PPP and the Economic Aid Act
How the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act Affects PPP Loans Previously Extended and New PPP Loans Going Forward
- The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), which was part of the Consolidated Appropriations Act, 2021 package, made various changes to the Paycheck Protection Program (PPP) that affect all PPP loans including those funded under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
- The Economic Aid Act opens a new PPP loan period for first loans and implements a second loan draw for certain PPP borrowers, each through March 31, 2021.
President Donald Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), which was included in the Consolidated Appropriations Act, 2021, on Dec. 27, 2020. In turn, the U.S. Small Business Administration (SBA) published a new consolidated Interim Final Rule (IFR) on Jan. 6, 2021, relating to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as revised by the Economic Aid Act.
The IFR consolidates prior PPP interim final rules, makes certain changes to existing PPP rules affecting all PPP loans, including those previously funded, and adds new rules for new loans (both first draw and second draw loans) issued under the PPP pursuant to the Economic Aid Act. The SBA's authority to guaranty both first and second draw loans expires March 31, 2021, which means lenders and borrowers will need to close both new first draw and second draw loans before then. (See related Holland & Knight alert, "Economic Aid Act Provides Second Draw PPP Loans," Jan. 15, 2021.)
In reviewing the criteria below, please note that this Holland & Knight alert only addresses the key issues that have changed under the PPP and that you should also refer to previous alerts published by Holland & Knight (see Previous PPP Alerts below) to understand the full PPP program and the rules that remain in effect for the PPP program.
The types of organizations and businesses eligible to receive a first PPP loan have been expanded under the Economic Aid Act, so long as they continue to meet all other eligibility requirements under the CARES Act, to include:
Housing Cooperatives. If a housing cooperative (as defined in Section 216(b) of the Internal Revenue Code of 1986 or Code), together with all of its affiliates as determined by SBA affiliation rules, has 300 or fewer employees, it is eligible for a PPP loan.
Nonprofit News Organizations. A public broadcasting entity (as defined in Section 397(11) of the Communications Act of 1934) which is a nonprofit organizations or is an organization subject to Section 511(a)(2)(B) of the Code and has 500 or fewer employees, is eligible for a PPP loan. If such organization has multiple locations and has a trade or business assigned a North American Industry Classification System (NAICS) code beginning with 511110 or 5151, and makes a good faith certification that proceeds of the loan will be used to support the production and distribution of locally focused or emergency information.
Destination Marketing Organizations.1 A destination marketing organization 1) that does not receive more than 15 percent of its receipts from lobbying activities, 2) with lobbying activities that do not comprise more than 15 percent of the total activities of the organization, 3) for which the cost of its lobbying activities did not exceed $1 million during its most recent tax year ending prior to Feb. 15, 2020, 4) that has 300 employees or fewer, and 5) that is (x) a 501(c) under the Code and is tax exempt under section 501(a) of the Code or (y) is a quasi-governmental entity or is a political subdivision of a state or local government, including any instrumentality to those entities.
501(c)(6) Organizations. Any organization that is described under Section 501(c)(6) of the Code and is tax exempt under Section 501(a) of the Code (excluding professional sports leagues and organizations whose purpose is promoting or participating in a political campaign or other activity), so long as: 1) it does not receive more than 15 percent of its receipts from lobbying activities, 2) its lobbying activities do not comprise more than 15 percent of its total activities, 3) the cost of its lobbying activities did not exceed $1 million during its most recent tax year ending prior to Feb. 15, 2020, and 4) it has 300 employees or fewer.
In addition to existing ineligibility criteria, those business and organizations that are ineligible for any PPP loan made on or after Dec. 27, 2020, have been expanded to include any business or organization:
- that received or will receive a grant under the Shuttered Venue Operator Grant program under Section 324 of the Economic Aid Act
- if the President, Vice President, head of an Executive Department or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in such business2
- that is listed on an exchange registered as national securities exchange under Section 6 of the Securities Exchange Act of 1934, and
- that has permanently closed and has no intention of reopening
The waiver under the CARES Act of the affiliation rules contained in Section 121.103 of the Small Business Act has been extended by the Economic Aid Act to include:
- any business concern (including any station which broadcasts pursuant to a license granted by the Federal Communications Commission under Title III of the Communications Act of 1934 without regard for where such a station is a concern as defined in Section 121.105 of title 13, code of Federal Regulations, or any successor thereto) that employs 500 or fewer employees, or the alternative size standard related to such business concern's NAICS code, per physical location of such business concern and is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 or 5151, or
- any nonprofit organization that is assigned a NAICS code beginning with 5151.
