Hundreds of thousands of small businesses and millions of people have been waiting for a second round of Paycheck Protection Program (“PPP”) loans to keep businesses and professionals operational.
Congress will hopefully answer the prayers of these borrowers, their employees, and Warren Buffet by enacting the “Emergency Coronavirus Relief Act of 2020” next week.
This Act has been drafted to correct a number of problems that PPP borrowers have had, and also opens the door to new opportunities for borrowers who were not treated as well under the previous program.
The following appropriations are to be made available through September 30, 2021:
- $267.5 billion for guaranteed loans under the heading “Small Business Administration–Business Loans Program Account, CARES ACT”
- $50 million for SBA salaries and expenses for “the cost of carrying out reviews and audits of loans…”
- $13.5 billion for new Economic Injury Disaster Loan (“EIDL”) Grants
PPP Loans Which are Forgiven Will Be Deductible
The IRS has issued a series of Revenue Procedures and Notices that alarmed many PPP borrowers by stating that expenses paid for with forgiven loans will not be able to be deducted. This was against Congress’s intent, and the new Act clarifies their position. The new Act states as follows:
(2) no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1)
The meaning of this language and its implications for borrowers are discussed in the blog I have posted today entitled “PPP Borrower Tax Relief Under Stimulus Bill – Let’s Hope It Happens.”
Eligible Entities May Have a Second Chance to Receive a PPP Loan
Many borrowers have requested a second round of PPP loans, and many potential borrowers who were unable to receive a PPP loan during the first round would like to have access to a PPP loan. The new Act allows new and old borrowers to receive a PPP loan if they meet the requirements of an “eligible entity.”
An “eligible entity” will need to satisfy the “Necessity Test” that is discussed in my blog post dated May 4, 2020 “Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions” as of the time of applying for this new second loan. This test, which is based upon whether the loan is “necessary to support the on-going operations of the applicant” will be hard to meet by businesses that have survived one or two hard quarters but are now making ends meet while waiting for the vaccines to clear our economy up. The test will clearly not be passed by a high percentage of PPP borrowers who will otherwise qualify, and will present a very important issue to be carefully addressed with the borrower’s CPA, financial and legal advisors. While the SBA has announced that it will not question the necessity issue for those who have aggregate borrowings not exceeding $2 million, other agencies, or even whistleblowers, may, and the fact that a second loan has been received will not be kept confidential.
Assuming that the necessity test will be met, the next question is whether the PPP borrower is an “eligible entity” which the bill defines as a Schedule C taxpayer (but apparently not a Schedule E landlord or a Schedule F farmer), an LLC or other entity treated as an S corporation or partnership that meets the following requirements:
- The borrower must demonstrate that there was a 30% reduction from the gross receipts of the entity during the same quarter in 2019.
- For the purposes of this 30% rule, gross receipts will include all revenues from the normal operation of the business before subtraction of expenses but will not include amounts borrowed, including amounts received for PPP loans.
- The borrower must employ no more than 300 employees, or meet an alternative size standard.
The proposed Rubio-Collins bill (“HEALS Act”) that did not pass, would have required a 50 percent reduction from gross receipts, so this change to 30 percent in the “Emergency Coronavirus Relief Act of 2020″ will allow PPP loans to reach a greater number of potential borrowers.
For purposes of the above 30% reduction in gross receipts test, borrowers who were not in business during the first, second, or third quarter of 2019 (January 1 – September 30), but were in business during the fourth quarter of 2019 (October 1 – December 31), can compare the first, second, or third quarter of 2020 (January 1 – September 30) to the fourth quarter of 2019.
If the entity was not in business during 2019 but was in business by February 15, 2020, then such borrower can compare their gross receipts during the second or third quarter of 2020 (April 1 – June 30) to the first quarter of 2020 (January 1 – March 30) to see if they qualify.
Maximum Amount of New PPP Loans For Seasonal Employers, New Entities, and Businesses With More Than One Physical Location
For seasonal employers, the maximum amount of new PPP loans is based upon the average monthly payroll costs for a 12-week period selected by the borrower that begins February 15, 2019 or March 1, 2019 and ends June 30, 2019. Alternatively, the borrower may elect to use any consecutive 12-week (any 96 consecutive days) period beginning after February 14, 2020 and ending before January 1, 2021) multiplied by 2.5, but not exceeding $2 million.
For new entities, the maximum amount of new PPP loans is based upon the average monthly payroll costs up through the date when the entity applies multiplied by 2.5, but not exceeding $2 million.
