Happy New Year! I hope you were able to find peace and enjoyment during this past holiday season, even while socially distancing and dealing with the ongoing stress and challenges of the pandemic. 2020 was most certainly a difficult year for everyone. We are grateful to have been in a position to continue to provide our clients with the attention, guidance and support needed during such a difficult time. In our efforts to help all of you, we derived a tremendous amount of satisfaction and fulfillment. Thank you for the opportunity to serve you, and for your ongoing confidence. We are here for you, always.

As we enter the new year, I am optimistic for several reasons including the distribution of vaccines and additional economic relief for those most in need. In that light, I am pleased to be able to provide you with an update on the Paycheck Protection Program (PPP).

The U.S. Small Business Administration (SBA) recently announced that the Paycheck Protection Program will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. Updated PPP guidance outlining Program changes to enhance its effectiveness and accessibility was released on January 6 in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. While additional guidance from the SBA on both programs is anticipated, we can share the following general information which pertains to both the first round of PPP funding (being referred to widely as “first draw”) and the latest round of PPP funding (“second draw”).  

Now that Congress finally got around to it, a new round of the Paycheck Protection Program is resuming this week. If you’re a small-business owner and you want to take advantage of this financing, here’s what you need to know.

The program is largely the same. Under PPP, small businesses can apply for loans to help them keep their employees working despite the pressures of COVID-19. The loan is forgiven when an employer documents that the money has been used properly. The maximum loan is now $2 million (it was previously $10 million) although the payback period (five years) and interest rate (1%) for unforgiven amounts remain the same. Unless you’re in a certain industry (see below), the calculation to determine the size of your loan will still be up to 2.5 times your company’s monthly qualifying payroll and exclude yearly compensation of more than $100,000. Funding will be provided by all SBA approved lenders. 

The core expenses are the same. Payroll and related costs such as group health insurance, rent and mortgage interest are still included in the forgiveness calculation. The mix of costs that can be used in the forgiveness calculation is still the same ratio: 60% for payroll, 40% for non-payroll. If you found that, because of rule changes, you could borrow more under a previous PPP loan, you can now go back to your banker and have that loan value changed, whether or not it’s been fully disbursed.

Unlike before, not every business is eligible for a loan. You can get a first loan if you haven’t received one before or even a second loan. But to get a loan now you must show that your business has had revenue decline by at least 25% in any quarter of 2020 compared with its corresponding quarter of 2019. You also must have no more than 300 employees at a physical location, down from 500 in previous rounds. Certain firms, among them publicly held companies and businesses that started up after Feb. 15, 2020, are also excluded.

The rules for forgiveness have been changed and for the better. The biggest selling point of the PPP loan program is that PPP loans are forgivable. To get forgiveness you must incur certain expenses over an 8- or 24-week period (you can determine which). But with the new legislation, forgiveness has been made a lot easier. If your business has a PPP loan that’s less than $150,000 then all you need to do to get forgiveness is to complete a new, one-page form that your lender will provide on which you will estimate the total amount of the loan spent on forgivable expenses. You will also need to represent that you have restored your full-time employees, salaries and wages to pre-Feb. 15, 2020, levels, otherwise your forgiveness will be reduced.

More expenses can now be included in the forgiveness calculation. PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures.

Restaurants and some other businesses are eligible for more loans. If your business is in the restaurant and accommodation industry (those who were assigned a NAICS code beginning with 72) then you can get a loan of up to 3.5 times your average monthly payroll instead of the normal 2.5 times.

Substantial funding will be directed at Low to Moderate Income Areas. If your business is located in a Low to Moderate Income area (essentially a census tract that has a poverty rate up to 20%), then you get special treatment. That’s because the new act set aside $15 billion for initial PPP loans and $25 billion for second PPP loans, up to $250,000 per loan, for small-businesses borrowers in those tracts with as many as 10 workers. In addition, $15 billion was set aside specifically for small community banks, small credit unions, and small agricultural credit institutions, and $15 billion has been targeted for community development financial institutions, certified development companies, minority depository institutions, and SBA Microloan intermediaries.

The key eligibility requirements for a Second Draw are different. Applicants must (1) have received a First Draw PPP Loan and used the full amount only for authorized uses, (2) have no more than 300 employees, and demonstrate at least a 25% reduction in gross revenue in any quarter in 2020 relative to the same quarter in 2019.

If you are interested in obtaining a “second draw” PPP loan, we strongly encourage you proactively reach out to your SBA lender(s) and consult with your legal, financial and tax advisors for further details about your specific circumstances. If you are interested, we have provided a more detailed background of the PPP program below. 

