For many of us, the past 9 ½ months, rolling out of bed and walking to our home office has started to feel like Groundhog’s Day. The impending release of a new round of Paycheck Protection Program loans (PPP2) has intensified that déjà vu feeling and flashbacks to the start of the pandemic.
The renewed PPP program is part of the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” which has an estimated price tag of $900 billion and marks the fourth package enacted in 2020 to provide continuing economic relief from the COVID-19 pandemic. This bill is part of the Consolidated Appropriations Act of 2021, which funds the federal government for the next fiscal year.
This time around, however, and having learned some lessons from the difficult rollout of the original program, let’s hope that Congress and the Treasury Department have improved the program to help more businesses. The bill gives small businesses a second chance at PPP loans, expands the program to news and marketing organizations and provides grants to certain live performing arts organization operators, museum operators and motion picture theatre operators.
It’s hard to imagine now, but applications for the original PPP loan program were being processed just one week after the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed in March and everyone (small businesses, Treasury, the Small Business Administration (SBA), banks, CPAs and lawyers, to name a few) were scrambling. Now that PPP2 is here – what has changed, what have we learned and what are we doing differently?
The original PPP program offered loans to qualifying businesses with an interest rate of 1%. Loans issued prior to June 5, 2020 have a maturity of two years; loans issued after June 5, 2020 have a maturity of five years. Loan payments are deferred for borrowers who apply for loan forgiveness.
The PPP included three rounds of funding between March and August, when the program closed to new loans. During that time, the SBA approved $525 billion in loans to 5.2 million qualifying entities; $134 billion of the original amount allocated from the program was never disbursed. The average loan size was $100,729; 5,460 lenders have participated in the program. About 50% of the loans went to four sectors: healthcare, professional services, construction and manufacturing. As of late November, about 11% of companies that received a loan have filed for forgiveness.
There is debate if PPP was the right program to roll out and success varies by company, but there is no debate that it helped support the economy and keep people employed. For some industries, such as restaurants, hotels, cinemas, travel and dry cleaners, the PPP was only a small life preserver and companies in these sectors struggled to meet the payroll threshold of 60% (which had been reduced from 75% in the original law). Other industries experienced unexpected growth during COVID-19; PPP loans helped with expansions and forgiveness was easily obtained.
So, how does the new bill change the PPP? The goal of Congress was to get this second round of PPP to those that need it the most, so they added new qualifiers. Businesses will be eligible for a “PPP second draw” loan of no more than $2 million (with some exceptions) if they:
Borrowers generally may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. Accommodations and food services companies (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs. Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location. Waiver of affiliation rules that applied during initial PPP loans apply to a second loan. Sec. 501(c)(6) organizations (typically Chambers of Commerce) and destination marketing organizations are also now eligible for PPP loans, if they meet certain conditions.
FCC license holders and newspapers with more than one physical location are now also eligible for PPP loans as long as the business has no more than 500 employees per physical location.
The bill requires the SBA to release guidance to lenders within 17 days of enactment that allows borrowers who returned all or part of their PPP loan to reapply for the maximum amount applicable so long that they have not received forgiveness. This is especially relevant for partnerships that submitted applications in early April prior to regulations released later relating to eligibility of guaranteed payments.
The bill resumes the payment of principal and interest (P&I) on small business loans guaranteed by the SBA under the 7(a), 504 and Microloan programs established under the CARES Act.
The bill extends the covered period for Economic Injury Disaster Loan (EIDL) grants through December 31, 2021. It extends time for SBA to approve and disburse Emergency EIDL grants from 3 to 21 days. The bill also repeals a provision that required PPP borrowers to deduct the amount of their EIDL advance from their PPP forgiveness amount. The SBA is required to issue rules that ensure borrowers are made whole if they received PPP loan forgiveness and their EIDL was deducted from that amount.
The bill also overrules the IRS to clarify that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan, retroactive to the enactment of the CARES Act. This is a relief to the struggling businesses hoping to carryback net operating loss (NOL) and other businesses hoping to avoid bank financing for an April 15 payment.
The bill expands expenses that are eligible and forgivable to include:
The bill also modifies rules for forgiveness by simplifying forgiveness documentation submission requirements for loans under $150,000; this change is designed to speed up the approval process and reduce burden on the banks. Borrowers will need to do all the calculations and maintain supporting documentation for up to four years; so still need to calculate those 24 different ways to maximize forgiveness. Additional expenses are now eligible for forgiveness including supplier and PPE costs; however, payroll is still required to make up 60% of the eligible costs; so adding additional eligible expenses will not impact many companies.
The first round of PPP was a huge learning curve for everyone involved, so what did we learn? To start, the rules of engagement have been set for the most part. In March and April, new FAQs were coming out daily from the Treasury clarifying various issues (what’s included in payroll costs, net or gross payroll, clarification of who is eligible, among 50-plus FAQs). Today, most eligible borrowers have a solid grasp of how to calculate the month of payroll and 2.5 or 3.5 times for the loan amount. The trick will be which companies are eligible this time around.
The necessity question will rear its ugly head again this round. Back in April, almost every employer in the country felt uncertain about where we were headed, so obtaining the PPP was a no brainer. This time around, we have over nine months of operating results to look back on. If a company had sales less than 30% over the previous year in quarter two of 2020, but sales have since rebounded and are maybe higher than in previous years, do they still need additional PPP to support operations and pay employees? The answer will depend on each business’ situation but be certain the SBA will be doing selective reviews of loans during the funding process and how companies spent the money.
Both the banking community and CPA firms are more prepared for this round of PPP loans. Banks have their portals and processes built, but not all will be anxious to participate in a new round of PPP loans. Fintech companies (think Intuit, Paypay, Biz2Credit, Cabbage) got invited late to the game for Round 1 but hope to lead the automation and funding in Round 2. The AICPA has been instrumental in making sure firms are ready this time and has partnered with multiple firms to make funding faster for clients.
Remember, back in April 2020, the initial $350 billion of PPP funds was gone in two weeks, and a majority of that in the first weekend. So, if your business is struggling and needs this funding, be prepared. Gather your documents, talk to your CPA and find your funding source as quickly as you can. Also remember that the PPP under the CARES Act was significantly modified by regulation and guidance for several months; the new law when enacted will be subject to this modification also. In addition, with a new administration starting January 20, 2021, further changes to small business support may be coming.