Loans – SBA PPP Steerage on First and Second Draw PPP Loans

On January 6, 2020, the S(BA) printed its 26^th Interim Last Rule (the First Draw PPP IFR) and 27^th Interim Last Rule (the Second Draw PPP IFR)^[1] with respect to the Paycheck Safety Program (PPP), as reauthorized and modified below Title III (cited because the Financial Support to Arduous-Hit Small Companies, Nonprofits, and Venues Act (the Financial Support Act)) of Division N of the Consolidated Appropriations Act, 2021.  The PPP was initially enacted below the Coronavirus Support, Aid, and Financial Safety Act (as amended, supplemented or in any other case modified infrequently previous to the enactment of the Financial Support Act, together with by the Paycheck Safety Program and Well being Care Enhancement Act, the Paycheck Safety Program Flexibility Act, relevant federal rules and interpretive steering issued by the S(BA) and Treasury, the CARES Act).

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As detailed in our consumer alert summarizing the reauthorization and modification of the PPP below the Financial Support Act, the Financial Support Act reopens the appliance course of for companies looking for PPP funds for the primary time (a First Draw PPP loan), whereas increasing the approved makes use of for PPP loan proceeds and rising flexibility to acquire loan forgiveness.  The Financial Support Act additionally permits an eligible enterprise that obtained a First Draw PPP loan to use for a second draw of PPP loan proceeds (a Second Draw PPP loan), albeit by adopting usually extra restrictive eligibility standards and lowering the utmost quantity of proceeds obtainable for a Second Draw PPP loan.

The First Draw PPP IFR and Second Draw PPP IFR have been issued pursuant to the mandates of the Financial Support Act. The First Draw PPP IFR restates sure of the interim ultimate guidelines issued by the S(BA) and/or Treasury previous to the enactment of the Financial Support Act, and updates such guidelines to include the relevant amendments effectuated by the Financial Support Act in relation to the First Draw PPP Loans.  The Second Draw PPP IFR dietary supplements the Financial Support Act by offering additional rules pertaining to the Second Draw PPP Loans.

Additional, on January 8, 2020, the S(BA) issued a revised First Draw PPP Software Type and new Second Draw PPP Software Type for PPP candidates to account for modifications to this system below the Financial Support Act.

Highlights of fabric new steering or clarification of present steering relating to the PPP contained within the First Draw PPP IFR and Second PPP IFR are as follows:

I. First Draw PPP IFR

A. Calculating the Most PPP loan Quantity

The First Draw PPP IFR clarifies that candidates looking for First Draw PPP Loans below the Financial Support Act may use calendar 12 months 2019 or calendar 12 months 2020 for functions of calculating their common payroll prices for functions of figuring out their most PPP loan quantity, regardless that the Financial Support Act didn’t revise Part 1102 of the CARES Act instructing PPP candidates to calculate their most loan quantity through the use of “payroll costs incurred during the 1-year period before the date on which the loan is made.”

B.$20 Million First Draw PPP loan Quantity Limitation for a Single Company Group

The First Draw PPP IFR confirms that companies which can be a part of a single “corporate” group will not be permitted to obtain greater than $20 million of First Draw PPP Loans within the mixture.  The S(BA) elaborates that for functions of this $20 million mixture restrict, companies are a part of a single company group if “they are majority owned, directly or indirectly, by a common parent.”  The First Draw PPP IFR states that it’s the duty of a PPP applicant to inform the lender if such applicant and its affiliated companies have utilized for or obtained First Draw PPP loans in extra of the $20 million mixture restrict.  Failure to take action can be thought to be “a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness.”  A PPP lender may depend on an applicant’s illustration in regards to the applicant’s compliance with this $20 million limitation.

C. General Eligibility and Restrictions for “Permanently Closed” Companies

The First Draw PPP IFR confirms that, apart from increasing the checklist of prohibited candidates to incorporate publicly-traded corporations and companies which can be “permanently closed,”^[2] the eligibility standards for companies making use of for First Draw PPP Loans stays unchanged.  For evaluation on eligibility for First Draw PPP Loans, please go to our article on the subject material right here.

