On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, which revitalized the Paycheck Protection Program (PPP), an economic stimulus program that began under the CARES Act of 2020. The PPP is a loan program designed to provide a direct incentive for qualifying small businesses, including certain non-profits, to keep their workers on payroll. PPP borrowers are eligible for loan forgiveness if the funds are used for eligible qualifying costs.
Although this new round of the PPP is largely similar to the original program, there are some important changes. Most notably, given that this is the second round of the PPP, the new law makes a distinction between "First Draw" PPP loans for first-time program recipients (and some entities who previously applied for a loan but returned some or all of it) and "Second Draw" PPP loans for businesses who have previously received a PPP loan. Different rules apply to each.
First Draw Loans
The SBA's guidance explains that the First Draw PPP loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
Independent schools or other entities who initially obtained a PPP loan in the first round, but for whatever reason decided not to accept or to return the funds may still be eligible to apply for a First Draw PPP loan. The SBA specifically addresses this issue in its recent guidance:
Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020 may: (1) reapply for a First Draw PPP Loan if they previously returned some or all of their First Draw PPP Loan funds, or (2) under certain circumstances, request to modify their First Draw PPP Loan amount if they previously did not accept the full amount for which they are eligible.
As further explained in the SBA guidance, similar to the first round, the following entities affected by Coronavirus (COVID-19) may be eligible for a First Draw PPP loan:
- Sole proprietors, independent contractors, and self-employed persons
- Any small business concern that meets SBA's size standards (either the industry size standard or the alternative size standard)
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
- 500 employees, or
- That meets the SBA industry size standard if more than 500
- Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.
The SBA has indicated that First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained;
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds are spent on payroll costs.
Borrowers can apply for a First Draw PPP Loan until March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in PPP. The First Draw application can be found here.
Under the new legislation, the PPP now allows certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP loan with the same general loan terms as their First Draw PPP loan, but with more restricted eligibility criteria. A borrower is generally eligible for a Second Draw PPP loan if the borrower:
- Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
- Has no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
For most borrowers, the maximum loan amount of a Second Draw PPP loan is 2.5x its average monthly 2019 or 2020 payroll costs up to $2 million. The forgiveness terms that apply to a First Draw PPP loan apply to Second Draw loans.
Borrowers can apply for a Second Draw PPP loan until March 31, 2021. The Second Draw application can be found here.
Whether a First or Second Draw loan, any entity considering a second round PPP loan is strongly encouraged to carefully review the loan's terms and conditions, forgiveness requirements, and loan assurances before applying and/or accepting such loan. More information regarding both First Draw and Second Draw loans can be found here.
Finally, as was the case with the first round of PPP, borrowers will still be required to make certifications and assurances regarding economic uncertainty and compliance with certain federal non-discrimination laws. Independent schools in particular are reminded that in accepting PPP loans, they will be considered recipients of federal financial assistance, imposing obligations under a number of federal civil rights laws, including Title IX, Title VI, the Age Discrimination Act and likely, Section 504 of the Rehabilitation Act of 1973. Although all independent schools have existing non-discrimination statements, policies and practices to comply with existing state and federal non-discrimination laws, such documents and practices are not necessarily co-extensive or compliant with the specific regulatory requirements under these laws.
The above information represents a broad overview of the new features of the PPP.
Originally published January 21, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.