This notice summarizes the terms, eligibility and application conditions for the new payment protection program loan (PPP 2 loans) under the Law on Economic Assistance to Small Businesses, Nonprofits and Sites in difficulty, which President Trump signed into law in December 2020.
On December 27, 2020, President Trump enacted the Economic Aid for Small Businesses, Nonprofits, and Hard-Affected Places Act (Pub. L. 116-260) (Economic Aid Act). Crucially, the Economic Aid Act creates a new Paycheck Protection Program (PPP) loan (PPP 2 loans1 available to certain eligible entities that have received PPP loans under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) which was enacted on March 27, 2020 (such previous loan, a PPP 1 loan ). PPP 2 loans are available from participating lenders until March 31, unless earmarked funds run out earlier.
The Small Business Administration (SBA) and the US Treasury on January 6 released interim rules implementing the PPP 2 loan program (interim rules).2 Below is a high level summary of the PPP 2 Loan Program as implemented by the Interim Rules.3
terms – The conditions for PPP 2 loans are generally the same as those applicable to PPP 1 loans. These conditions include the following: (1) 100 percent SBA guarantee; (2) no collateral is required; (3) no personal guarantee is required; (4) one percent interest rate; (5) five-year term; and (6) lenders can make such loans under the delegated authority of the SBA and rely on the borrower’s certifications regarding eligibility.
Operations – a PPP 2 candidate must (1) have been in business on February 15, 2020, (2) have had a PPP 1 loan when the total amount of this loan has been used or will be used before the disbursement of the PPP 2 loan,4 and (3) to have used the proceeds of its PPP 1 loan only for eligible expenses under the existing rules of the PPP program.
Employees – Maximum of 300. PPP borrowers who were eligible for PPP 1 loans on the basis of a “by location” analysis (single business entities operating with NAICS code 72 – Accommodation and food services) cannot employ more than 300 employees by physical location for the purposes of a PPP loan 2.
Gross receipts5 – To be eligible, a PPP borrower must show a reduction of at least 25% of their gross revenue in Q1, Q2, Q3 or Q4 of 2020, compared to the same quarter in 2019.6 The interim rules also provide that a PPP borrower that was in business for all four quarters of 2019 is deemed to meet this income reduction requirement if it has experienced a reduction in annual income of 25% or more in 2020 compared to 2019, and the borrower submits annual tax forms justifying such a drop in revenue. Remission amounts received for PPP 1 loans are excluded from the calculation of a borrower’s gross receipts.
Guidelines – Non-eligible entities continue to be those set out in 13 CFR § 120.110 with the exception of non-profit and religious institutions. Companies engaged in political and lobbying activities and listed companies are also excluded from participation.7
Membership rules – The membership rules that applied to PPP 1 loans generally apply to PPP 2 loans. The PPP 1 membership rules relating to companies whose NAICS code begins with 72 (Accommodation and food services) are adjusted to maximum of 300 employees.8
Maximum PPP loan amount 2
The calculation is based on 2.5x of the monthly salary costs in the year preceding the origination of the PPP loan, the calendar year 2020 or the calendar year 2019 (or 3.5x the monthly salary costs for PPP borrowers with a code NAICS 72 – Accommodation and Food Services).9 Maximum PPP 2 loan amount: $ 2 million.ten
Includes those applicable to PPP 1 loans (staff costs, mortgage payments, rent payments, utility payments) plus the following:
(1) covered operating expenses – includes payments for business software or cloud computing;
(2) supplier costs covered – includes goods that were essential to the business at the time the expenditure was made and that these expenses were made under a contract;
(3) worker protection expenses covered – includes expenses necessary to comply with government requirements (including sneeze guards, ventilation systems and outdoor space expansion) and costs of personal protective equipment (these costs can be incurred at any time). time after March 2020); and
(4) the cost of material damage covered – includes costs related to looting or vandalism in 2020 that were not covered by insurance or other compensation.11
Number of loans
Only one PPP 2 loan can be obtained by a borrower.
Not less than eight weeks after creation and not more than 24 weeks after creation.
Economic necessity certification
The borrower must do the same certification as under a PPP 1 loan (current economic conditions make the loan request necessary).
All “eligible expenses” (defined above) incurred during the period covered are eligible for the rebate; however, the 60 percent / 40 percent ratio of salary costs, relative to other eligible expenses that applied to the PPP 1 loan forgiveness calculations, applies to the PPP 2 loan forgiveness calculations.
Each PPP 2 lender should either use the SBA application form or create a substantially similar form. According to the provisional rules, applicants for PPP 2 must also provide documentation to support the 25% revenue reduction requirement. This documentation may consist of relevant tax forms, quarterly financial statements or bank statements. PPP lenders are required to perform a “good faith, timely review” of a PPP loan applicant’s calculations and supporting documentation 2.
PPP borrowers 1 with loans under review by the SBA
When the SBA has information that a PPP 1 borrower might not have been eligible for such a loan, the lender will receive a notice from the SBA when they submit the PPP 2 loan application, and no SBA loan number will be issued. provided until a determination of eligibility has been made. The interim rule states that the SBA “will resolve unresolved borrower issues promptly.”
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As of the date of this client alert, it cannot be determined when PPP lenders will receive PPP 2 requests or when the ASB will start accepting these requests for processing. In addition, it is not possible to determine whether all lenders participating in PPP 1 loans will participate in PPP 2 loan program. However, it is likely that PPP lenders participating in PPP 2 program will have to adjust their internal resources to take into account of the demand that the program will generate given the limited duration and funding of the program. This potential change in the use of internal resources of lenders may result in a delay in processing PPP loan forgiveness requests 1.
1 About $ 284 billion is allocated for PPP loans (PPP1 and PPP2 loans). Note that PPP 1 loans are again available under the conditions set out in the CARES Act (ie up to 500 employees; maximum loan amount up to $ 10 million).
2 See Temporary Changes to the Business Loan Program; Paycheque Protection Program Second Draw Loans, published on January 6, 2021 in https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf.
3 This summary assumes that the PPP borrower is a business (not a sole proprietor or independent contractor) and eligible for a PPP 2 loan in an amount greater than $ 150,000.
4 ASB rules require that PPP proceeds be disbursed within 10 calendar days of approval.
5 Interim rules generally define “gross revenue” to include all income in any form received or accrued (in accordance with the entity’s accounting policy) from any source, including sales of products or services. , interest, dividends, rents, royalties, fees or commissions, less returns and indemnities. In general, revenue is considered “total income” plus “cost of goods sold”.
6 Different rules apply to companies that were not operational during the relevant periods in 2019.
7 The provisional rules provide that companies which have closed permanently are not eligible for a PPP 2 loan. Companies which are “temporarily closed” or which have “temporarily suspended” their activities are however eligible for such loans.
8See the Affiliate Rules for the US Small Business Administration Paycheck Protection Program, April 3, 2020, available at the following link: https://home.treasury.gov/system/files/136/Affiliation%20rules%20overview%20%28for%20public%29.pdf
9 Specific rules apply to calculations for seasonal businesses.
ten Companies that are part of the same corporate group cannot receive more than $ 4 million in PPP 2 loans in total.
11 PPP borrowers who have not had their PPP 1 loan canceled may include the newly eligible expenses in the calculation of their use of PPP funds for authorized purposes.