For businesses with more than one physical location, the maximum amount of new PPP loans is stated as follows:
(I) the total amount of all covered loans shall be not more than $2,000,000; and
(II) in applying this paragraph, the Administrator shall substitute ‘not more than 300 employees per physical location’ for the term ‘not more than 500 employees per physical location’ in paragraph (36)(D)(iii).
Borrowers Owned 20% or More by “Chinese Entities” Are Unable to Receive a Second PPP Loan
Publically traded businesses and entities affiliated with the People’s Republic of China are on the list of entities that cannot qualify for a new PPP loan. The proposed Act is stated as follows:
(AA) for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or that has significant operations int eh People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or
(BB) that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China
It is interesting that the People’s Republic of China is the only restricted country included in the new Act, not North Korea, Iran, Russia, or other adversarial nations.
Additional Loans Cannot Exceed $2,000,000 per Borrower–90 Day Wait Between Loans
The loan amounts for a vast majority of borrowers will be almost identical to what the borrower received for their original PPP loan. This second round of funding, however, is capped at $2 million per borrower rather than $10 million under the initial round of PPP loans in the CARES Act. For borrowers who received a PPP loan within the last 90 days, the new Act requires that the aggregate of the new and old loan not exceed $10 million.
No Enforcement Action Against Banks
The new Act provides that there will be no “enforcement action” with respect to lenders. The Act states as follows:
(2) NO ENFORCEMENT ACTION.—With respect to a lender that relies on the certifications and documentation described in paragraph (1) relating to a covered loan—
(A) no enforcement or other action may be taken against the lender relating to loan origination, forgiveness, or guarantee of the covered loan based on such reliance, including claims under—
(i) the Small Business Act (15 U.S.C. 631 et seq.);
(ii) sections 3729 through 3733 of title 31, United States Code (commonly known as the ‘False Claims Act’);
(iii) the Financial Institutions Reform, Recovery, and Enforcement Act (Public Law 101–73);
(iv) section 21 of the Federal De10 posit Insurance Act (12 U.S.C. 1829b), chapter 2 of title I of Public Law 91–508 (12 U.S.C. 1951 et seq.), and subchapter II of chapter 53 of title 31, United States Code (collectively known as the ‘Bank Secrecy Act’); or
(v) any other Federal, State, or other criminal or civil law or regulation; and
(B) the lender shall not be subject to any penalties relating to loan origination, forgiveness, or guarantee of the covered loan based on such reliance.
This Act also provides that lenders will be compensated by the Administrator of the SBA. The Act states as follows:
(J) REIMBURSEMENT FOR LOAN PROCESSING AND SERVICING.—The Administrator shall reimburse a lender authorized to make a covered loan in an amount that is—
(i) 3 percent of the principal amount of the financing of the covered loan up to $350,000; and
(ii) 1 percent of the principal amount of the financing of the covered loan above $350,000, if applicable.
Anti-Bankruptcy Rules Will Continue To Apply
Borrowers in bankruptcy will not be able to apply for a PPP loan based on the provisions of the new Act. If in the bankruptcy process a court finds that the debtor is eligible for a PPP loan, then the loan will be given a priority claim in the bankruptcy process.
Simplified Application for Loans Under $150,000
Borrowers who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness, but all of the same rules apply. The signer of this application may as well sign the longer application to make sure that they have everything done right because personal liability can be enormous. Our recommendation is that clients consult with their CPAs carefully and fill out the long application but actually submit the short application, with their answers in the long application being kept in case they are ever investigated.
The new Act states as follows:
(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is not more than $150,000, the covered loan amount shall be forgiven under this section if the eligible recipient submits to the lender a one-page online or paper form, to be established by the Administrator not later than 7 days after the date of enactment of the Continuing the Paycheck Protection Program Act, that attests that the eligi1ble recipient complied with the requirements under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).
Changes to the Application Process for Forgiveness of Loans Between $150,000 and $2,000,000
In regards to the loan forgiveness application for covered loans between $150,000 and $2,000,000, the new Act states as follows:
(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is more than $150,000 and not more than $2,000,000—
(i) the eligible recipient seeking loan forgiveness under this section—
(I) is not required to submit the supporting documentation described in paragraph (1) or (2) of subsection (e) or the certification described in subsection (e)(3)(A);
(II) shall retain—
(aa) all employment records relevant to the application for loan forgiveness for the 4-year period following submission of the application; and
(bb) all other supporting documentation relevant to the application for loan forgiveness for the 3-year period following submission of the application; and
(III) may complete and submit any form related to borrower demographic information;
(ii) review by the lender of an application submitted by the eligible recipient for loan forgiveness under this section shall be limited to whether the lender received a complete application, with all fields completed, initialed, or signed, as applicable; and
(iii) the lender shall—
(I) accept the application submitted by the eligible recipient for loan forgiveness under this section; and
(II) submit the application to the Administrator.
