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The "New and Improved" Paycheck Protection Program

February 25, 2021 (20 min read)

By: Steven J. Dickinson, Robert K. Magovern, and James F. Van Orden, Cozen O’Connor

The omnibus budget act signed by President Trump on December 27 reinstituted the Paycheck Protection Program (PPP), with significant changes. The act allows new borrowers to receive PPP loans and some existing borrowers to receive additional PPP funding. It also restores the tax deduction for expenses paid with PPP loan proceeds, makes a number of changes in PPP and other Small Business Administration (SBA) programs, and creates a new grant program for performance venues and businesses.

The new act extends the effectiveness of the original Paycheck Protection Program (now referred to as the first draw) creates a new program (the second draw) for some previous PPP borrowers, and permits some original PPP borrowers to receive an addition to their original PPP loans. SBA announced that first draw loan applications will be accepted starting January 11 and second draw applications begin January 13. For at least the first two days of each period, SBA will only accept applications from community financial institutions. SBA has also issued new interim final rules governing first and second draw loans. This article summarizes the act together with the implementing rules.

First Draw Loan

The first draw program is an extension of the original PPP and follows the original PPP unless otherwise changed. Thus, in many respects, it will be familiar to practitioners in this area. Here are some of the major changes in the new program:

  • PPP is extended through March 31, 2021.
  • Maximum loan amount is unchanged—2.5 times average monthly payroll costs, up to $10 million. The SBA’s rule incorporates the Economic Aid Act change in the definition of payroll costs by adding group life, vision, disability, and dental insurance costs. In the original program, SBA allowed a borrower to calculate payroll based on either calendar year 2019 or the 12 months prior to the loan applications. This is continued, with the addition of calendar year 2020 as a third alternative. There was some concern that the SBA might not allow use of 2019 payroll, but the rule says that will continue in order to place first draw participants on the same footing as borrowers in the original program. It is important to note that a borrower must use the same period for calculating both number of employees (for eligibility purposes) and payroll costs (for loan amount purposes). As in the previous rules, the new rule gives step-by-step guidance on how to calculate loan size for different types of borrowers.
  • The SBA’s rule continues its previous policy (not required by the statute) that a corporate group may not receive an aggregate of more than $20 million of PPP loans, even if otherwise eligible (for example, because of the waiver of the affiliation rules or the ability to calculate loan amounts on a per-location basis). The rule does not indicate whether second draw loans count against the $20 million cap. However, the rule refers to the $20 million group cap together with the $10 million individual loan cap, and the second draw rule creates a separate corporate group cap for second draw loans (see below), so unless the SBA issues future guidance suggesting otherwise, it seems reasonable to conclude that second draw loans do not count against the $20 million cap.
  • The SBA is to establish an expedited loan application process for loans up to $150,000. This is supposed to be a one-page form.
  • Categories of eligible borrowers are expanded to include housing cooperatives with no more than 300 employees, certain television stations and newspapers, certain 501(c)(6) organizations (e.g., chambers of commerce), and destination marketing organizations. The SBA’s rule specifies that eligible entities include those designated in the original program, and the rule confirms that SBA’s alternative size test, which considers net worth and revenues rather than number of employees, still applies in determining whether an entity is a small business concern. In addition, the rule clarifies the new eligible categories of housing cooperatives, 501(c)(6) organizations, destination marketing organizations, and media organizations. The rule also confirms that the SBA’s affiliation rules continue to apply in calculating the number of employees in meeting the size standard (e.g., 500 or 300).
  • Two specific ineligible categories are also established—(i) publicly traded companies and (ii) businesses or organizations not in operation on February 15, 2020. The SBA’s rule continues to apply its previous guidance on ineligible businesses, and adds new ineligible categories from the Economic Aid Act, including publicly traded companies and businesses controlled, either directly or indirectly, by the president, vice president, head of executive departments, and members of Congress (or their spouses). The rule also continues the SBA’s previous guidance that private equity portfolio companies are not automatically ineligible, although they are subject to the affiliation rules in calculating size and must be able to make the necessity certification. Businesses that are permanently closed are ineligible, but temporarily closed businesses may still apply.
  • The act authorizes the SBA to permit small business debtors in bankruptcy proceedings (i.e., debtors with less than $7.5 million in debt) to receive PPP loans, if they otherwise qualify. The loan would receive priority as an administrative expense. However, the new rule continues the SBA’s previous position that debtors in bankruptcy proceedings are not eligible.
  • Eligible costs (for which PPP money can be spent) in the original program—payroll, rent, utilities, and interest on secured debt—continue in the first draw program. The act clarifies that payroll costs include group insurance for life, disability, vision and dental, in addition to health.
  • New categories of eligible costs have been added: covered operations expenditures (software or cloud computing services), covered property damage costs (uninsured damage caused by 2020 disturbances), covered supplier costs (expenditures to suppliers under contracts entered into prior to the date of the loan that are essential to operations), and covered worker protection expenditures (PPP and adaptive investments to comply with health and safety requirements or guidelines). The new categories fall within the 40 percent portion for non-payroll costs.
  • Lobbying activities are specifically prohibited as a use of PPP proceeds.
  • A borrower may elect a covered period of any length between eight and 24 weeks. Previous SBA guidance had suggested a borrower could shorten the covered period if proceeds had been spent, but not all lenders allowed this.
  • Forgiveness and repayment provisions remain the same, except that previous December 31, 2020, deadlines have been appropriately extended. For example, the rehire safe harbor has been extended for new loans until the end of the covered period.
  • For loans up to $150,000, a streamlined forgiveness application and documentation process is to be established, with an application no more than one page long and no requirement to submit supporting documentation. Borrowers will still be subject to document retention and audit requirements.

