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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.
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:
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.
The act creates a new second draw PPP loan for borrowers that previously received a PPP loan. Major aspects of the new program include:
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.
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 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.
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.
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.
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.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Finance > Trends & Insights > First Analysis > Articles
For an overview of practical guidance on COVID-19, see
Coronavirus (COVID-19) Resource Kit: Finance
Research Path: Finance > Trends & Insights > First Analysis > Practice Notes
For an overview of provisions in credit agreements that could need review in light of the coronavirus crisis, see
Market Trends 2020: COVID-19 Ramifications in Loan Documents
Research Path: Finance > Trends & Insights > Market Trends > Practice Notes
For an analysis of the Paycheck Protection Program (PPP) Act, see
CARES Act: Congress Passes the Paycheck Protection Flexibility Act
Research Path: Finance > Trends & Insights > First Analysis > Articles
For a discussion of the PPP Act’s questionnaire requirement, see
Questionnaire Requirement Imposed on PPP Borrowers: Client Alert Digest
For an overview of the interim final rules on PPP loan forgiveness, see
Interim Final Rules on PPP Loan Forgiveness and Review Procedures Released
For a discussion of the PPP, see
First Analysis: CARES Act Paycheck Protection Program Summary