D. Conflicting Steerage on Eligibility for PPP Candidates in Chapter

As mentioned in our intensive abstract of the laws, the Financial Support Act reverses S(BA) guidelines set forth within the fourth interim ultimate guidelines printed April 28, 2020 in reference to the preliminary PPP loan program in addition to the rising majority of choices out of the federal chapter and appellate courts that held debtors-in-possession and chapter trustees in chapter circumstances to be ineligible to acquire PPP loans.  Against this, Part 320 of the Financial Support Act expressly amends the U.S. Chapter Code to authorize a debtor-in-possession or a trustee approved to function the enterprise of a debtor to use for and borrow a PPP loan (which is to be accorded the precedence of an administrative declare), however any opposite contractual restriction, prior prohibition below Part 363 of the Chapter Code relating to use of cash collateral, or different legislation prohibiting the debtor from incurring further debt.

Surprisingly, the S(BA) seems to have straight contradicted Part 320 of the Financial Support Act within the First Draw PPP IFR by preserving the PPP rules in place previous to the enactment of the Financial Support Act.  The S(BA), within the First Draw PPP IFR, signifies that it will likely be revising its beforehand issued PPP Steadily Requested Questions (FAQs) to completely conform to the Financial Support Act “as quickly as possible.” We question whether or not the S(BA) will, in a subsequent interim ultimate rule, revise its place within the First Draw PPP IFR to be in line with Part 320 of the Financial Support Act.  Within the meantime, courts might want to implement Part 320 of the Financial Support Act in opposition to the conflicting backdrop of the First Draw PPP IFR.

E. Eligibility for Type 1040, Schedule C Filers and Companions; Improve in PPP loan Quantity for Companions

The First Draw PPP IFR confirms that, usually, an applicant that recordsdata a U.S. Inside Income Code (IRC) Type 1040, Schedule C is eligible for a PPP loan if such applicant:  (i) was in operation on February 15, 2020; (ii) is a person with self-employment earnings (similar to an impartial contractor or a sole proprietor); (iii) has a principal place of residence in the USA; and (iv) filed or will file a Type 1040, Schedule C for 2019.^[3] Nevertheless, the First Draw PPP IFR provides that if the applicant is a associate in a partnership, then such applicant may not submit a separate PPP loan utility as a self-employed particular person.  As an alternative, the self-employment earnings of basic lively companions may be reported as a payroll price, as much as $100,000 on an annualized foundation, as prorated for the interval throughout which the funds are made or the duty to make the funds is incurred on a PPP loan utility filed by the partnership.  The S(BA) has decided that limiting a partnership and its companions (and an LLC submitting taxes as a partnership) to 1 collective PPP loan is critical “to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of March 31, 2021.”  The S(BA) moreover causes that approved makes use of of PPP Loans (e.g., for lease, mortgage curiosity, utilities, operations expenditures, property harm prices, employee safety expenditures, and many others.) are usually incurred on the partnership stage, so it’s “most natural to provide the funds for these expenses to the partnership, not individual partners.”

To accommodate the foregoing, the First Draw PPP IFR permits a partnership that obtained a PPP loan to extend its PPP loan quantity if it didn’t initially embody the compensation of its companions (topic to the pro-rated annual $100okay cap on a person’s compensation) in figuring out its most loan quantity eligibility.  The PPP borrower may achieve this by asking the lender to submit a request by the S(BA)’s E-Tran Servicing web site on or earlier than March 31, 2021, and such request is permissible even when the loan has been totally disbursed and/or the lender’s first S(BA) Type 1502 report back to the S(BA) on the topic PPP loan has already been submitted.

F. Eligibility for 501(c)(6) Organizations

The First Draw PPP IFR confirms that any group that’s described in IRC Part 501(c)(6) and that’s exempt from taxation below IRC Part 501(a) (excluding skilled sports activities leagues and organizations with the aim of selling or collaborating in a political marketing campaign or different exercise) can be eligible to obtain a First Draw PPP loan so long as different eligibility necessities established below the CARES Act and Financial Support Act are met, and if:  (i) the group doesn’t obtain greater than 15% of its receipts from lobbying actions; (ii) the lobbying actions of the group don’t comprise greater than 15% of the whole actions of the group; (iii) the price of the lobbying actions of the group didn’t exceed $1 million throughout the latest tax 12 months of the group that ended previous to February 15, 2020; and (iv) the group employs no more than 300 workers.

G. Skill to Reapply or Request an Improve within the PPP loan Quantity

The First Draw PPP IFR restates the provisions within the Financial Support Act that let PPP debtors to reapply for, or request a rise in, a PPP loan within the following certified circumstances:

• If a borrower returned all of a PPP loan, the borrower may reapply for a PPP loan in an quantity the borrower is eligible for below present PPP guidelines;

• If a borrower returned a part of a PPP loan, the borrower may reapply for an quantity equal to the distinction between the quantity retained and the quantity beforehand authorized; and

• If a borrower didn’t settle for the total quantity of a PPP loan for which it was authorized, the borrower may request a rise within the quantity of the PPP loan as much as the quantity beforehand authorized.

