On January 6, 2021, two Interim Final Rules related to the Paycheck Protection Program (PPP) were issued with several clarifications on the Economic Aid Act passed in December. A summary of key highlights from both rules are noted below. The SBA reopened the PPP program on January 11 for new borrowers and on January 13 for existing PPP borrowers to allow for submission of applications.
Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act
This Interim Rule outlines key provisions of the PPP loan program that was revised by the Economic Aid Act, extending lending through the program through March 31, 2021. Loans are available to first-time borrowers and borrowers that previously had a PPP loan, referred to as First Draw and Second Draw loans, respectively. New PPP loans offer a covered period between 8 and 24 weeks, ending on any date selected by the borrower, and require at least 60% of costs to be used towards payroll for full forgiveness.
Borrowers and all affiliates combined must still fall under SBA’s affiliation rules for their industry, either determined by revenue or employee size per 13 CFR 121.301. SBA has a tool to utilize, providing your NAICS code and either three-year average of gross receipts or average number of employees over the last 12 months. There is a limit of 300 or 500 employees by location for certain industries (housing cooperatives, section 501(c)(6) organizations, destination marketing organizations, and NAICS codes beginning with 72).
Key changes issued include:
- First and Second Draw Loans calculation of payroll costs can elect to use 2019 or 2020 calendar year, or precisely the one year period prior to loan application.
- EIDL loan obtained 1/31/20 to 4/3/20 can be refinanced with PPP loan and should be added to 2.5 months of payroll cost for loan value.
- Life, disability, vision and dental insurance employer contributions can be included in payroll cost.
- Maturity date of First and Second Draw Loans is five years.
- Eligible use of proceeds now includes:
- covered operations expenditures (i.e. software or cloud computing, product or service delivery, HR/sales/billing/payroll tracking, accounting functions)
- covered property damage costs due to public disturbances
- covered supplier costs
- covered worker protection expenditures (adapting business facilities to comply with established guidance and protocols, including drive through window, air pressure filtration system, health screening, PPE)
- Payroll costs included for determining Employer Retention Credit are not eligible for forgiveness.
- For partnerships that received a PPP loan, if partner compensation was not included on the original loan, lender can request SBA to increase the loan to cover partner compensation, even if the loan has been fully disbursed and used.
Interim Final Rule on Paycheck Protection Program Second Draw Loans
This Interim Rule includes key provisions specifically on the Second Draw Loans. The actual terms of the loan are as follows:
- Loan is guaranteed 100% with no collateral required.
- Interest rate is 1%.
- Maximum loan size is $2 million.
The eligibility requirements are stricter with Second Draw Loans in the following ways:
- For borrower and affiliates with NAICS code beginning with 72, must have 300 or fewer employees by location (previously was 500 employee threshold).
- Borrower must have gross receipts reduction of 25% or greater for at least one quarter in 2020 compared to the same quarter in 2019.
- Borrower must have received First Draw PPP Loan and used all funds for eligible expenses.
- If First Draw Loan Forgiveness Application has not yet been reviewed and approved by the SBA, this does not preclude borrower from applying for the Second Draw Loan.
The Interim Rule also clarified the definition of gross receipts. Gross receipts should follow definition of 13 CFR 121.104 in line with the SBA’s size standard regulations. Gross receipts should be calculated as follows:
- All revenue received or accrued in line with the method used on the tax return, including sale of products and services, interest, dividends, rents, royalties, fees, or commissions, net of any returns or allowances.
- Exclude net capital gains or losses per IRS guidelines.
- Exclude any forgiveness income from First Draw Loans.
- Exclude any taxes collected for taxing authorities (i.e. sales tax).
- Exclude proceeds from affiliates.
- Exclude amounts collected for another (i.e. agent transactions).
The Second Draw Loan application is similar to the First Draw. The following are identified changes that are required with the new application:
- Loan value is determined as the lesser of 2.5 months of average monthly payroll costs or $2 million.
- For borrowers with NAICS code beginning with 72, calculation is 3.5 months of average monthly payroll costs.
- Loans greater than $150,000 must include documentation to support 25% or greater reduction in gross receipts at time of application, which may include tax returns, quarterly financials or bank statements.
- Loans less than $150,000 must submit by the date of loan forgiveness application.
If we can assist you with completing a forgiveness application, in explaining the new programs' provisions, analyzing the potential benefits or assisting you with gathering the needed information to apply, please call any Sponsel CPA Group Team member or our colleagues listed below.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.