SBA Issues Guidance on the New PPP

In response to the passage of the Consolidated Appropriations Act, 2021 (CAA), the SBA on January 6, 2021, released an 82-page interim final rule (IFR) that consolidates the prior guidance applicable to PPP1 (i.e., the original PPP loan program that opened up on April 3, 2020 in response to the CARES Act).

This IFR appears to have been issued because the SBA intends for these consolidated rules to apply wholesale to PPP2. On the same day, the SBA also released a 42-page IFR discussing the additional rules applicable to PPP2. This IFR also explains the differences between these rules and the consolidated rules applicable to PPP1. Below is a summary of the second IFR that summarizes the rules applicable to PPP2.

Eligibility

• Only one loan per borrower, which can be issued through March 31, 2021.
• Businesses that are permanently closed may not received a PPP2 loan; those that are temporarily closed or suspended remain eligible.
• Borrowers under PPP1 are eligible for loans under PPP2 as long as they “have used or will use the full amount of the [PPP1] loan for authorized purposes on or before the expected date of disbursement of the PPP2 loan.” The “full” amount includes any upsizing of the PPP1 loan pursuant to the CAA.
• Entity Size: Borrower must have 300 or fewer employees (vs. 500 or fewer in PPP1).
  • The exception for hotels, restaurants, and franchisees (and others with a NAICS code beginning with 72) applies to PPP2 in the same manner as it did to PPP1. This exception now applies to news organizations for purposes of PPP2.
  • The alternative size standards (which would have allowed borrowers with more than 300 employees to qualify) will not apply to PPP2 (except for eligible news organizations and businesses with NAICS codes beginning with 72 – generally hotels and restaurants – with more than one physical location). This is a departure from the rules that applied to PPP1 and is consistent with the goal that PPP2 apply so smaller businesses.
  • The affiliation rules apply for purposes of this calculation.
• Reduction in Gross Receipts: Borrower must have experienced a 25% or greater revenue reduction during any quarter of 2020 relative to the same quarter in 2019.
  • The revenue reduction is based on gross receipts, which does not include the amount of any PPP1 loan that was forgiven.
    • For non-profits, this refers to the definition in Internal Revenue Code section 6033. For for-profit entities, this refers to SBA regulation 121.104 (generally following the entity’s accounting method and including total income, reduced by returns and allowances, but not net capital gain or loss). Both of these definitions are extremely broad and generally refer to top-line revenue, including cost of goods sold.
    • Gross receipts include the gross receipts of affiliates, and there are special rules for the inclusion of new affiliates and the removal of former affiliates.
  • Example: if gross receipts in Q2 2019 were $50K, and in Q2 2020 they were $30K, then the borrower experienced a 40% reduction and would be eligible for a PPP2 loan.
  • For administrative simplicity, there is also an annual revenue reduction test that compares gross receipts in all of 2020 in relation to all of 2019, but the borrower must submit copies of annual tax forms to substantiate the revenue decline. This test will greatly simplify the documentation process because tax returns are readily available to all borrowers.
  • There are special rules for calculating the reduction in gross receipts for entities that were not in business for all or part of 2019.
• Excluded Borrowers: The list of excluded entities remains unchanged, but there are several additional categories of excluded entities: (i) businesses primarily engaged in political activities or lobbying activities, (ii) businesses organized in China or Hong Kong, or those with other specified ties to China or Hong Kong (including having a resident of China on its Board of Directors), (iii) persons required to register under section 2 of the Foreign Agents Registration Act, (iv) persons that received shuttered venue operators grants under the CAA, (v) entities in which certain politicians or their spouses generally own, directly or indirectly, 20% or more of the vote or value of any class of equity of such entities, and (iv) certain publicly-traded companies registered on a national securities exchange.

Loan Amount

• Lesser of (i) 2.5 months of borrower’s average monthly payroll in 2020 or (ii) $2 million. Restaurants and hotels (and others with NAICS codes beginning with 72) can use 3.5 months of their average monthly payroll, but they are still limited to $2 million.
• Average monthly payroll is either (i) the 12-month period prior to when the loan is made or (ii) calendar year 2019 average monthly payroll if it used calendar year 2019 for its PPP1 loan and uses the same lender it used for PPP1 (in this case, no additional documentation will be required of the borrower and this will greatly simplify the application process).
  • Alternatively, borrowers can use calendar year 2020 instead of the 12-months prior to when the loan is made. This was intended to simplify the application process.
• Businesses that are part of a single corporate group cannot receive more than $4 million in PPP2 loans in the aggregate.
• Special rules are provided for (i) seasonal businesses, (ii) businesses that did not exist during part or all of 2019 but were in business on February 15, 2020, and (iii) farmers and ranchers.

Loan Terms

• Key terms of PPP2 loans are as follows: 1% non-compounding interest, 5-year term, no collateral or personal guarantees required, maximum loan of $2 million, and the loans will processed through private lenders just like PPP1.
• Lenders can rely on borrower certifications regarding eligibility and use of loan proceeds.

Application Process

• For loans greater than $150,000, borrower must submit documentation to establish that it experienced a revenue reduction of 25% or greater in 2020 relative to 2019. This may include quarterly or annual tax forms, or quarterly financial statements or bank statements.
  • Lender must conduct a good faith review of borrower’s calculations and supporting documents concerning the revenue reduction.
• For loans of $150,000 or less, such documentation is not required to be submitted to the lender at the time of application, but must be submitted on or before the borrower applies for loan forgiveness.