The First Draw PPP IFR provides that seasonal employers who obtained a PPP loan previous to December 27, 2020 to extend the quantity of its present PPP loan through the use of the revised calculation of the utmost loan quantity obtainable for seasonal debtors below the Financial Support Act.

Any request for a rise should be submitted electronically within the S(BA)’s E-Tran Servicing web site on or earlier than March 31, 2021, and is topic to the supply of PPP funds.

The S(BA) will situation further steering on the method to reapply or request a loan enhance.

H. Affiliation

The First Draw PPP IFR confirms that, usually, the affiliation guidelines that utilized to candidates of PPP Loans previous to the enactment of the Financial Support Act proceed to use, besides that, for functions of a Second Draw PPP loan, the worker measurement normal is diminished to a most of 300 workers (from 500 workers) for functions of figuring out affiliation.^[4]  For additional evaluation on the PPP affiliation guidelines, please go to our agency’s articles right here and right here.

I. loan Reimbursement Graduation Date

The First Draw PPP IFR offers that as long as a PPP borrower submits its forgiveness utility date inside 10 months after the tip of its loan forgiveness coated interval, it is not going to should make any funds of principal or curiosity on its PPP loan till the S(BA) (i) makes a dedication on such PPP borrower’s forgiveness utility, and (ii) remits the decided forgiveness quantity (if any) to the PPP lender.  This stance is a modification of the loan compensation guidelines in place previous to the enactment of the Financial Support Act, which directed that except the PPP loan was beforehand repaid or forgiven in full, the PPP borrower could be required to start making funds on the unforgiven stability of its PPP loan starting on the 10 month anniversary of the final day of the 24-week (or, if relevant, 8-week) loan forgiveness coated interval.  Beneath such prior steering, if all or a portion of the PPP loan was subsequently forgiven, the S(BA) would remit to the borrower that portion of the funds made by the borrower that have been subsequently forgiven.

 II. Second Draw PPP IFR

A. March 31, 2021 Software Deadline

The Second Draw PPP IFR confirms that the final day to “apply for and receive” a Second Draw PPP loan is March 31, 2021.  The steering, nonetheless, doesn’t make clear what is meant by “receive a PPP loan,” and whether or not the receipt date is taken into account to be:  (i) the date of the S(BA) loan approval; (ii) the date the PPP be aware is executed; or (iii) the date the PPP loan is disbursed.  As there can be a niche in time between submission of a PPP loan utility and the disbursement date of the PPP loan, candidates for Second Draw PPP Loans are inspired to submit their functions nicely upfront of the March 31, 2021 deadline.

B. Eligibility

The Second Draw PPP IFR confirms that for Second Draw PPP Loans the utmost cap of 300 workers established below the Financial Support Act is the one measurement take a look at permitted to find out basic eligibility.  The CARES Act and the following implementing S(BA) rules and steering expanded the 500 worker measurement cap for First Draw PPP Loans to incorporate, as impartial various bases of measurement eligibility:  (i) NAICS Code measurement requirements relevant to the first trade sector through which the PPP loan applicant operates; and (ii) the S(BA)’s Different Measurement Requirements, each of that are used to find out eligibility for different S(BA) loan applications.  These various measurement assessments to find out eligibility stay restricted to First Draw PPP Loans and don’t apply to Second Draw PPP Loans.

C. Calculating Gross Receipts

Along with the 300 worker most measurement take a look at, the Financial Support Act additionally situations eligibility for Second Draw PPP loans on whether or not the applicant can exhibit a 25% discount in gross receipts in any quarter in 2020 in comparison with the corresponding quarter in 2019.  Whereas the Financial Support Act doesn’t outline “gross receipts,” the Second Draw PPP IFR usually defines the time period to incorporate “all revenue in whatever form received or accrued (in accordance with the [PPP borrower’s] accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.”  The Second Draw PPP IFR provides that, usually, receipts are thought of “total income” (or within the case of a sole proprietorship, impartial contractor, or self-employed particular person “gross income”) plus “cost of goods sold,” and excludes internet capital features or losses as these phrases are outlined and reported on IRS tax return types.^[5]  All different objects, similar to subcontractor prices, reimbursements for purchases a contractor makes at a buyer’s request, funding earnings, and employee-based prices similar to payroll taxes, may not be excluded from gross receipts.