These changes are not retroactive to loans already forgiven even if a borrower would, for example, no longer be eligible under the new first draw PPP provisions or would be in a position to obtain a greater amount of forgiveness under those provisions.

An entity that has submitted an application for forgiveness that has not yet been granted by the SBA and for which these changes may be beneficial, may wish to speak with its lender about amending its forgiveness application prior to any grant of forgiveness by the SBA.

Second Draw Loans

The act creates a new second draw PPP loan for borrowers that previously received a PPP loan. Major aspects of the new program include:

  • Except as specifically provided, second draw loans are to be made under the same terms, conditions, and processes as under the first draw program.
  • A second draw borrower must have received a first draw loan and must have used prior to disbursement of the second draw loan all of the first draw loan. This includes the amount of any increase received on a first draw loan (as discussed in Part III). In addition, the SBA’s rule adds a requirement not in the Economic Aid Act—the first draw loan must have been used only for eligible purposes. An entity may only receive one second draw loan.
  • Eligibility is limited to business concerns, nonprofit organizations, housing cooperatives, veterans organizations, Tribal business concerns, eligible self-employed individuals, sole proprietors, independent contractors and small agricultural cooperatives (all as defined for first draw purposes) that meet two additional criteria—(i) employ not more than 300 employees and (ii) had gross receipts in the first, second, or third quarter or 2020 that are at least 25% less than the same quarter in 2019. For applications submitted on or after January 1, 2021, the revenue reduction may also be shown for the fourth quarter of 2020 compared to the fourth quarter of 2019. There are alternative calculation methods for businesses not in operation in 2019 and for seasonal businesses and a simplified process for demonstrating revenue loss for loans up to $150,000. For convenience, the SBA’s rules also allow a borrower that was in operation for all four quarters of 2019 to demonstrate through its tax returns that its gross receipts for all of 2020 were at least 25% less than for all of 2019.
  • The Economic Aid Act does not define gross receipts, so the SBA’s rule defines the term consistent with the SBA’s standard size regulations—all revenue of any form received by the borrower, including sales, interest, dividends, royalties, fees, or commissions, reduced by returns and allowances. The rule says this is generally total income plus cost of goods sold, but excluding capital gain or loss. However, the rule specifically excludes several items from gross revenues—taxes collected and to be remitted to a tax authority (e.g., sales tax paid by customers), proceeds of transactions between the borrower and its affiliates, and amounts collected for another by a travel agent, real estate agent, conference management service provider, freight forwarder or customs broker. All other items, including subcontractor costs, reimbursements for purchases made at a customer’s request, investment income and employee-based costs such as payroll taxes, are included in gross receipts. Any forgiveness amount of a first draw loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.
  • Unlike the first draw loan, second draw eligibility does not also include businesses that otherwise qualify as a small business concern under the SBA’s size standard regulations, such as under the alternative size test based on net worth and revenue rather than number of employees. Presumably, this is because the Economic Aid Act regulates the size of a second draw borrower through the 300-employee limit. Since small business concerns are not included in the second draw law, borrowers that qualified as a small business concern under the SBA’s regulations, but do not meet the new 300-employee limit, do not appear to be eligible for a second draw loan, although the rule does not address this directly. SBA affiliation rules apply in calculating the number of employees, except as provided in the Act for borrowers in NAICS code 72 (hospitality), for-profit broadcasters that employ no more than 300 persons per location, and nonprofit broadcasters.
  • However, none of the following may be an eligible entity: (i) certain entities not eligible for SBA loans under existing SBA rules (financial businesses, passive businesses, illegal businesses, and the like), (ii) businesses primarily engaged in lobbying or political activities, specifically including think tanks, (iii) entities owned 20 percent or more by businesses organized under the law of the Peoples Republic of China (PRC) or that have significant operations in the PRC, (iv) entities having a PRC resident as a director, (v) any person required to be registered under the Foreign Agents Registration Act, or (vi) a person receiving a grant under the program for shuttered venue operators created under the act.
  • In general, the maximum loan amount is the lesser of (i) 2.5 times average total monthly payroll costs during either the year before the loan application or calendar year 2019, at the borrower’s option, or (ii) $2 million. There are alternate calculation methods for seasonal employers and new employers. For entities with a NAICS code beginning with 72 (restaurants, hotels, and other hospitality businesses), the multiplier is 3.5.
  • For NAICS code 72 businesses with more than one location, there is a rule similar to first draw PPP loans. The borrower is eligible for a loan if each location meets the eligibility criteria—300 employees and a 25% revenue decrease.
  • The waiver of the affiliation rule used in first draw loans (NAICS code 72, SBA-registered franchises and businesses receiving SBIC assistance) also applies to second draw loans, but instead of 500 employees the limit is 300.
  • Businesses that are part of a single corporate group are limited to an aggregate of $4 million of second draw loans. This is not required by the Economic Aid Act, but is a procedure adopted by SBA.
  • Second draw loans will be eligible for forgiveness on the same basis as first draw loans, except there will be a simplified forgiveness application and documentation process for loans of $150,000 or less.