Calculating the Maximum Borrowing Amount
- In calculating the amount that may be borrowed, the PPP borrower may use (x) calendar year 2019, (y) calendar year 2020, or (z) if not self-employed, the precise one-year period before the date on which the PPP loan is made.
- Self-employed borrowers (including sole proprietorships and independent contractors), seasonal employers, farmers, ranchers and partnerships all have specific rules and directions for determining the amount that they may borrower, so any PPP borrower who falls into one of those categories should refer to the IFR dated Jan. 6, 2021, to review those requirements.
- The calculation of payroll costs has been expanded to include not only the existing allowance for "payment for the provisions of employee benefits consisting of group health care benefits," but now also includes employer contributions for "group life, disability, vision, or dental insurance benefits." This change applies retroactively to all PPP loans made before, on or after Dec. 27, 2020.
Interest Rate on PPP Loans
The Economic Aid Act clarified that the interest on a PPP loan shall be calculated on a "non-compounding, non-adjustable basis" for PPP loans made on or after Dec. 27, 2020 and is only retroactive for PPP loans made before Dec. 27, 2020 upon the mutual agreement of the PPP borrower and PPP lender. Each Borrower should review its loan statements to determine if its PPP lender has charged compounding interest and if so, work with its PPP lender on making this change retroactive.
How Can PPP Loans be Used
In addition to how PPP loans can be used as set forth by the CARES Act, PPP loans made before, on or after Dec. 27, 2020, may be used for the following:
- costs related to group life, disability, vision or dental benefits or insurance premiums
- refinancing an SBA Economic Injury Disaster Loan (EIDL) loan made between Jan. 31, 2020 and April 3, 2020
- covered operations expenditures (payments for software or cloud computing service that facilitate business operations, product or service delivery, the processing, payment or tracing of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory records and expenses)
- covered property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation)
- covered supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that (x) are essential to the operations of the PPP borrower at the time at which the expenditure is made; and (y) is made pursuant to a contract, order, or purchase order 1) in effect at any time before the covered period with respect to the applicable covered loan; or 2) with respect to perishable goods in effect before or at any time during the covered period with respect to the applicable covered loan), and
- covered worker protection expenditures
The Economic Aid Act makes it clear that PPP funds may not be used for 1) lobbying activities as defined in Section 3 of the Lobbying Disclosure Act of 1995, 2) lobbying expenditures related to a state or local election or 3) expenditures otherwise destined to influence the enactment of legislation, appropriations, regulations, administrative action or Execute order proposed or ending before Congress or any state government, state legislature, or local legislature or legislative body.
EIDL Advance Amounts
The Economic Aid Act repeals the CARES Act provision requiring EIDL Advance Amounts received by a PPP borrower be deducted from the forgiveness payment made by the SBA to the PPP lender. If a PPP borrower had its EIDL Advance Amount deducted from its forgiveness amount for a PPP loan already forgiven by the SBA, the SBA will remit to the PPP lender the EIDL Advance Amount, together with interest on that amount to the date of remittance, for further disbursement to the PPP borrower, if applicable.
The SBA has expanded the category of those who are eligible to be a PPP lender, to include any Farm Credit System institution as defined in 12 U.S.C. 2002(a) that applies the requirements under the Bank Secrecy Act and its implementing regulations as a federally regulated financial institution or functionally equivalent requirements.
Each PPP lender must register in SAM.gov to make PPP loans by no later than 30 days after the first disbursement of a PPP loan made by such PPP lender after Dec. 27, 2020.
The Hold Harmless clause is expanded to protect PPP lenders for PPP loans made pursuant to the Economic Aid Act.
For all PPP loans made before, on or after Dec. 27, 2020:
- if a PPP borrower has knowingly retained an "agent," such fees will be paid by the PPP borrower, and
- a PPP lender is only responsible for the fees of an "agent" if such PPP lender contracted directly with such "agent."
The following special situations allow for an increase of a PPP loan made prior to Dec. 27, 2020:
- If a partnership received a PPP loan that only included payroll costs for the employees, the PPP lender may submit a request through SBA's E-Tran Servicing site to increase the PPP loan amount to include the partners compensation, even if the PPP loan has been disbursed.
- If a seasonal employer received a PPP loan and it would be eligible for a higher loan amount in accordance with Section 336 of the Economic Aid Act, the PPP lender may submit a request through SBA's E-Tran Servicing site to increase the PPP loan amount, even if the PPP loan has been fully disbursed.