The Second Draw PPP IFR notes that its definition of gross receipts is in line with 13 CFR.121.104 utilized by the S(BA), amongst different issues, to calculate conformance with the NAISC Code-based various measurement take a look at for eligibility for a First Draw PPP loan, and additional excludes First Draw PPP Loans from the calculation of gross receipts.

D. Calculating Common Payroll Prices to Decide Most Second Draw PPP loan Quantity

 The Financial Support Act adjusted the methodology for calculating a borrower’s payroll prices for PPP loans, and the Second Draw PPP IFR clarifies that candidates for Second Draw PPP loans will be capable of use any of (i) calendar 12 months 2019, (ii) calendar 12 months 2020 or (iii) the 12 months previous the date of utility for a Second Draw PPP loan for functions of calculating common payroll prices in figuring out a most loan quantity.

E. $four Million Second Draw PPP loan Quantity Limitation for a Single Company Group

The Second Draw PPP IFR offers that companies which can be a part of a single company group shall not obtain greater than $four million of Second Draw PPP Loans within the mixture.  The S(BA) concluded {that a} limitation of $four million is acceptable as a result of it’s proportional to the $20 million most quantity obtainable for company teams with respect to First Draw PPP Loans.

F. The Unresolved Borrower Dilemma

An in any other case eligible borrower making use of for a Second Draw PPP loan may discover its utility course of adversely impacted if its First Draw PPP loan is below evaluation by the S(BA) and/or a dedication has been made that the borrower in ineligible pursuant to PPP rules or “data in [the] S(BA)’s possession.”  The S(BA) defines such a borrower to be an “unresolved borrower,” and if the S(BA) notifies the PPP lender that the applicant for a Second Draw PPP loan is an unresolved borrower, the S(BA) is not going to situation an S(BA) loan quantity, and extra loans are prohibited from being made to such borrower till the excellent points are resolved.  The S(BA) states that it’ll “resolve issues related to unresolved borrowers expeditiously,” and that ongoing evaluation by the S(BA) of an unresolved borrower doesn’t disqualify an eligible unresolved borrower from receiving a Second Draw PPP loan.  Nonetheless, being categorized as an unresolved borrower may end in a considerable delay within the approval and funding of Second Draw PPP loans for companies or, even worse, trigger an unresolved borrower to overlook out on the briefly obtainable second draw PPP funds altogether.  Furthermore, it’s unclear as as to whether a borrower of First Draw PPP Loans who submitted its forgiveness utility and is awaiting S(BA) evaluation constitutes an “unresolved borrower”.  That is significantly so for debtors with First Draw PPP Loans of $2 million or extra because the S(BA) has acknowledged that it’ll individually evaluation every such loan as to its “necessity certification”.^[6]

*Issues are altering shortly and the measures and interpretations described herein may change.  Our evaluation is essentially restricted by the point sensitivities of the present disaster, in addition to the absence of precedent for some of what’s contained right here.  This evaluation represents our greatest interpretation and suggestions primarily based on the place issues at present stand.*

FOOTNTOES

_{[1] The 26th IFR and 27^th IFR are efficient with out advance discover and public remark as a result of Part 1114 of the CARES Act authorizes S(BA) to situation rules to implement the PPP with out regard to note necessities.}

_{[2] The S(BA) notes that this exclusion applies to any enterprise that has “gone out of business and has no intention of reopening” however, for the avoidance of doubt, a enterprise that has “temporarily closed or temporarily suspended its business but intends to reopen” stays eligible for a PPP loan.}

_{[3] On June 26, 2020, the S(BA) issued further steering for these people with self-employment earnings who: (i) weren’t in operation in 2019 however who have been in operation on February 15, 2020, and (ii) filed a Type 1040 Schedule C for 2020.  See Query 10 within the S(BA)’s How To Calculate Most loan Quantities – By Enterprise Sort truth sheet.}

_{[4] Part 317 of the Financial Support Act provides an exception to the PPP affiliation guidelines for information organizations.}

_{[5] The S(BA) excludes the next from constituting “gross receipts”:  (i) taxes collected for and remitted to a taxing authority if included in gross or whole earnings (similar to gross sales or different taxes collected from prospects and excluding taxes levied on the priority or its workers); (ii) proceeds from transactions between a priority and its home or international associates; and (iii) quantities collected for one more by a journey agent, actual property agent, promoting agent, convention administration service supplier, freight forwarder or customs dealer.}

_{[6] Please go to our earlier consumer alerts discussing the “necessity certification” right here and right here.}