New Steering Issued on Subsequent Spherical of PPP Loans: An Overview for Small Companies
On January 6, 2021, the Small Business Administration (SBA) issued new guidelines on which businesses are eligible and how to apply for the new round of Paycheck Protection Program (PPP) funding approved under the new Economic Aid for Hardly Affected Small Businesses were. The Economic Aid Act was signed on December 27, 2020.
The key takeaway is that any company that has not previously received a PPP loan, or companies that experienced a 25% drop in revenue in a quarter of 2020 from 2019, can apply for this new round of PPP. Even more helpful, companies, sole proprietorships, and independent contractors applying for loans of $ 150,000 or less based on the same calculation as the first round (2.5 times per month of 2019 payroll) do not submit new documents must when applying through the same lender. The new rules allow lenders to request additional documentation from borrowers if they deem it necessary.
However, those borrowers less than $ 150,000 must document the decrease in revenue when applying for forgiveness. The new program will open once lenders can resume the process and will expire on March 31, 2021.
Borrowers with loans over USD 150,000 must document their gross earnings reduction when applying for the second round of PPP. The easiest way to do this, per the regulations, is to file tax returns for 2020 and 2019, if available. If not, quarterly financial statements or bank statements may be sufficient.
In contrast to the first round of PPP, the calculation method for the new loans is the same, but the new loans are limited to USD 2 million. Second, while first-time borrowers can have 500 or fewer employees, as in the first round of PPP, applicants can only have a maximum of 300 employees.
Terms and Conditions for PPP Loans Round Two
The new PPP loans are largely subject to the same first round terms and conditions, including the following:
- The loans are 100% guaranteed by the federal government;
- No collateral is required.
- No personal guarantees are required.
- The interest rate is 100 basis points, or 1%, calculated on a non-compound, non-adjustable basis;
- The term is 5 years; and
- Loans are processed by authorized lenders who may rely on borrower certifications to determine the borrower’s eligibility and use of the loan proceeds.
Borrowers applying for a second round of PPPs must also have used the entire first tranche of funds before or by the date of receipt of new funds. And while companies that have been or will be temporarily closed due to the Covid-19 pandemic may apply for the second round, companies that are permanently closed cannot.
The new law also provided additional benefits for restaurants, hotels and other businesses under NAICS Code 72. These companies can calculate their loan amount by multiplying a month of payroll for 2019 by 3.5 instead of 2.5 for more cash. This also applies to seasonal companies and companies without a 12-month operating history. For restaurants and hotels with multiple locations, each location can apply for a separate loan as long as each has fewer than 300 employees. However, the maximum loan amount at all locations is capped at $ 4 million.
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More companies are now eligible
The Economic Aid Act also expanded the list of companies that are now eligible for PPP loans. These new groups include 501c (6) organizations such as chambers of commerce, nonprofits and religious organizations, and local news organizations. These loans are also capped at $ 2 million.
Additionally, the new law provided for $ 15 billion in direct grants not to be repaid for live entertainment venues, which were among the hardest hit companies due to the Covid shutdown. These businesses include theaters, museums, and zoos. This also includes companies that represent artists. It is important to note that a company’s primary activity must be live entertainment, so a restaurant that has an evening singer, for example, is out of the question.
The SBA also issued guidelines on access to capital for minority, underserved, veteran and women owned companies to address the main criticism of the original PPP. This criticism, which was harsh at times, was that small businesses with fewer than 10 employees, women and minority-owned businesses and businesses in economically disadvantaged areas were excluded from the program, while large businesses, chains and publicly traded companies received funding.
In this guidance, the following shutdowns were described for these companies:
- $ 15 billion in first and second drawdowns of PPP loans for loans from Community financial institutions;
- $ 15 billion in first and second drawdowns of PPP loans for loans to insured custodians, credit unions and farm credit system institutions with consolidated assets less than $ 10 billion;
- $ 35 Billion for New Initial PPP Borrower; and
- $ 15 billion and $ 25 billion for first and second drawing PPP loans for borrowers with 10 or more employees, or for loans less than $ 250,000 to borrowers in low and middle income areas. The SBA has determined that at least 25% of each of these closures go to each of the groups: loans to borrowers with no more than 10 employees and loans to borrowers in low or middle income areas less than $ 250,000.
The guidelines state that the SBA will not accept loan applications from Community financial institutions for at least two days after the loan portal is reopened and that it will work with the general public, along with a media campaign, to promote the program and promote these groups apply.
The SBA also describes the companies that were not eligible to apply for the new PPP round, including the following:
- Lobby companies or those that are politically active or advocate;
- Companies located in or affiliated with the People’s Republic of China;
- Companies that lobby or publicize foreign clients and are required to register their activities under the Foreign Agents Registration Act;
- Live entertainment venues that receive grants under the Economic Aid Act;
- Entities in which the president, vice president, chief executive or member of Congress or that person’s spouse owns, controls or holds at least 20% of an equity class; and
- A publicly traded company.
New award rules
The new PPP round has the same requirements to make the loan and convert it into a grant. Borrowers still need to use 60% of the funds on payroll and 40% on expenses over a 24 week period. In a positive trend, borrowers on loans worth $ 150,000 or less can check the box and self-certify that they have used funds in accordance with regulations, greatly simplifying the application process.
In addition, the Economic Aid Act expanded the list of expenses from the original short list of rents, utilities, mortgages, and interest on existing debt to include essential supplier costs, personal protective equipment, and operating costs such as software, accounting, and cloud computing.
RELATED: SBA Facilitates Paycheck Protection Program Loans Of $ 50,000 Or Less
As in the first round, borrowers must continue to try to maintain their headcount as much as possible. A reduction of over 25% in salaries will result in a reasonable reduction in general forgiveness. The rules stipulate that a borrower who cannot find a new employee or is closed due to Covid has a “safe haven” and is not penalized for reducing the number of employees by more than 25%.
Neither do the rules now require borrowers to deduct the grants received if they applied for the SBA’s other loan program, Economic Injury Disaster Loans (EIDL). These grants ranged from $ 1,000 to $ 10,000, depending on the number of employees. The EIDL funding program ran out of money and the Economic Aid Act reimbursed the program for $ 40 billion. Companies that did not apply for the grant or did not receive the full amount can apply now.
One of the biggest problems with the first round of PPP was the unintended tax ramifications. While it was clear that a PPP loan made would not be considered income, Treasury Department guidelines did not allow normally deductible expenses paid by PPP funds to be deductible. It was through this tax burden that the government actually taxed PPP grants. Because of the effective lobbying of every corporate group in Washington, this issue has been resolved by the new law and now expenses paid by PPP funds can be deducted.
After all, companies that received PPP loans were not eligible for the employee retention tax credit as well. This program allows employers to deduct up to $ 14,000 per employee from tax withholding. Now businesses can get PPP loans and claim the tax credit, provided they see a 25% or greater reduction in revenue in a quarter of 2020 from 2019. The tax credit is available in the first and second quarters of 2021 and it is both refundable, meaning the IRS sends employers’ checks, and upfront, meaning employers can request the credit before paying their employees.
While it took Congress nine months to pass this new law and President Trump over a week to sign it, the new move offers many solutions for PPPs and new funding opportunities at a time when economic uncertainty remains consists. And, like the first round, new regulations are sure to come into effect, especially regarding the pending review of exams for borrowers over $ 2 million.
With the new Biden government sworn in on January 20, 2021 and a democratically controlled Senate and House taking place, new regulations and aid packages are on the horizon. Meanwhile, the Economic Aid Act and new regulations are improving PPPs and expanding them to those companies that need it most.
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