In Closing
Our top priority remains acting in your best interest at all times. In helping you live a life with meaning, our lives have meaning. We will continue to provide you with updates on PPP and other developments that may impact your financial plans and investment strategies.

Please feel free to contact us at any time if you have questions or concerns, or simply need some reassurance. 

Warm Regards and Happy New Year,
Rick W. Campbell

New PPP and EIDL Funds Available
The initial wave of PPP loans in April 2020 was provided on a first-come, first-served basis and quickly ran out of funding. The second wave of PPP loans was available until August 8, 2020 and expired with funds still available. For both rounds of PPP funding, each borrower could obtain only one loan, with the loan amount calculated based on 2.5x the borrower’s monthly average payroll costs in 2019 (with certain exceptions).

The new legislation included appropriations for new loans and advances to be administered by the SBA, including approximately $284 billion for PPP loans and $20 billion for Economic Injury Disaster Loans (EIDLs). The specific details on how this third tranche of PPP loans will be made available remain to be determined, but the legislation does mandate that a portion of the authorized funds be set aside for loans by community lenders and small depository lenders, loans to borrowers with 10 or fewer employees, and loans of no more than $250,000 to borrowers located in designated low-income or moderate-income neighborhoods. Additional SBA rulemaking is expected.

Expanded Eligibility for PPP Loans
The CARES Act, which authorized the PPP, included limits on the types of entities that were eligible for PPP loans. Under the new legislation, certain categories of borrowers previously not eligible are now more clearly eligible, including local chambers of commerce, housing cooperatives, and certain news stations. Congress also included language confirming that churches and religious organizations are eligible borrowers.

Separately, the new legislation provides for a new relief program for certain music venues. However, the legislation also states that entities receiving such grants are not eligible for PPP loans.

“Covered Period” for Loan Forgiveness
In calculating the amount of eligible expenses paid or incurred that would qualify for loan forgiveness, borrowers who received loans before June 5, 2020 were previously given the option of choosing between an 8-week period contemplated by the CARES Act or a 24-week period contemplated by an interim amendment to the PPP legislation. The duration of this “covered period” impacts the amount of expenses that could be included in the borrower’s forgiveness calculation, but also impacts the measurement period for potential reductions to loan forgiveness that are based on changes in full time employee equivalents (FTEs) or salary or hourly wage reductions. Borrowers who received their loan on or after June 5, 2020 were required to use the longer 24-week “covered period,” but in theory were allowed to apply for forgiveness before the end of their “covered period.”

The new legislation provides that PPP borrowers will be provided the option to choose between an 8-week covered period and a 24-week covered period. It is not clear whether this flexibility to choose a customized covered period will apply retroactively to loans made prior to the enactment of the new legislation.

Eligibility for “Second Draw” PPP Loans
The new legislation permits borrowers that previously received and fully spent a PPP loan to apply for a “second draw” PPP loan. These “second draw” PPP loans are subject to new eligibility requirements, including the following:
  • Eligible borrowers are capped at no more than 300 employees (rather than 500); however, borrowers that have more than 300 employees but whose primary industry is in NAICS category 72 (accommodations and food service) and that have no more than 300 employees per physical location will also be eligible. The SBA’s “affiliation” rules continue to apply, except with respect to certain excluded businesses as discussed here.

  • Eligible borrowers must have had gross receipts during the first, second, or third quarter of 2020 (or for loans after January 1, 2021, the fourth quarter of 2020) that demonstrate not less than a 25% reduction compared to the same quarter in 2019 (or, if the borrower was not in business in 2019, a 25% reduction in the second, third, or fourth quarter of 2020, compared to the first quarter of 2020). The SBA may require documentation substantiating the revenue loss as part of the loan forgiveness process.

  • Certain business types are specifically excluded from eligibility, regardless of their number of employees or revenue losses. This includes businesses created in or organized under the laws of China or Hong Kong, or having significant operations in China or Hong Kong, or those that are more than 20% owned by businesses in China or Hong Kong, or businesses with a Board member who is a resident of China. 

In addition to the new eligibility requirements described above, applicants for “second draw” PPP loans will still be required to certify that current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.

Calculation of “Second Draw” PPP Loan Amount
The CARES Act provided that the calculation of the loan amount for PPP loans was based on 2.5x the borrower’s average monthly payroll costs in 2019, up to a total of $10 million.

For “second draw” PPP loans, the loan amount is capped at the lower of (1) 2.5x the borrower’s average monthly payroll costs for the 1-year period before the loan is made (this need not be calendar year 2019), or calendar year 2019, or (2) $2 million. However, for certain borrowers, a different formula applies. Specifically, for accommodation and food service businesses categorized under NAICS Sector 72, the payroll multiplier is increased from 2.5x to 3.5x. Additional adjustments to the formula apply for seasonal employers and businesses that did not exist for a full year prior to February 1, 2020.

