January 14, 2021
Originally published in the Connecticut Law Tribune on January 14, 2021
A second round of COVID-19 based stimulus loans is finally here and not a moment too soon. President Trump ended 2020 by signing into law the Consolidated Appropriations Act of 2021 (the “Act”), which incorporated all the key provisions contained in the prior COVID-19 relief bill which was first introduced into Congress back in October. The Act was passed by both houses of Congress on December 21st and signed into law by President Trump on December 27th.
As many will recall, President Trump did threaten to block the bill’s passage, having tweeted out a four-minute video opposing the Act because it was full of “non-essential” spending and for failing to go far enough in providing aid to “hard working Americans” impacted by COVID-19. In his video the President told Congress to amend the bill to remove “the wasteful and unnecessary items from the legislation” and to significantly increase the size of the stimulus checks to be distributed to millions of Americans from the currently proposed $600 per individual ($1,200 per couple) to $2,000 per individual ($4,000 per couple). The President called the proposed amounts “ridiculously low.”
President Trump’s eleventh hour rebuke of the Act caused the collective economy to press pause on what many had hoped would be significant economic relief for millions of Americans. However, after a few days of delay the President ultimately signed the bill unchanged.
So what really happened?
Congress, instead of offering a standalone bill to combat the economic fallout of the COVID-19 pandemic, bundled its highly anticipated COVID-19 economic relief package into its proposed 2021 federal budget. This move gave the President an easy avenue to protest many items contained in the proposed budget. It also gave him a ready platform to claim the relief bill was unacceptably low. Since the components of the COVID-19 aid package and budget were tied together in the one bill, neither could pass on its own. The bill has since passed and many of the bill’s benefits are starting to be rolled out, including the much anticipated second round of PPP loans. Yesterday, the SBA opened the application portal for businesses to apply for their second PPP loan. You can download a copy of the application at sba.gov.
The following is what Americans can expect from the Act in COVID-19 economic relief and more specifically from a second round of loans/grants to be administered under the Paycheck Protection Program (the “PPP”). The Act includes a sweeping stimulus package that consists of over $900 billion in federal aid to help combat the economic fall out of the COVID-19 pandemic. The Act is designed to help aid millions of Americans with much needed economic support through $600 stimulus checks for many Americans ($1,200 per couple and an additional $600 per child), enhanced unemployment benefits (an extra $300 per week through March 14, 2021), and an additional $285 billion to fund the long awaited second round of forgivable PPP loans. The Act also clarifies and amends several provisions of the initial PPP. In total, the 5,600-page Act covers much, much more, but today we will focus on the second round of PPP loans.
A Second Bite at the Apple
The Act allows an “eligible entity” to take out a second PPP loan or first loan for certain borrowers which may not have participated in the first round of PPP lending. The amount of the loans for most borrowers will be unchanged from their initial PPP loan; however, the cap on a second PPP loan will be $2,000,000 instead of the previous cap of $10,000,000. For most borrowers, the total permitted loan amount is still 2.5 months’ of payroll costs, but there is a provision which allows hotels and restaurants to borrow an amount equal to 3.5 months. For many businesses the payroll period that will be the basis for the loan will be that business’s average payroll during 2019.
In order to qualify for a new PPP loan an “eligible entity” must pass a necessity test. For those hardest hit by COVID-19, this will be a relatively easy standard to meet. For those who survived but were less prosperous than before COVID, the standard could be more difficult. It is worth mentioning that the original PPP program never defined this standard for loans below $2 million. The SBA simply presumed anyone borrowing at or below a $2 million threshold met the standard. Since these new loans are only for a maximum of $2 million, maybe that means necessity is presumed for all borrower. Let’s hope this is how the SBA sees it.
For potential borrowers who pass the necessity test, the next hurdle is whether they are considered an “eligible entity.” With few exceptions, to be considered an “eligible entity” your business must:
- Have experienced at least a 25% reduction in gross receipts for any one calendar quarter in 2020 as compared to the same quarter of 2019 (the “25% rule”);
- Employ no more than 300 employees (unless they meet an enumerated exception) (the prior standard was 500 employees); and have used all of the funds from its prior PPP loan.
For the purpose of the “25% rule,” gross receipts will not include any monies received from a prior PPP loan. The “25 rule” is a welcome sight for many small businesses as prior bills had proposed a much steeper threshold of a 50% reduction in gross receipts.
The Act allows for certain adjustments to be made to the “25% rule” look back period should a business not have been a going concern for the entire period. The Act also has special limitations for the maximum amount eligible to be borrowed for new and seasonal businesses and other adjustments for employers with more than one physical location.
The Act also clarifies that there will be no enforcement action against lenders for their reliance on borrowers representations and sets rates for servicing fees which lenders can get reimbursed from the SBA.
Assuming a borrower satisfies the loan parameters outlined above, like the first PPP loans, the business must ensure that the loan proceeds are spent on approved items to be eligible for forgiveness. Also like the original PPP program, to be completely forgiven, at least 60% of the loan proceeds must be used for payroll and approved associated expenses.
Other key stimulus provisions contained in the Act
- Streamlined loan forgiveness process for loans under $150,000. Eligible entities seeking a second loan, which received less than $150,000 under their first PPP loan, will be able to use a streamlined one-page application for forgiveness.
- Business expenses leading to forgiveness of a borrower’s first PPP loan will be tax deductible.
- Prior EIDL grants of up to $10,000 ($1,000 per employee) are forgivable.
- Additional EIDL funds will be available.
- $25 billion in PPP dollars will be reserved for businesses with 10 or fewer employees as of February 15, 2020.
- Expanded Eligibility for certain 501(c)(6) Organizations. A 501(c)(6) is defined as follows: Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
- Borrowers can choose the time period to use loan proceeds. Borrowers can choose between 8 weeks and up to 24 weeks to spend loan on qualified expenses.
This last point above, relating to individualized selection of covered period, will be of significance for many borrowers as it will allow them to end the covered period before making any workforce reductions that may otherwise impact the borrower’s ability to have the loan forgiven.
Conclusion
The COVID-19 economic stimulus provisions contained in the Act will provide much needed relief to those hit hardest by COVID-19. Many believe these measures are just the first step in a more comprehensive COVID-19 relief package to be implemented in the New Year under the Biden Administration. Only time will tell.
No reader of this article should act or refrain from acting on the basis of information contained in this article without first seeking legal advice from counsel in the relevant jurisdiction. The subject matter contained herein is very technical. It is also an evolving area of law and very fact specific. Our goal here is to simply alert you to some of the key issues involved. We urge you to seek competent legal counsel before applying these ideas to your specific situation.