PPP Borrowers Can Select Covered Period for as Short as 8-Weeks and as Long as 24-Weeks
Borrowers are now able to choose the 8 to 24 week covered period during which the borrower is required to spend a sufficient amount on qualified expenses to receive forgiveness. This begins the day the borrower received the funds and ends on any day selected by the borrower, but no earlier than 8-weeks from the date the loan proceeds are received and no later than 24 weeks after such date of origination.
This change will enable borrowers to cut off the testing period before making a reduction in workforce that would cause the applicable reduction in workforce penalties to apply, as long as the workforce is at its pre-February 15 levels on the last day of the Covered Period. The Act states as follows:
(4) the term ‘covered period’ means the period—
(A) beginning on the date of the origination of a covered loan; and
(B) ending on a date selected by the eligible recipient of the covered loan that occurs during the period—
(i) beginning on the date that is 8 weeks after such date of origination; and
(ii) ending on the date that is 24 weeks after such date of origination;
Expanded Eligibility for 501(c)(6) Organizations
Organizations that are classified as a 501(c)(6) will have expanded eligibility to PPP loans. A 501(c)(6) is defined as follows:
(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
The Act states as follows regarding 501(c)(6) eligibility:
(I) IN GENERAL.—Except as provided in subclause (II), any organization that is described in section 501(c)(6) of the Internal Revenue Code and that is exempt from taxation under section 501(a) of such Code (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) shall be eligible to receive a covered loan if—
(aa) the organization does not receive more than 10 percent of its receipts from lobbying activities;
(bb) the lobbying activities of the organization do not comprise more than 10 percent of the total activities of the organization; and
(cc) the organization employs not more than 150 employees.
The New Kid on the Block—Targeted EIDL Program For Businesses Hardest Hit by the Coronavirus
The new Act created a targeted EIDL program to assist businesses that were hardest hit by the economic impacts of the Coronavirus. The EIDL program was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally-declared disasters. EIDL loans bear interest at 3.75% and come with significant loan program requirements that very few borrowers are aware of or have thought about.
Businesses that receive EIDL loans are unable to pay several things without SBA approval, including paying dividends, paying bonuses to any employees, including non-owners, and using EIDL funds for anything other than business purposes.
EIDL borrowers must keep records of how the EIDL loan is spent, and provide this information to the SBA within 90 days after the loan is repaid. There is a lack of privacy for the borrower of an EIDL loan, and the loan details are available to the public because of the Freedom of Information Act, enumerated at 5 U.S.C. § 552. While these loans can save businesses, owners should speak with their advisors before making a decision to take these loans, and many borrowers will be well advised to pay their loans back while they can, especially if they might end up in bankruptcy and thus scrutinized by the Department Of Justice and other federal agencies who frequent the bankruptcy courts.
The term “covered entity” for the targeted EIDL program is stated as follows:
(i) means any entity that, during the covered period, is eligible for a loan made
under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) (as expanded under section 1110(b) of the CARES Act (15 U.S.C. 9009(b))), if that
(I) has not more than 25 employees; and
(II) has suffered an economic loss of not less than 30 percent; and
(III) except with respect to an entity included under section 123.300(c) of title 13, Code of Federal Regulations, or any successor regulation, does not include an agricultural enterprise.
The amount of funding that a covered entity is eligible for in the targeted EIDL program is stated as follows:
(A) IN GENERAL.—The amount of funding provided to a covered entity that submits a request under paragraph (2) shall be in an amount that is the lesser of—
(i) the amount of working capital needed by the covered entity for the 180-day period beginning on the date on which the covered entity would receive the funding, as determined by the Administrator using a methodology that is identical to the methodology used by the Administrator to determine working capital needs with respect to an application for a loan submitted under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)); or
The priority for the targeted EIDL program is as follows:
(8) PRIORITY.—During the 56-day period beginning on the date of enactment of this Act, the Administrator may approve a request for funding under this subsection only if the request is submitted by—
(A) a covered entity located in a low-income community;
(B) a covered entity owned or controlled by a veteran or a member of the Armed Forces; or
(C) a covered entity owned or controlled by an economically disadvantaged individual or a socially disadvantaged individual.
This new Act will provide much needed relief to small businesses affected by the Coronavirus. There are sure to be numerous SBA pronouncements that follow, but I will stay informed on the topic to keep readers posted.