence. That date has now been extended to Monday, May 18th.
The new guidance should provide comfort to the recipients of PPP loans of all sizes. According to the new guidance, any recipient of a loan less than $2 million will be deemed to have made the required certification regarding the necessity of the loan in good faith. Recipients of loans over $2 million are still likely to face increased scrutiny, but if the SBA determines that the borrower lacked an adequate basis for the required certification, it will notify the borrower. As long as the borrower repays the loan after receiving notice, the SBA will not pursue any further enforcement activities.
Question 46 of the revised interim guidelines contains the new guidance, and is set forth in full below:
Question: How will the SBA review borrowers’ good faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to the SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable the SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
guidance on ppp loan forgiveness
As many Paycheck Protection Program (PPP) loan borrowers approach the end of their eight-week “Covered Period” which began when they received their PPP loan proceeds, the Small Business Administration (SBA) has finally released its initial long-awaited guidance on loan forgiveness. On Friday, May 15th, the SBA issued a Loan Forgiveness Application which borrowers must submit to their lenders to apply for forgiveness of the loan. The Application includes a Loan Forgiveness Calculation Form, a schedule and worksheet to calculate eligible payroll costs, and an optional borrower demographic information form.
The instructions accompanying the Loan Forgiveness Application contain answers to some of the most pressing questions that borrowers and their advisors have had about the program. The following are some of the key issues addressed by the Application and instructions:
- While the eight-week “Covered Period” technically began ticking on the day the loan proceeds were disbursed, borrowers can choose to calculate eligible payroll costs using an “Alternative Payroll Covered Period” - the eight-week period beginning on the first day of their first pay period following the disbursal of the loan proceeds. The example given in the instructions is that if a borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following the loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the “Alternative Payroll Covered Period” is Saturday, June 20.
- Payroll costs eligible for forgiveness include the costs incurred during either the “Covered Period” or the “Alternative Payroll Covered Period.” Payroll costs are considered paid on the day that paychecks are distributed or an ACH credit transaction is originated, and are considered incurred on the day that the employee’s pay is earned. Costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during either the Covered Period or the Alternative Payroll Covered Period. This means that loan forgiveness will not apply to payroll costs incurred prior to the Covered Period or Alternative Payroll Covered Period, and will not apply to the extent that payroll costs are prepaid for periods after the Covered Period or Alternative Payroll Covered Period.
- As previous guidance had stated, eligible non-payroll costs such as covered mortgage obligations and rent obligations cannot exceed 25% of the total forgiveness amount. The instructions clarify that covered rent obligations include leases of both real and personal property in force before February 15, 2020. Borrowers are not required to report non-payroll expenses that are not included in the forgiveness amount.
- The Application clarifies that loan forgiveness will not be reduced as a result of a reduction in full-time employees due to employee job offers and refusals, firings for cause, voluntary resignations, and written requests by employees for reductions in work schedule.
- The Application includes detailed, step-by-step instructions for calculating the amount of loan forgiveness that a borrower is eligible to receiver. The American Institute of CPAs has created a loan forgiveness calculator reflecting the SBA guidance and additional recommendations from the institute, with updates based on the new guidance expected Monday, May 19. The revised calculator will be available at www.aicpa.org/SBA.
While the Application form and the instructions address some issues of concern, there are still a number of significant unanswered questions. Additional regulations and guidance from the SBA are likely to continue to be forthcoming in the days ahead.
PPP CERTIFICATION REQUIREMENT CREATES RISK AND UNCERTAINTY FOR BORROWERS
New guidance issued by the U.S. Treasury Department has created confusion and dismay among thousands of businesses across America that have received loans under the Paycheck Protection Program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The application form for a PPP loan requires the applicant to certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the Applicant.” Under tremendous pressure to file a loan application as quickly as possible before funding ran out, and with no guidance from the SBA or Treasury as to what the certification really meant, borrowers were left to interpret this language for themselves.
