Overview of Interim Final Rule #1 on PPP
On January 6, 2021, the Small Business Administration (SBA) and U.S. Department of Treasury issued two Interim Final Rules (IFRs) surrounding the Paycheck Protection Program (PPP). The IFRs include the following:
- Interim Final Rule #1: Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans: Implements the key provisions of the Second Draw PPP Loans.
- Interim Final Rule #2: Business Loan Program Temporary Changes; Paycheck Protection Program as Amended: (1) Incorporates the latest guidance included in the Consolidated Appropriations Act, 2021, (2) Consolidates the guidance issued to date governing borrower eligibility, lender eligibility and PPP application and origination requirements for new PPP loans and (3) Provides general rules relating to loan increases and loan forgiveness.
This alert covers the details of IFR #1 referenced above; click here for our summary of the highlights of IFR #2.
On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law, ushering in $900 billion of COVID-19 related aid as part of an omnibus $2.3 trillion spending package. While the provisions of the CAA were far-reaching, the PPP received some much-needed enhancement and clarifications under this new legislation.
As part of the issuance of the CAA, the SBA was required to release rules within 10 days of the enactment of the CAA. This IFR, the highlights of which are located below, covers loans to be received under the newly issued PPP Second Draw provisions that were initially referenced in the CAA.
- Similar to the first round of the PPP loans, key terms include:
- 100% guaranteed by the SBA
- No collateral or personal guarantees
- 5-year loan term
- 1% non-compounding, non-adjustable interest rate
- Borrowers may take only one Second Draw PPP loan; funds must be disbursed by the lender within 10 calendar days of loan approval.
- The Covered Period to make loans is extended from December 31, 2020 to March 31, 2021.
- General Requirements: Borrowers with 300 or fewer employees that experience a 25% or greater reduction in revenue in any quarter in 2020 as compared to 2019 are eligible for Second Draw PPP Loans.
- Eligible Entities: Eligible entities include business concerns, independent contractors, eligible self-employed individuals, sole proprietors, nonprofit organizations eligible for First Draw PPP Loans, veteran organizations, Tribal business concerns, housing cooperatives, small agricultural cooperatives, eligible 501(c)(6) organizations, destination marketing organizations and eligible nonprofit news organizations.
- Borrowers must have exhausted or will exhaust First Draw PPP funds prior to the disbursement of PPP Second Draw loans.
- Ineligible Entities: In addition to the ineligibility stipulations provided in 13 C.F.R 121.110 and 13 C.F.R. 121.111, ineligible entities include business concerns primarily engaged in political or lobbying activities, entities created in, organized under the laws of, or have significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, have members of the board that are residents of the People’s Republic of China, any person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938, recipients of a Shuttered Venue Operator Grant, entities in which the President, Vice President, head of an Executive department, or a Member of Congress or the spouse of such person owns, controls or holds at least 20% of any class of equity, and publicly-traded companies.
- General Requirements: Similar to First Draw PPP loans, the affiliation rules apply, which generally stipulate that a borrower is considered together with its affiliates for determining PPP eligibility. Affiliation rule waivers are available for food service and accommodation industry borrowers, as well as certain franchises.
- Eligible news organizations, housing cooperatives and religious organizations now may qualify for an affiliation waiver.
Revenue Reduction Considerations
- Revenue Reduction: Borrowers compute the 25% revenue reduction by comparing quarterly 2020 vs. 2019 gross receipts.
- The IFR further stipulates that a borrower that was in operation for all four quarters of 2019 is deemed to have met this revenue reduction threshold if they experienced a reduction of annual gross receipts of at least 25% when comparing 2020 to 2019. Borrowers using this methodology will be required to submit annual tax forms to substantiate the documentation.
- Applicants that were not in business for all of 2019 are provided with special comparative rules as well.
- Gross Receipts Definition: While not specifically defined in the CAA, gross receipts are calculated similarly to the definition contained in 13 C.F.R. 121.104 of the SBA’s size regulations. These regulations stipulate that gross receipts (computed under the borrower’s method of accounting for tax purposes) include all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
- First Draw PPP loans are excluded from the gross receipts threshold calculation for purposes of determining Second Draw PPP loan eligibility.
- Gross receipts exclude net capital gains or losses, taxes collected for and remitted to a taxing authority if included in gross or total income (e., sales taxes) and proceeds from transactions between a small business concern and its domestic or foreign affiliates.
- Gross receipts of a business concern with affiliates is calculated by adding the gross receipts of business concern with the gross receipts of each affiliate. Pay attention to situations where business concerns were acquired or divested of during the entire period of measurement (e., not just post-acquisition or pre-disposition).
- Nonprofit organizations, veteran organizations, IRC Sec. 501(c)(6) entities and eligible destination marketing organizations calculate gross receipts pursuant to IRC Sec. 6033.
Payroll Costs & Maximum Loan Amounts
- General Requirements: Similar to First Draw PPPs, most borrowers will compute the maximum loan amount using 2.5x the average monthly payroll costs (maximum loan of $2 million under Second Draw PPP). Borrowers are given the option to use payroll costs from calendar 2019, calendar 2020 or the twelve-month period prior to the disbursement of the loan.
- Borrowers in the food service and accommodation industries can use 3.5x average monthly payroll costs.
- Seasonal employers, farmers & ranchers and employers that did not exist for the full twelve-month period prior to loan disbursement are provided with alternate means to compute the loan amount as well.
- Corporate Group Limitations: Businesses part of a single corporate group may not receive more than $4 million in aggregate Second Draw PPP funding. A single corporate group is defined as a business that is directly or indirectly majority-owned by a common parent.
Loan Application & Documentation Requirements
- General Requirements: The documentation required to substantiate Payroll Cost calculations is generally the same for the Second Draw PPP as was required as part of the first round of PPP funding.
- No additional documentation will be required to substantiate the Payroll Costs if the applicant that utilizes the same lender used in calendar 2019 to compute its First and Second Draw PPP loans.
- $150,000 Threshold: Documentation surrounding the 25% reduction in gross receipts referenced above is impacted by loan size:
- $150,000+ Loans: Examples of documentation required as part of the loan application submission include annual tax forms, quarterly financial statements or bank statements.
- Other Loans: Above-referenced documentation will be submitted with the loan forgiveness application. The SBA may still request this information even if loan forgiveness is not pursued.
- Loan Application Forms: On Friday, January 8, 2021, the following loan application forms were released:
- Certifications: Applicants will be required to make similar certification for Second Draw PPP loans as were required as part of the first round of funding, although additional certifications regarding the decline in gross receipts will be required, as well as certification indicating the funds from the First Draw PPP will have been fully-exhausted prior to the disbursement of the funds from the Second Draw. Additional certifications supporting the fact that the eligibility requirements have been met will be required as well.
While this guidance is a good start, we are still awaiting information on the exact procedures on loan forgiveness. The SBA has indicated that it will separately issue consolidated rules governing all aspects of loan forgiveness and loan review. While we await this guidance, now is as good a time as any to begin gathering the data you need to submit with your loan application, including quarterly gross receipts, employee headcount, etc.
For an in-depth overview on the new guidance recently released on the PPP loans, register for our webinar on Thursday, January 14 @ 10 am.
Sax will continue to update you as further details are made available. Reach out to your Sax advisor or email [email protected] with questions. For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.