More paycheck protection is here, but mind your PPPs and Qs
If your business wants to pursue another, or perhaps your first, Paycheck Protection Program loan to help make it through the next several months of the COVID-19 pandemic, make sure you’re not slow on the draw because there are some differences between the 2021 program and earlier rounds of PPP.
Most local community banks began facilitating the loan application process on Jan. 19. The $285 billion allocated for small businesses as part of the 2021 PPP loan program is segmented into first-draw borrowers, or those who are seeking a PPP loan for the first time, and second-draw options, which are for businesses that previously received a loan.
For the latest on what local employers need to know, we spoke to Kevin Piette, chief operating officer and chief information officer for State Bank of Cross Plains, and Josh Marron, senior vice president and chief banking officer for Park Bank. As more federal guidance became available, they received a last-minute assist from Gordon Meicher, founding partner of Meicher CPAs.
The nuts and bolts
Under the 2021 program, first-time qualified borrowers are defined as businesses with 500 or fewer employees that are eligible for other U.S. Small Business Administration 7(a) loans; sole proprietorships, independent contractors, and eligible self-employed people; and nonprofits, including places of worship.
Companies that previously received a PPP loan, or those that have a “second-draw” option, include businesses with 300 or fewer employees that have used or will use the full amount of their first PPP loan in accordance with program requirements and are able to show 25% gross revenue decline in any 2020 quarter compared with the same quarter of 2019.
“The difference now is that borrowers who applied the first-round funds, received those funds, and used them the way they were supposed to, they can now apply for a second round of funding,” Marron notes. “A couple of other differences include the expanded eligibility. In the previous round, there were some nonprofits that were not eligible, so 501(c)(6) organizations and business associations are able to apply in this round.”
There are also eligible expenses, as PPP loan funds must be spent on at least 60% of a borrower’s payroll expenses, with the remaining 40% eligible for expenses such as rent, covered mortgage interest, and utilities. Under the 2021 program, other eligible expenses will require more investigation, as the following expenses also may be forgivable, according to Park Bank:
- Operating costs such as software, cloud computing, human resources, and accounting needs;
- Property damage costs attributable to public disturbances that occurred in 2020 and that are not covered by the borrower’s insurance;
- Supplier costs related to any purchase order or order of goods made prior to receiving a PPP loan that are essential to a borrower’s operation; or
- Worker protection expenditures such as any personal protection equipment (masks or latex gloves), or property improvements made after March 1, 2020 that allowed the borrower’s operation to be considered compliant with health officials’ orders pertaining to COVID-19.
Borrowing in code
Most PPP loan borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs. However, any borrower with a NAICS industry code starting with 72, which is the accommodations and food services category and includes hotels, restaurants, bars, and caterers, can receive up to 3.5 times their average monthly payroll costs on second-draw loans. Nationwide, these businesses number more than 900,000.
“That will help some of these industries that have been hit the hardest,” Marron notes.
While first-draw loans are available up to the $10 million maximum from 2020, the maximum of a second draw PPP loan is $2 million.
As for the forgiveness of loans — provided because the pandemic-related losses are not the fault of business operators — a simplified forgiveness application process is underway for loans of $150,000 or less. Eligibility for PPP loan forgiveness is contingent on whether borrowers will have spent no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks.
“In the last round, it was a moving target on not only who could apply but how much would be forgiven,” Piette notes. “It started as more or less a grant program and changed along the way. If a borrower attested to their criteria — that they truly did have a falloff in their business over a specified period of time — their borrower certification basically was taken for those dollars of loans under $50,000. Now, that changes to $150,000, so anyone that applies for a loan of $150,000 or less is really borrower certified.
“They call it a streamlined application process,” he adds. “So, that’s different as well, and I know that’s what many businesses have been eager to hear.”
On Jan. 19, the SBA and the U.S. Department of the Treasury shed additional light on the topic of loan forgiveness, releasing a one-page application for borrowers that received a PPP loan of $150,000 or less. The form, called the PPP Loan Forgiveness Application Form 3508S, can be used by borrowers in this category, according to Meicher. The form seeks information about the borrower’s loan amount, disbursement date, employee totals, covered period dates, amount of the loan spent on payroll, and the amount of the loan for which forgiveness is being sought. “Borrowers are not required to submit any supporting documentation with the application but are mandated to maintain payroll, nonpayroll, and other documents that could be requested during an SBA loan review or audit,” Meicher explains.
Other changes from the 2020 program are as follows:
- An adjustment in the Economic Injury Disaster Loan (EIDL) program eliminates the requirement that recipients of EIDL advances have their PPP forgiveness amount reduced. In 2021, borrowers that previously had PPP forgiveness reduced as a result of an EIDL advance will be made whole, and an advance may be refinanced with a new first- or second-draw PPP loan.
- The enabling legislation’s provisions specify that business expenses paid with forgiven PPP loans are tax deductible. Previous IRS guidance stated that such expenses could not be deducted, and borrowers should consult their tax advisor for more information.
- In terms of reapplying for the maximum amount, some businesses may be eligible to request increases to a PPP loan received in 2020, but future guidance from the SBA will address that.
Piette notes that PPP was created out of the Coronavirus Aid Relief and Economic Security (CARES) Act last year. The first round of $350 billion went very quickly, within about two weeks. Washington immediately put in a second round of $320 billion, but much of that money sat there. “There wasn’t as much of a response to it because of some of the criteria that the SBA was releasing was unclear and because it was changing some of the business parameters of the program itself,” Piette recalls. “There was also a lot of skepticism by businesses that applied, or were considering applying, due to potential audits by the government. So, that money did not get expired in the second round.”
Any lingering confusion largely stems from what Piette calls the “fluidity” of the PPP criteria — who can lend, when and how a borrower may apply, and the rules for getting approved. Adding to this uncertainty is the treatment and the differences in the early rounds (1 and 2) and the latest round. “The SBA initially had to roll out the first round in a very short time frame, and though they did a respectable job, there was a lot of confusion on the part of borrowers and lenders alike, because the Interim Final Rules (IFRs) kept changing,” he says. “As a result, there were businesses that applied for relief in the early first and second rounds that may not or should not have qualified for loans.
“The SBA has tightened that stuff up in this current round.”
Piette notes that Round 3 started on Monday, Jan. 11, and extended this week for lenders classified as Community Development Financial Institutions (CDFIs). These are largely nonprofit organizations that typically lend to small businesses, minority businesses, and others. Meanwhile, Tuesday, Jan. 19 was the first day for community banks to accept either first- or second-draw applications.
“The entire program is to ensure that you retained your employees during this period,” Piette states, “which is one of the preeminent criteria.”
Biden their time
Asked if there is enough money allocated in the latest round to meet demand, Marron cites speculation that newly minted President Joe Biden would not hesitate to refill the pot. “There is even talk, in a future stimulus bill, of another rollout of another round of this should we need it,” Marron notes. “So, I can’t answer that with anything real concrete, but I can only imagine that, just like in Round 1 when the money was used up fast, the Biden administration would act to appropriate more funds should they get used up.”
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