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Third Wave of Paycheck Protection Program Loans


More financial relief may finally be within reach for organizations suffering from the economic impact of the COVID-19 pandemic. The Consolidated Appropriations Act (CAA) of 2021, signed into law December 27, 2020, created a third round of funding for the Paycheck Protection Program (PPP). With $284 billion made available, the newly secured funds come with relaxed guidelines that make it easier for smaller businesses and previously excluded individuals to obtain a PPP loan. In addition, organizations that received funding in the first or second round of the PPP may now be eligible to secure a follow-up loan.

In the following, we explain the updated PPP loan terms and conditions and how to fast-track potential loan forgiveness.

Third wave of Paycheck Protection Program relief

After the second wave of PPP loans ran dry in August of 2020, Congress moved to fund the popular relief program for a third, and potentially final, time. Within the larger CAA bill, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) earmarked up to $284 billion for PPP loans available through March 31, 2021. Several categories of loans were created to provide:

  1. A second PPP loan for small businesses that already used their first PPP loan (“Second Draw Loan”)
  2. A first PPP loan for small businesses that did not receive a 2020 loan (“First Draw Loan”)
  3. An increase to the amount of 2020 PPP loans to account for expanded qualifying expenses and conditions (“increased Draw of 2020 PPP Loans”)

Taking a look a Second Draw PP Loans

Perhaps the most anticipated change to the PPP loan system is the newly implemented option of attaining a second loan after having secured a first PPP loan.

To qualify for a Second Draw PPP Loan, an eligible entity is defined as any small business that has 300 or fewer employees and can demonstrate a 25% or greater decline in gross receipts for any one quarter in 2020 – compared to the corresponding quarter in 2019. The Act also requires that small business applicants have used, or will use, all of their 2020 PPP loan funds by the loan funding date.

To receive a loan that exceeds $150,000, the applicant must submit documentation that substantiates the 25% revenue reduction. For loans that do not exceed $150,000, documentation is not required for the application, however the borrower must submit documentation to receive forgiveness of the loan.

Second Draw PPP Loan Eligible Entities: In addition to those included in the 2020 PPP loans, eligible entities have been expanded to include housing cooperatives; certain nonprofit 501(c)(6) business organizations; certain news and broadcasting organizations; and destination marketing organizations. The Act also specifically excludes publicly traded entities and their affiliates; debtors in bankruptcy proceedings; entities engaged in political or lobbying activities; companies organized in China or that have a director that is a resident of China; any participant in the Shuttered Venue Operator Grant Program; and any business that was not in operation on February 15, 2020.

Second Draw PPP Maximum Loan: The maximum amount of the Second Draw PPP Loan is the lesser of a) $2 million ($4 million for an affiliated group) or b) 250% of the average payroll costs incurred or paid for either calendar 2019 or the one-year period before the date on which the Second Draw PPP loan is made. For NAICS 72 businesses, including restaurants, hotels, bars and other hospitality businesses, the percentage of average monthly payroll costs is increased to 350%.
Use of Second Draw PPP Loan Proceeds: In addition to the permitted uses outlined in the 2020 PPP program, the Act expands the types of expenditures that qualify for the loan and for loan forgiveness. Additionally, the percentage of proceeds that apply to non-payroll expenditures is increased from 30 to 40%. The covered expenses include:

Operating Expenditures - Payment for any business software or cloud computing service that facilitates business operations; product or service delivery; processing of payments or tracking of payroll expenses, human resources, sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses.

Property Damage Costs - Property damage costs that are related to property damage and vandalism or looting due to pubic disturbances that occurred in 2020 and was not covered by insurance or other compensation.

Supplier Costs - Covered supplier costs are expenditures for the supply of goods that (a) are essential to the operations of the PPP borrower at the time at which the expenditure is made and (b) are made pursuant to a contract, order or purchase order:
o (i) in effect at any time before the covered period with respect to the applicable covered loan or;
o (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.