- If a borrower had received a PPP loan but had returned the full amount of such PPP loan, such borrower may reapply for a PPP loan in an amount such borrower would be eligible for under the current PPP rules.
- If a borrower returned a portion of a PPP loan, such borrower may reapply for an amount equal to the difference between what the borrower retained and what the borrower had originally been approved for, and the PPP lender may submit a request through SBA's E-Tran Servicing site to increase the PPP loan amount.
- If a borrower did not accept the full amount of a PPP loan (i.e., borrower only received a partial disbursement of such PPP loan), such borrower may request an increase in the amount of the difference between what was disbursed to the borrower and the full amount originally approved for such PPP loan, and the PPP lender may submit a request through SBA's E-Tran Servicing site to increase the PPP loan amount.
Forgiveness Related Changes
- Covered Period. The Economic Aid Act revised the loan forgiveness covered period such that now the PPP borrower is allowed to decide the length of its covered period, so long as it is between eight weeks and 24 weeks. Because of this change, the SBA also removed the "alternative covered period" as it would no longer be applicable.
- Forgiveness of PPP loans of $150,000 or less. The PPP borrower for any PPP loan made before, on or after Dec. 27, 2020, that was for $150,000 or less, is not required to submit any application or other documentation to its PPP lender when it applies for forgiveness other than the certification and information required by Paragraph 7(A)(l)(1)(A) of the Small Business Act. Because the SBA may still audit these smaller loans at any time, those borrowing $150,000 or less are still required to retain relevant records to prove compliance with all PPP requirements 1) for four years after submission of loan forgiveness for employment records and 2) for three years after submission of loan forgiveness for all other records.
- Deduction of Expenses. A PPP borrower may, as it relates to any PPP loan made before, on or after Dec. 27, 2020, deduct as ordinary and necessary business expenses, such expenses that were paid for from the proceeds of its PPP loan, even if that PPP loan is forgiven by the SBA.
Previous PPP Alerts
For previous Holland & Knight alerts on the SBA's PPP, please see below:
- Economic Aid Act Provides Second Draw PPP Loans, Jan. 15, 2021
- SBA to Require PPP Borrowers of $2 Million-Plus to Complete Loan Necessity Questionnaires, November 24, 2020
- SBA Issues Much-Anticipated Guidance Regarding Changes of Ownership in PPP Loans, October 8, 2020
- SBA Publishes 2 New Interim Final Rules to Implement PPP Flexibility Act, June 25, 2020
- Congress Makes PPP Loans More Flexible for Borrowers, June 4, 2020
- New PPP Interim Final Rules Address Loan Forgiveness Requirements and Agency Review Procedures, May 27, 2020
- New PPP Interim Final Rule Clarifies That Foreign Employees Count for Size, May 18, 2020
- SBA Paycheck Protection Program Loans: Forgiveness Guidance, Part II, May 18, 2020
- SBA Provides Safe Harbor for PPP Borrowers Receiving Less Than $2 Million, May 13, 2020
- Paycheck Protection Program: Updated Guidance on Counting Employees in Foreign Affiliates, May 6, 2020
- Safe Harbor Deadline for Repayment of PPP Loans Extended from May 7 to May 14, May 6, 2020
- SBA Paycheck Protection Program Loans: Forgiveness Guidance, Part I, May 4, 2020
- Key Factors for Companies to Consider When Certifying Their PPP Need, April 25, 2020
- Small Business Loan Programs: Overview and Insights, April 7, 2020
- Guidance for VC-Backed Companies Seeking SBA Paycheck Protection Program Loans Under CARES Act, April 6, 2020
1 The SBA defines a Destination Marketing organization as: any nonprofit entity that is 1) an organization described in Section 501(c) of the Code and exempt from tax under Section 501(a) of the Code, or 2) a state, or a political subdivision of a state (a) engaged in marketing and promoting communities and facilities to business and leisure travelers, (1) assisting with the location of meeting and convention sites, (2) providing travel information on area attractions, accommodations, and restaurants, (3) providing maps, and (4) organizing group tours of local historical, recreational, and cultural attractions, or (b) is engaged in and derives the majority of the operating budget of the entity from revenues attributable to providing live events.
2 For PPP loans made prior to Dec. 27, 2020, and one of the parties in this subsection (ii) holds a controlling interest in it, then the principal executive officer must disclose such information to the SBA by a) no later than Jan. 26, 2021, if the PPP borrower submitted for forgiveness prior to Dec. 27, 2020, or b) no later than 30 days after submitting for forgiveness.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.