In addition, borrowers who previously applied for and returned a PPP loan can apply again for the difference between (1) the loan amount they retained and (2) the amount they could now qualify to obtain.

Expanded Eligible Uses of “ALL” PPP Loan Proceeds
The CARES Act and subsequent guidance issued by the SBA limited the use of PPP loan proceeds to cover the following: payroll costs; payments of interest on any mortgage obligation (excluding prepayments); rent (including rent under a lease agreement); utilities; and interest on any other debt obligations that were incurred before the applicable “covered period” of the loan (i.e., the period during which permitted uses of PPP loan proceeds would be eligible for forgiveness). For background on how these categories of permitted uses are defined, including limitations on which eligible uses would qualify for loan forgiveness, see here and here.

The new legislation expands the scope of expenses that PPP loans may be used for and for which forgiveness may be granted to include the following types of expenses:

  • “Covered operations expenditures”—defined as business software or cloud computing expenses for business operations, product or service delivery, payroll processing, payment, or tracking, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

  • “Covered property damage costs”—defined as costs relating to damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.

  • “Covered supplier costs”—defined as supplier payments that are essential to the borrower’s operations and were made either (1) pursuant to a contract, order, or purchase order in effect prior to the covered period, or (2) with respect to perishable goods, pursuant to a contract, order, or purchase order before or during the covered period.

  • “Covered worker protection expenditures”—defined as operating costs or capital expenditures incurred by a borrower, during the period beginning on March 1, 2020 and ending upon the expiration of the presidential national emergency declaration with respect to COVID-19, to facilitate adoption of business activities to comply with applicable laws and guidance relating to COVID-19. For example, this could include expenditures on drive-through improvements, ventilation or filtration systems, physical barriers, expansion of business space, establishment of health screening capabilities, or other assets as determined by the SBA in consultation with HHS and the Secretary of Labor, as well as personal protective equipment (PPE).

  • To the extent there was doubt about whether group life, disability, vision, or dental insurance could be included as “payroll costs,” the new legislation clarifies that these expenses are included and thus are eligible uses and qualify for loan forgiveness.

These changes to the list of expenses that qualify as permitted uses apply to both new and existing PPP loans, but do not apply to PPP loans that have already been forgiven.

Deductibility of Expenses Covered by a Forgiven PPP Loan or EIDL Advance
The law resolves the confusion around tax treatment of the PPP loan and expenses and reverses the Treasury position on the deductibility of expenses paid with PPP loan funds that are forgiven. Under the revised law, businesses can deduct expenses paid with forgiven PPP loans. The deductibility is without caps, guardrails, or limitations and applies to all taxpayers.

This confirms the intention of the law to create a two-part subsidy for tax-free income (on debt forgiveness) and deduction of costs. This rule is effective for tax years ending after the date of the original CARES Act (March 26, 2020) and is, therefore, retroactive.

Simplified Loan Forgiveness for PPP Loans of $150,000 or Less
This forgiveness process is much simpler than what existed prior to the new legislation, in that it eliminates the need for borrowers of $150,000 or less to submit supporting documentation to validate their claim for forgiveness, other than documentation to substantiate the borrower’s revenue loss required to make them eligible for the PPP loan. Based on SBA data, loans of $150,000 or less represented 87.4% of the number of PPP loans, or 28.2% of the aggregate value of PPP loans, made through August 8, 2020.

Reduced Document Retention Requirements for Loans Under $150,000
Unlike larger loans that require borrowers to retain relevant supporting documentation for six years, for loans of up to $150,000, borrowers will only be required to retain applicable documents for four years, as to employment records, or three years as to other records. These changes are retroactive to the passage of the CARES Act.

Oversight of SBA Audits
A source of frustration for many PPP borrowers has been the opaque nature of the SBA’s rulemaking and review process, including as to whether borrowers properly made the so-called “necessity” certification in their PPP loan application. The new legislation directs the SBA to provide to Congress audit plans detailing (1) the policies and procedures of the SBA for conducting forgiveness reviews and audits of PPP loans and (2) the metrics that the SBA will use to determine which PPP loans will be audited. The SBA will then have to submit monthly reports on its forgiveness review activities, including the number of active reviews and audits, the number of reviews and audits that have been ongoing for more than 60 days, and any substantial changes made to the audit plan the SBA previously submitted to Congress. The SBA has 45 days to submit these audit plans.

The following link provides all available information provided by the SBA/Treasury Department and was used as a basis for this communication:
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