Worker Protection Expenditures - Covered worker protection expenditures are any operating or capital expenditures to facilitate the adaptation of the business activities of a PPP borrower to comply with federal, state or local requirements established or guidance issued during the period beginning on March 1, 2020, and ending the date on which the national emergency declared by the President expires. This includes costs related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Additional included Payroll Costs - In addition to the allowable payroll costs in the 2020 PPP, the definition of includable payroll costs was expanded to include payments for group life, disability, vision and dental insurance benefits.

Second Draw PPP Loan Forgiveness. A borrower is eligible for forgiveness of a Second Draw PPP Loan in an amount equal to the sum of the following listed costs incurred and payments made during the covered period. The covered period is an 8- to 24-week period selected by the PPP borrower at the beginning of the loan period. Forgivable expenditures include:
a. payroll costs,
b. payments of interest on any covered mortgage obligation (but not any prepayment of or payment of principal on a covered mortgage obligation),
c. payments on any covered rent obligation,
d. covered utility payments,
e. covered operations expenditures,
f. covered property damage costs,
g. covered supplier costs, and
h. covered worker protection expenditures.

For loan forgiveness, payroll costs must comprise at least 60% of the forgiveness amount requested. This is a reduction from the 70% required for the original Cares Act.

Revised conditions for First Draw PPP Loans

First Draw PPP Loans are available to any small business that did not apply for or receive a 2020 PPP loan in the first round. Entities are eligible for a First Draw PPP loan if the business:
• Has less than 500 employees, and
• Is either a business concern, veterans’ organization, nonprofit, sole proprietor, self-employed individual, or independent contractor, and
• The SBA is still requiring businesses applying for loans over $2 million to meet the "necessity test." That requirement means borrowers have to certify that the PPP loan is necessary to support their business’s ongoing operations. It can be a tricky requirement to meet, so make sure to talk to your financial and legal advisors.

Certain modifications in the Act apply retroactively to the 2020 PPP loans. This should be taken into consideration for a Second Draw PPP Loan, the 2020 PPP loan forgiveness application, and potentially 2020 tax returns. These items include retroactive application of:
• The covered costs as expanded in the Act and noted in the Second Draw PPP Loan, above.
• The requirement for the payroll component is reduced to 60% of the forgiveness amount, reduced from 70%.

Increased draw of 2020 PPP Loans

Since many of the provisions of the Act pertaining to PPP Loans were given retroactive to March 27, 2020, the date on which the PPP was established by the CARES Act. 2020 PPP loan recipients may be able to request an increase to their 2020 PPP Loan amount in certain circumstances if and, only if, the SBA did not issue a loan forgiveness determination on or before December 26, 2020. These circumstances include (a) partnerships and limited liability companies taxed as partnerships that did not include any amount for partner compensation, and (b) seasonal employers whose calculation of their maximum loan amount increased based on the changes made by the Economic Aid Act.

In addition:
(a) a 2020 PPP Loan recipient that returned all of its 2020 PPP Loan may apply for a First Draw PPP Loan;
(b) a 2020 PPP Loan recipient that returned part of its loan may reapply for a loan amount equal to the difference between the loan amount retained and the loan amount previously approved; and;
(c) a 2020 PPP Loan recipient that did not accept the full amount of the loan for which it was approved may request an increase in the 2020 PPP Loan amount up to the amount previously approved.

PPP Loan forgiveness

The process of applying for forgiveness for a loan over $150,000 remains the same. However, a shortcut to forgiveness for businesses that receive a loan equal or less than $150,000 has been implemented. The loan will be forgiven if its representative signs and submits to its lender a certification that is less than one page in length that lists:
(a) the number of employees the recipient was able to retain because of the covered loan;
(b) the estimated amount of the covered loan amount spent on payroll; and
(c) the total loan value.

Final thoughts

The PPP loan system has been a much-needed source of financial relief for organizations hit hard by the COVID-19 pandemic. With the third round of PPP loans now live, there are no guarantees that there will be any more rounds funded in the future. In addition, Employee Retention Credits (ERC) may be available to companies that meet the eligibility requirements, retroactive to March 13, 2020.

To make sure you get the loan amounts you are due, maximize the potential for forgiveness, and consider whether you qualify for ERC, it is recommended you consult with MGO’s dedicated accounting specialists.

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