Additional Loans

The general rule is that a borrower may only receive one first draw loan. However, the act instructs SBA to issue rules within 17 days of the effective date that allow a recipient of a first draw loan that is not yet forgiven to seek an additional loan in three cases. First, a borrower that returned all or part of its first draw loan may apply for a new loan equal to the difference between the amount they actually received and the maximum amount applicable. Second, a borrower that did not accept the full amount to which they were entitled may request a modification of the loan to receive the maximum amount applicable. Last, certain partnerships and seasonal employers may be eligible for increases in their original loans due to changes in SBA guidance.

Changes Applicable to Existing Loans

Several of the changes in first draw loans are applicable not only to new loans but also to existing loans that have not yet been forgiven. As a result, current borrowers may wish to alter their spending or wait to apply for forgiveness until these provisions are fully implemented.

The Economic Aid Act allows recipients of original PPP loans to receive additional funding in two main instances, as part of the first draw program. First, borrowers that received a loan and then returned it in whole or in part or were approved for a loan but did not accept it may now receive a loan in the amount that was originally approved. Second, because of changes in SBA guidance that increased the maximum loan amount for partnerships and seasonal employers, such employers that received a smaller loan than was available under the amended guidance may now apply for an additional to the original loan. The first draw loan rule confirms that such loans or increases in loans are available, but states that additional guidance will be provided on the process to reapply or request a loan increase in these cases.

The retroactive provisions (previously summarized) include the following:

  • The new categories of permissible costs—covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
  • The inclusion of group life, disability, and vision and dental insurance as a payroll cost.
  • The streamlined forgiveness application and documentation process for loans up to $150,000.
  • Elimination of eligibility for borrowers not in operation on February 15, 2020.

PPP and the Employee Retention Tax Credit

The CARES Act created an employee retention credit (ERC), a refundable tax credit available to taxpayers that either had their business fully or partially suspended during at least one quarter of 2020 or had a significant drop in gross receipts for quarters in 2020 relative to the same quarter in 2019. Eligible businesses may claim a maximum credit of $5,000 per employee who is paid qualified wages. The appropriations act extends ERC from January 1, 2021, to July 1, 2021.

The CARES Act prohibited a PPP borrower from receiving the ERC. Because ERC applies to a single employer on an aggregated basis, in general a taxpayer could not use a PPP loan for one company and still have that company or any other member of the corporate group be eligible for ERC. This provision is repealed by the appropriations act, so now even the same party may receive a PPP loan and take the ERC.

To prevent double dipping, a taxpayer may not receive the ERC for payroll costs that are paid for with a PPP loan, to the extent the loan is forgiven. However, a taxpayer is permitted to elect not to include certain payroll costs in the computation of the ERC, which allows them to be funded by a PPP loan. The act also requires the SBA to adopt rules so that a borrower whose PPP loan is not fully forgiven may elect for the unforgiven portion of payroll costs to be eligible for ERC.

As a result of these changes, a PPP borrower may now have payroll costs paid from PPP proceeds to the extent required to receive full forgiveness of a loan and then to take ERC with respect to the excess payroll costs. These changes are effective as of the original effective date of the CARES Act.

