Congress has reached a bi-partisan agreement on the Consolidated Appropriations Act of 2021 (the “Act”), which includes a supplemental relief package aimed at mitigating the continued economic impact of COVID-19 on American businesses, individuals and families, and includes expansion of the Paycheck Protection Program (“PPP”) as initially enacted under the CARES Act. The Act is currently pending signature by the President, who has indicated that he does not intend to sign without further modification of certain matters not directly related to the PPP. If the President does not sign, it is possible that Congress will agree to certain modifications to the Act or override any Presidential veto and adopt the Act as drafted.
Below is a summary of the key provisions of the expanded PPP, as proposed in the Act in its current form.
Expansion of Paycheck Protection Program Relief. The Act not only provides for a second round of PPP funding to first and second-time borrowers, but also provides a mechanism for borrowers to increase the amount of their original PPP loans.
(a) Borrowers with Existing PPP Loans. First, the Act permits borrowers who, due to supplemental guidance issued by the SBA, obtained a smaller PPP loan than they could have otherwise obtained upon passage of such supplemental guidance. Affected borrowers may request that their PPP lenders increase their existing PPP loan by the differential. Second, the Act permits PPP borrowers who returned all or any portion of their original loan to reapply for a loan in the amount of such returned portion. This extends to eligible borrowers who did not accept the full amount of the initial PPP loan as well, allowing such borrowers to apply for an increase up to the maximum amount initially authorized.
(b) New and Second Round Borrowings. As drafted, the Act proposes to allocate approximately $267.5 billion in funding for a new pool of PPP funds, $25 billion of which are reserved for businesses with 10 or fewer employees as of February 15, 2020. Eligible borrowers may now apply for a second PPP loan, provided that such supplemental loan cannot exceed $2 million and, the aggregate amount of all loans to all affiliated borrowers from both the first and second round of funding shall not exceed $10 million.
Generally, the aggregate PPP loan amount per applicant shall not exceed 2.5 times the average monthly payroll for the 12 months preceding the date of application or the average monthly payroll for 2019. For accommodation and food service businesses under NAICS Code 72, the maximum loan amount if increased to 3.5 times monthly payroll, not to exceed $2 million.
(c) Eligible Borrowers.
- All first-time PPP applicants will be subject to the eligibility criteria set forth in the initial PPP under the CARES Act. In order to apply for a second loan under the PPP, the applicant must be a business with 300 or fewer employees (decreased from 500 under the initial program) and have experienced a decline in gross receipts of 25% in any completed quarter in 2020 prior to the loan compared to the same quarter in 2019.
- The Act expands eligibility to certain 501(c)(6) organizations, subject to certain conditions.
- The Act permits a debtor in possession or bankruptcy trustee to obtain a PPP loan on behalf of a debtor, which loan will be treated as a debt of the company unless and until forgiven. Further, any Plan of Reorganization that provides for payment of a claim specified in Section 503(b)(10) of the Code (i.e., administrative claims) may be confirmed if the plan proposes make payments on account of such claim when due under the terms of the PPP loan giving rise to such claim.
(d) Use of Proceeds for New PPP Loans. The Act substantially expands the provisions of the existing PPP relating to authorized uses of PPP loan proceeds, in an effort to address certain non-ordinary course expenses incurred by businesses in connection with COVID-19 safety measures. New categories of acceptable uses of PPP loan proceeds include:
- Covered Operational Expenditures: Payments by a business for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
- Covered Property Damage Costs: Any cost related to property damage, vandalism and looting due to public disturbances that occurred during 2020, to the extent not covered by insurance or other compensation.
- Covered Supplier Costs: Payments to suppliers pursuant to a contract, order, or purchase order in effect before the date of disbursement of the PPP loan, for the supply of goods that are essential to the operations of the business at the time such expenditure is made.
- Covered Worker Protection Expenditures: Any operating or capital expenditure required to facilitate the adaptation of the applicant’s business to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent State or local requirements, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19, in all cases during the period commencing on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires. Such expenditures may include costs or expenses incurred in connection with the following:
- purchase or maintenance of a drive-through window, air filtration or ventilation system or physical barriers (e.g. sneeze guards);
- expansion of additional indoor, outdoor or combined business space;
- onsite or offsite health screening capabilities;
- purchase of particulate filtering face-piece respirators;
- purchase and maintenance of personal protective equipment
In addition to the above, the Act expands the definition of payroll costs to include payments for group health or other group insurance benefits (including group life, disability, vision and dental insurance), including insurance premiums. The above notwithstanding, in order to obtain full forgiveness of any PPP loan, no less than 60% of loan proceeds must be used to fund payroll and associated eligible costs.
(e) Forgiveness. In addition to existing PPP loan forgiveness requirements, the Act codifies an attempt by the Federal Reserve and the SBA to simplify the PPP loan forgiveness process for smaller loans. For PPP loans less than $150,000, the SBA will issue a new one-page forgiveness application (to be issued within 24 days of passage of the Act), in which a borrower will attest to compliance with all loan requirements, supported by limited information. Upon forgiveness, records must be retained for at least 3 years (4 years with respect to employment records). The Act also provides direction to the SBA to submit an audit plan to Congress regarding policies and procedures for review or larger loans. Lastly, proceeds of EIDL loans will no longer reduce full forgiveness.
(f) Deductibility of PPP Loan Funded Expenses.
- The Act clarifies that gross income does not include any amount as a result of the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for deductible expenses paid with the proceeds of a PPP loan (e.g., employee salaries) that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
- While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible. The IRS then stated that no deduction would be allowed under existing law for an expense that is deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income. The Act changes current law to reverse that decision and permit a deduction.
The Act passed both houses of Congress on December 20, 2020. The President has indicated as recently as Wednesday, December 23, 2020, that he does not intend to sign the Act without substantial changes. If and when passed, we can expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The SBA is directed to issue regulations to carry-out the Act within 10 days of its enactment.
Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.
 For a comprehensive review of the existing Paycheck Protection Program and related SBA guidance, please refer to our COVID-19 Resource Center.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.