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12.22.2020 | Legal Advisory

Congress has passed the long-awaited bipartisan stimulus package on December 21, 2020 which is expected to be signed by the President. Included in this package are significant changes to the existing Paycheck Protection Program (PPP), as well as an opportunity for certain businesses to seek a second PPP loan (a “second draw loan”) if they meet specific financial metrics. Below is a summary of the changes to the existing program, as well as details on eligibility for a second draw loan.

Changes to the PPP

• Tax Treatment – Perhaps the single biggest change is the modification to the IRS’s position on the deductibility of expenses that were paid with a PPP loan. Any forgiveness of a PPP loan (including a second draw loan) is not taxable and expenses paid with a PPP loan, such as compensation and rent, that would otherwise have been deductible will remain deductible. With this clarification, Congress has overruled the IRS’s prior position that such expenses could not be claimed as deductions.
• Clarification on Payroll Costs – All employer-provided group insurance benefits (e.g., group life, disability, vision or dental) are includable in the definition of payroll costs.
• Additional Covered Expenditures – Additional categories of forgivable expenditures were created and/or clarified, such as:
  • software and cloud computing for operational needs;
  • costs related to uninsured property damage from public disturbances;
  • costs payable to suppliers for contracts or purchase orders placed prior to the receipt of the PPP loan and related to essential materials for the borrower’s business (if the goods purchased are perishable, those can be included if purchased during the covered period); and
  • costs incurred to provide PPE and/or adaptive instruments to comply with federal, state or local safety regulations related to COVID-19.
• Simplified Application for Forgiveness of Loans Less Than $150,000 – The SBA will provide a short-form application (likely similar to the existing form for loans less than $50,000) that requires the borrower to only report the (i) number of employees retained, (ii) amount of the loan paid for payroll costs, and (iii) total loan amount.
• Selection of Covered Period Termination – Borrowers now have the flexibility to select the end date of their covered period as any date that is between 8 weeks and 24 weeks following the origination of the PPP loan. Previously a borrower could apply for forgiveness prior to the end of their covered period, but the date of application would serve as the end of their covered period.
• Eligibility of Borrowers in Bankruptcy – Overruling the SBA’s original position, potential borrowers who are involved in certain bankruptcy proceedings may obtain a PPP loan (or, if applicable, a second draw loan) if approved by the bankruptcy court. In the event of such approval, the loan will be given superpriority status, similar to other debtor-in-possession financing.

Second Draw Loans

• Eligibility – To be eligible for a second draw loan, in addition to the eligibility rules that related to the original PPP loan (including the applicable affiliation rules), a borrower must meet the following criteria:
  • Borrower employs fewer than 300 people - however, borrowers classified under NAICS code 72 (accommodation and food services) with more than one physical location may receive a second draw loan for each location that employs fewer than 300 people;
  • Borrower’s “gross receipts” for one of Q1, Q2 or Q3, respectively 2020 are at least 25% less than the corresponding fiscal quarter in 2019 (applications made after January 1, 2021 may use Q4 data and exceptions are made for borrowers that were not in business for all or any part of 2019);
  • Borrower is not primarily engaged in lobbying or other political activities;
  • Any person or entity created in or with significant operations in China does not own more than 20% of the equity of borrower;
  • No member of the borrower’s board of directors is a resident of China; and
  • Borrower is not the recipient of a grant under the Shuttered Venue Operator Grant program, which is also being authorized under the stimulus package.
• Amount of Loan – The maximum amount is 2.5 multiplied by (i) the average monthly payroll costs for the year preceding the date of the loan, or (ii) for calendar year 2019 (at the option of borrower); provided that the second draw loan may not exceed $2 million. For borrowers that are classified under NAICS code 72, the applicable multiple is 3.5.
• Maximum Number of Loans – No more than one second draw loan is permitted.
• Short Form for Loans of $150,000 or Less – Borrowers will be permitted to apply using a short form attestation with minimal documentary evidence required.
• Loan Forgiveness – Generally, the second draw loans will have a similar process for obtaining forgiveness as the original PPP loan. Furthermore, the safe harbors for restoring FTE headcount and reduced compensation are extended to enable borrowers to comply with such safe harbors prior to the end of the covered period on the second draw loan. It is expected that the Treasury Department will issue further guidance clarifying the extent and dates related to the safe harbors, including the broad safe harbor forgiving loss of FTE headcount if the borrower was unable to return to pre-COVID levels of business.

Still to Come

• Ability to Request Increase Due to Updated Regulations – The SBA must release guidance to lenders within 17 days to permit any borrower that returned all or a portion of its original PPP loan to reapply for the maximum amount applicable, but only if the borrower has not received forgiveness.
• Prioritization of Underserved Communities – The SBA must release guidance addressing barriers to access to capital for underserved communities within 10 days.
• Audit Plan – Within 45 days, the SBA must submit to Congress a plan detailing its audit process, noting the metrics it is specifically reviewing, and must provide monthly reviews and audit updates thereafter. Hopefully this will provide insight to those PPP borrowers who are preparing responses to the Loan Necessity Questionnaire as to how the SBA is reviewing borrower materials related to the good faith certification for necessity.

What Next?

Based on the original PPP, we expect more detailed guidance to be promulgated by the Treasury Department and the SBA over the next few weeks, but many of the provisions sought by hard hit businesses have been addressed in this bipartisan legislation; namely, the (i) deductibility of covered PPP expenses, and (ii) ability for borrowers to obtain a second draw loan if there is a clear decline in revenue. In particular, the bright line revenue test, whether or not an appropriate measure of need, will at least provide borrowers with certainty as to eligibility. If you have any questions about these changes or wish to discuss your eligibility for a second draw loan, please do not hesitate to reach out to anyone on the Nutter team.

This advisory was prepared by Josh French, Michael Krebs, John Loughnane, Stephen Patterson, and Shannon Zollo in Nutter’s Corporate and Transactions Department and Melissa Sampson McMorrow in the Tax Department. For more information, please contact one of the authors or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.