Tax Treatment of Expenses Paid with PPP Proceeds

The IRS issued guidance that expenses paid with PPP loan proceeds may not be deducted on the borrower’s federal income tax return if the borrower reasonably expects to receive forgiveness of the loan, even if forgiveness has not been received or even applied for. The premise for this position is to prevent double dipping because the forgiveness of the PPP loan is not taxable as cancellation of debt. This position had been widely criticized as taking away much of the economic benefit to a borrower intended by the program. The act remedies this situation by specifically mandating that no deduction shall be denied, no tax attribute shall be decreased, and no basis increase shall be denied because the forgiveness of a PPP loan is not subject to tax as cancellation of debt. As a result, the IRS has now rescinded its previous guidance.

Necessity and Audits of PPP Loans

In November, the SBA began using new Forms 3509 and 3510 to require certain borrowers to provide additional information concerning the necessity for their PPP loan. There has been considerable controversy surrounding the question of necessity and the use of the new forms. Some hoped that Congress would modify the necessity requirement or the SBA forms in the stimulus act, but it did not. A necessity certification continues to be required for new PPP loans of all types. In fact, for the new second draw program, Congress waived two of the certifications required in the previous PPP loan application, but not the necessity certification.

The House Select Subcommittee on the Coronavirus Crisis has identified what it believes is more than $4 billion in questionable PPP loans. The SBA fraud hotline has received thousands of complaints, and the U.S. Department of Justice has filed criminal charges against more than 80 individuals for suspected fraud in CARES Act relief programs. As a response to concerns about fraud and waste in PPP, the act requires the SBA to submit to the House and Senate small business committees within 45 days of the effective date an audit plan with regard to forgiveness of loans over $150,000, and to provide updates on that plan every 30 days. The audit plan is to include policies and procedures for conducting forgiveness reviews and audits and the metrics the SBA will use to determine which loans will be audited. The act also appropriates $50 million for PPP audits and fraud mitigation efforts.

It appears borrowers will need to respond to Form 3509 or 3510 when received, unless the new administration changes policy or the pending litigation challenging the forms is successful.

Other Provisions

The act establishes a Shuttered Venue Operator Grant program to provide financial assistance to live venue operators or promoters, theatrical producers, live performing arts organizations, museum operators, motion picture theatre operators, and talent representatives that meet certain requirements. Fifteen billion dollars is appropriated for the program.

The act continues the payment of principal and interest on certain qualifying SBA loans existing prior to the CARES Act. Borrowers receive an additional three months of full payments, starting in February 2021. Thereafter, the payments will be capped at $9,000 per month. Certain borrowers are eligible for more favorable treatment.

The SBA’s regular 7(a) loan and Express Loan programs continue to operate. The act increases the 7(a) guarantee percentage to 90 percent and increases the amount and guarantee percentage for Express Loans. Changes are also made in SBA’s 504 loan program for fixed assets, microloan program, and Economic Impact Disaster Loan (EIDL) program. The act repeals the CARES Act section requiring the amount of an EIDL advance (up to $10,000) to be deducted from a PPP borrower’s loan forgiveness amount. The EIDL changes are expected to increase the availability and usability of that program. PPP borrowers may also receive an EIDL loan. Companies may wish to take another look at EIDL as a funding source.


The unused money from the original PPP is returned to the Treasury, and a new appropriation of $284.45 billion is made for PPP and related programs. Of this, $131.72 billion is set aside for various purposes, including PPP loans for first-time borrowers, small borrowers, or small loans in low-income areas. After 25 days, the SBA may adjust these set-asides. The total unrestricted appropriation for PPP (both first and second draw) is $152.73 billion.

Steve Dickinson is a partner in the Corporate and International practices of Cozen O’Connor and represents companies in a full range of domestic and international business matters. He is a leader of Cozen O’Connor’s Paycheck Protection Program (PPP) team and has advised dozens of companies on PPP-related issues. He has also spoken and written extensively on the PPP, including more than a dozen client alerts, webinars for national industry groups, and interviews with The Wall Street Journal, Independent Retailer, and Glossy.

James Van Orden is a partner at Cozen O’Connor who focuses his practice on environmental and energy law. In addition, he draws on his 11 years of prior government service to advise clients on a variety of general regulatory and strategic matters. He has helped to spearhead Cozen O’Connor’s PPP team and has advised dozens of companies on PPP-related issues.

Robert Magovern is a partner in the Transportation and Trade practice of Cozen O’Connor. With an emphasis on Government Contracts, International Trade and Antitrust, he counsels U.S. and foreign companies and trade associations on a variety of domestic and international trade regulation issues. His Government Contracts work includes issues related to the formation of small businesses, applications to and issues arising under all Small Business Administration (SBA) programs, including 8(a) Business Development, teaming agreements and joint ventures, affiliation issues, size challenges, and bid protests. He has also helped to spearhead Cozen O’Connor’s PPP team and has advised dozens of companies on PPP-related issues.

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