First Time PPP Loan Recipients
On December 27,2020, a new COVID relief bill was signed into law changing the Paycheck Protection Program (PPP) to make some businesses eligible for a “second” PPP loan and expand the pool of possible “first” PPP loan recipients. Last week, the SBA announced that the PPP will re-open on January 11th for certain new borrowers (with the initial funding moving through community lenders for the first few days after the program reopens) and will re-open on January 13th for certain existing PPP borrowers.
If a business owner did not receive a PPP loan in 2020, that owner may be eligible to apply for a “first” PPP loan in 2021. In a nutshell, to be eligible to apply for a “first” PPP loan in 2021, (i) the applicant’s business must have been operational before February 15, 2020, (ii) the applicant’s business must be still operational, and (iii) the applicant’s business must have no more than 500 employees. Loans are limited to a maximum of $10 million and those businesses that have temporarily closed can receive a loan.
Second-Draw PPP Loan Recipients
If a business owner received a PPP loan in 2020, that owner may be eligible to apply for a second PPP loan if the owner’s business suffered a 25% or greater loss in revenue in 2020 when comparing any quarter in 2020 to the same quarter in 2019 or, had a 25% or greater reduction in gross receipts in 2020 as compared to 2019. Revenue does not include any receipts related to 2020 PPP loan draws that were properly applied.
Businesses seeking a second draw PPP loan can employ no more than 300 people (500 employees for restaurants and hotels) and must not be permanently closed. Loans are capped at 2.5 times an applicant’s average monthly payroll costs in year prior to the loan being issued (3.5 times for restaurants and other eligible hospitality businesses which were hit hard by the pandemic). Borrowers who took out a PPP loan in 2020 can apply for one additional loan of up to $2 million.
For both new PPP applicants and second draw PPP loan applicants, the loan process will largely remain the same with a few noteworthy changes:
- seasonal employers have greater flexibility in picking the 12-week period used to determine the maximum loan amount; and
- certain types of businesses are excluded from this round, (e.g., entities that receive grants for shuttered venue operators under the Economic Aid Act, businesses primarily engaged in political or lobbying activities, and China-affiliated businesses).
Also excluded from this round of loans are entities owned or controlled by the President, Vice-President, the head of an Executive department or a member of Congress or the spouse of any of the aforementioned people.
In the first and second round of PPP loans, businesses had to pick either 8 or 24 weeks to cover a business’s payroll and certain non-payroll costs (e.g., rent, secured loan interest, utilities). But this round provides more flexibility, allowing businesses to select any period between 8 and 24 weeks. Total eligible costs must still be comprised of at least 60% of payroll costs (e.g., compensation, health, retirement, etc.) over the covered period.
Tax Treatment and Loan Terms
PPP loans will not be included as taxable income. Expenses paid with the proceeds of a PPP loan that is forgiven are now tax-deductible. This covers not only new loans (whether “first” or “second” loans) but also existing and prior PPP loans. The interest rate will be 1% non-compounding interest and the term of the loan will be five years.
The PPP program is open through March 31, 2021 or until the new funding is exhausted so eligible businesses should apply as soon as possible.