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SBA Issues Guidance on Re-Opened Paycheck Protection Program

(Parker Tax Publishing January 2021)

The U.S. Small Business Administration (SBA) re-opened the Paycheck Protection Program (PPP) on January 11 for new borrowers and certain existing PPP borrowers and issued several items of guidance relating to the re-opening. In an Interim Final Rule, the SBA is allowing new borrowers to choose 2019 or 2020 as the base period for calculating their maximum loan amount, thereby ensuring that they are able to obtain funding on terms commensurate with existing PPP borrowers. SBA Press Release 21-02; Interim Final Rules SBA-2021-0001, SBA-2021-0002.


In the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law in March of 2020, Congress created the Paycheck Protection Program (PPP). The program authorized the Small Business Administration (SBA) to guarantee new loans to eligible businesses and nonprofits affected by coronavirus/COVID-19. Such loans have the potential to qualify for tax-free loan forgiveness. The deadline for applying for a PPP loan under this program was August 8, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) (Pub. L. 116-260) became law. The Economic Aid Act extended the authority to make PPP loans through March 31, 2021 and revised certain PPP requirements.

Earlier this month, the SBA issued a press release announcing the PPP reopening. Initially, to promote access to capital, only community financial institutions were able to make First and Second Draw PPP Loans. After January 13, the program opened to all participating lenders. The SBA also issued updated guidance outlining PPP changes in accordance with the Economic Aid Act. Under the PPP re-opening, First Draw loans are authorized and certain existing PPP borrowers may apply for a Second Draw PPP Loan. A maximum loan amount of $2 million is available for eligible businesses that have used, or will use, the full amount of their first PPP loan (i.e., PPP First Draw loan).

In the press release, the SBA announced the following key updates to the program:

(1) PPP borrowers can set their PPP loan's covered period to be any length between 8 and 24 weeks to best meet their business needs;

(2) PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;

(3) PPP's eligibility is expanded to include Code Sec. 501(c)(6)s, housing cooperatives, and destination marketing organizations, among other types of organizations;

(4) the PPP provides greater flexibility for seasonal employees;

(5) certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and

(6) certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan.

A borrower is generally eligible for a Second Draw PPP Loan if the borrower:

(1) previously received a First Draw PPP Loan and will use, or has used, the full amount only for authorized uses;

(2) has no more than 300 employees; and

(3) can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020.

In addition to the press release, the SBA issued guidance on the re-opened program in Interim Final Rule SBA-2021-0001 and Interim Final Rule SBA-2021-0002.

Interim Final Rules

SBA-2021-0001, Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act, governs new PPP loans made under the Economic Aid Act, as well as applications for loan forgiveness on existing PPP loans where the loan forgiveness payment has not been remitted. In Interim Final Rule SBA-2021-0001, the SBA addresses the needs of new PPP borrowers by allowing all new borrowers to use 2019 or 2020 for purposes of calculating their maximum loan amount. Section 1102 of the CARES Act states that borrowers are to calculate their maximum loan amount by using "payroll costs incurred during the 1-year period before the date on which the loan is made ... ." For PPP loans made in 2020, most borrowers used 2019. The Economic Aid Act did not change this language for borrowers that are not farmers and ranchers and would require most new PPP borrowers who obtain a loan in 2021 to use 2020 as their base period.

Using authority granted by Section 1109 of the CARES Act, the SBA, in Interim Final Rule SBA-2021-0001, allows new borrowers to choose 2019 or 2020 as the base period, thereby ensuring that they are able to obtain funding on terms commensurate with existing PPP borrowers. Separately, Section 313 of the Economic Aid Act states that farmers and ranchers must calculate their maximum loan amount using 2019 as their base period. Interim Final Rule SBA-2021-0001 allows farmers and ranchers to elect either 2019 or 2020 as their base period, in order to ensure that they can obtain funding on terms commensurate with those available to other new PPP borrowers.

In Interim Final Rule SBA-2021-0002, the SBA describes the key differences between First Draw PPP Loans and Second Draw PPP Loans, and explains the loan terms, eligibility requirements, and application process for Second Draw PPP Loans. According to this Interim Final Rule, Second Draw PPP Loans are generally subject to the same terms, conditions and requirements as First Draw PPP Loans. These include, but are not limited to the following terms:

(1) The guarantee percentage is 100 percent.

(2) No collateral will be required.

(3) No personal guarantees will be required.

(4) The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis.

(5) The maturity is five years.

(6) All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower's eligibility and use of loan proceeds.

The Economic Aid Act provides that, to be eligible for a Second Draw PPP Loan, the borrower must have experienced a revenue reduction of 25 percent or greater in 2020 relative to 2019. A borrower must calculate this revenue reduction by comparing the borrower's quarterly gross receipts for one quarter in 2020 with the borrower's gross receipts for the corresponding quarter of 2019. For example, a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters, and is therefore eligible for a Second Draw PPP loan (assuming all other eligibility criteria are met). Interim Final Rule SBA-2021-0002 provides that a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline. This provision, the SBA said, will allow a borrower to provide annual tax return forms to substantiate its revenue reduction. The SBA said that this rule is necessary to improve administrability of Second Draw PPP Loans by providing borrowers an additional verifiable method for substantiating their revenue reduction.

Observation: This method will be particularly important for small borrowers that may not have quarterly revenue information readily available. Moreover, this approach is appropriate because, if annual filings show a 25 percent revenue reduction, then at least one quarter in 2020 would have had at least a 25 percent revenue reduction. A borrower that did not experience a 25 percent annual decline in revenues, or that was not in operation in all four quarters of 2019, may still meet the revenue reduction requirement under one of the quarterly measurements described above.

The Economic Aid Act does not include a general definition of gross receipts for purposes of determining a borrower's revenue reduction. Interim Final Rule SBA-2021-0002 defines gross receipts consistent with the definition of receipts in 13 C.F.R. 121.104 of SBA's size regulations because, the SBA said, this definition appropriately captures the type of income that is typically included in a small business's gross receipts. Moreover, this definition will enhance the administrability of Second Draw PPP Loans because it is a definition already used by the SBA and many small businesses.

Finally, Interim Final Rule SBA-2021-0002 specifies that any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower's gross receipts. Excluding the forgiveness amount from a borrower's gross receipts is consistent with Section 7A(i) of the Small Business Act, which expressly excludes PPP forgiveness amounts from being taxed as income. This clarification in the SBA guidance ensures the effectiveness of the second draw loan program by ensuring that a borrower is not disqualified from receiving a Second Draw PPP Loan because it received forgiveness on a First Draw PPP Loan.

For a discussion of the discharge of indebtedness and the Paycheck Protection Program, see Parker Tax ¶72,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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