Fast forward a month. In what appears to be a reaction to the media backlash from the revelation that large publicly-traded corporations such as Shake Shack, Ruth’s Chris Steakhouse and Potbelly Sandwich Shop received millions of dollars in PPP loans, the U.S. Treasury Department quietly issued revised guidance for PPP loans that has essentially redefined the standard for determining which borrowers are eligible. The new guidance also includes a “safe harbor” for borrowers who discover that they are no longer eligible by allowing them to repay the loans without penalty by May 14. 
The new guidance is set forth in Question 31 of the revised interim guidelines, set forth below:
“Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(b) of the Small Business Act), borrower still must certify in good faith that their loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lender’s may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
In what has been a recurring theme in the evolution of PPP loan regulation, the revised guidance creates more questions than it answered. While large publicly traded companies appear to be the primary target of the revised guidance, there are serious implications for businesses of all sizes. For the first time, the Treasury Department is now retroactively requiring borrowers to take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” even though the certifications were given before the new guidance was given. This new guidance may call into question the validity of many PPP loans which have already been issued.
The meaning of this new “significantly detrimental” standard is still unclear and will likely vary depending on the individual circumstances of each business. Frustratingly, the guidance does not define either the nature or extent of the impact to operations that would be required to make the loan request “necessary” to support ongoing operations. It is also unknown how the SBA will interpret “access to other sources of liquidity” and “not significantly detrimental to the business.” While the CARES Act and the guidance clearly states that a borrower is not required to prove that it could have obtained credit elsewhere, businesses with cash reserves, access to capital from an unused line of credit or other sources, or which were in a relatively strong financial position immediately prior to the crisis may be at risk of failing to meet this standard.
The government has signaled that it will be taking strong enforcement measures regarding PPP loans. Treasury Secretary Steve Mnuchin has publicly announced that the government will audit any company taking a loan of $2 million or more. Smaller loans may also receive spot checks. Borrowers found not to have made the certification in good faith may be subject to both civil and criminal penalties, including potential exposure under the False Claims Act, which carries the risk of treble damages and per-claim penalties in excess of $21,000. Furthermore, because the government intends to publicly release the employer identification numbers (tax ID numbers) of all loan recipients, there is a risk of unwanted publicity from those eager to name and shame companies perceived as abusing the PPP program.
If your company has already received a PPP loan, you should reconsider whether you would still be able to give the certification in good faith considering the latest guidance from the Treasury Department. If you are uncertain about your ability to make the certification, you have until May 14 to decide whether your company should repay the loan. If you decide not to return the funds, make sure that you carefully document the need for the loan. Helpful documentation may include employment records, records demonstrating the impact of the COVID-19 crisis on business operations, your ability to access capital and the cost of accessing capital, the amount of cash reserves, budget forecasts, and other financial measures that demonstrate need. Other factors that may be important include the extent to which the business has been able to continue operating during the crisis, unused borrowing capacity, and other indicators of the health of the business.
 The deadline for repayment of loans was originally May 7, but has now been extended to May 14.
COVID – 19 Related Employee Retention Credit
If your business did not receive a Paycheck Protection Program (PPP) loan under the CARES Act, all is not lost. The Employee Retention Credit represents an additional incentive designed to encourage businesses, including tax-exempt organizations, to keep their employees on the payroll. The credit is a fully refundable tax credit against the employer’s share of certain employment taxes equal to 50 percent of the qualified wages an Eligible Employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible Employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Additionally, if the employer's employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
To determine the amount of the credit, each employee’s wages in an amount up to $10,000 (including certain health care costs) can be counted. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. Since this credit can apply to wages already paid after March 12, 2020, employers can get access to the credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.
Employers are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- a significant decline in gross receipts.
A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.
The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended. The definition of qualified wages depends upon whether the Eligible Employer has more or less than 100 full-time employees.
An Eligible Employer's ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
- Wages counted for this credit can't be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code.
Eligible Employers will report their total qualified wages and the related health insurance costs for each quarter on the quarterly Form 941 employment tax return beginning with the second quarter.