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PPP 2.0: Welcome, But Still Too Complicated?

Corporate and Securities Alert | January 13, 2021
By: Ryan J. Udell and Adam J. Chelminiak

While the arrival of vaccines for the coronavirus have us seeing the proverbial light at the end of the COVID-19 tunnel, many small businesses, particularly in industries such as travel, hospitality and specialty retail, continue to feel the pain of governmental restrictions intended to minimize the spread of the insidious virus and associated behavioral shifts. In order to provide much needed help to these and other impacted small businesses, Congress, as part of a larger stimulus package (through the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act)) has finally reauthorized and amended the popular Paycheck Protection Program (PPP).

The PPP was initially established by the CARES Act to provide emergency economic relief to small businesses and individuals that have been adversely affected by the COVID-19 pandemic in the form of fully-forgivable loans. In the months after its initial implementation, the PPP was continually modified by approximately two-dozen interim final rules issued by SBA and Treasury as well as other forms of guidance including a series of Frequently Asked Questions (FAQs) and created a cottage industry to advisors to small businesses as they grappled with the barrage of changes and updates.[1] Although the PPP was far from perfect, it has been widely credited with keeping businesses afloat (and people employed). As that initial “bridge” has shown to be not enough for many small businesses, PPP 2.0 is certainly a welcome holiday gift that may sustain them until the country is able to return to a more normal existence.

We have previously discussed some of the key features of PPP 2.0 as part of our larger overview of the stimulus package here. But as a refresher, PPP 2.0 builds upon the original PPP in three main ways: (i) it reauthorizes lending under the PPP with $284 billion in additional funding available until March 31, 2021 (or until such funding is depleted, if sooner), $35 billion of which is reserved for first-time PPP borrowers; (ii) it allows certain borrowers that previously received an initial PPP loan (a First Draw Loan) to obtain an additional “second draw” PPP loan (a Second Draw Loan); and (iii) it implements a series of important changes, some of which apply both prospectively to new loans as well as retroactively to existing PPP loans in cases where loan forgiveness payment has not yet been completed.

As with the original PPP, Congress has left it to the Small Business Administration (SBA) to fill in many of the details and late last week the SBA issued its first two (of presumably many) such rules (collectively, the Implementing Rules): (i) an interim final rule consolidating all existing and new guidance for First Draw Loans (the First Draw Rule); and (ii) an interim final rule focusing on guidance for Second Draw Loans (the Second Draw Rule). We review these Implementing Rules below.

Availability of PPP 2.0

New PPP loans have not been available since the deadline for applications closed on August 8, 2020. The Economic Aid Act, however, reopens the application window until March 31, 2021. Applicants seeking First Draw Loans or Second Draw Loans are permitted to apply prior to that deadline. As of this writing, lenders have begun taking applications for both First Draw Loans and Second Draw Loans; however, the SBA announced that applications will only be accepted from community financial institutions serving minority, underserved, veteran and women-owned business concerns for “at least the first two days.” The SBA’s form of Second Draw Borrower Application Form is available here and a revised version of the original application which is used for First Draw Loans is available here.

First Draw Loans

Applicants for First Draw Loans under PPP 2.0 must meet the original eligibility criteria established in the CARES Act (as modified by the regulations and interpretive guidance issued by the SBA and Treasury). We have written in more detail about eligibility (here, here and here), but a business or individual is generally eligible to receive a PPP loan if the applicant:

  1. is (together with their affiliates) either:
    • a “small business concern” under SBA’s applicable standard size standards (expressed either in number of employees or annual receipts in millions of dollars);[2]
    • a “small business concern” under SBA’s alternative test;[3]
    • a business concern that has 500 or fewer employees (including 501(c)(3) nonprofits, 501(c)(19) veterans organizations, tribal business concerns, self-employed individuals, independent contractors and sole proprietors);
    • a housing cooperative, an eligible 501(c)(6) organization or an eligible destination marketing organization that employs no more than 300 people;[4] or
    • a news organization that employs no more than 500 or a nonprofit public broadcasting entity;[5] and
  2. was in operation on February 15, 2020 and either had employees to whom it paid salaries, paid independent contractors or was an otherwise eligible self-employed individual, independent contractor or sole proprietorship with no employees.

In most cases, a business’s size is measured in aggregate together with its affiliates. The CARES Act provides a specific waiver of affiliation rules for business concerns in the accommodation and food services industry that are assigned a NAICS code beginning with 72, such that the business is eligible to receive a PPP loan if it employs no more than 500 employees per physical location. Under SBA rules, affiliation is determined based on a number of factors including common ownership, overlapping management and identity of interest arising due to family relationships and economic dependence.

Businesses or individuals that meet the applicable size eligibility thresholds are able to borrow the lesser of (i) 2.5 times its average monthly payroll costs; and (ii) $10 million. Under the original PPP, borrowers were required to determine average monthly payroll costs based on the 12-month period immediately prior to the application date. But under the First Draw Rule, new borrowers are now allowed to choose either 2019 or 2020 as the “base period” for purposes of calculating average monthly payroll costs in the maximum loan amount determination. This ensures that applicants who are applying for First Draw Loans in 2021 are able to receive funding amounts based on pre-pandemic payroll levels even if the new applicants experienced dramatically reduced payroll in 2020 due to the pandemic and governmental mitigation efforts. Aside from this flexibility in selecting a base period, the terms applicable to new First Draw Loans are virtually identical to the terms applicable to existing PPP loans.[6]

In addition, the Economic Aid Act allows a borrower to reapply or request an increase in its existing PPP loan amount if the borrower returned that loan (in whole or in part) or declined to accept the full amount of a PPP loan for which it was approved but is now eligible under current PPP rules. These additional amounts will be considered a disbursement of the borrower’s existing PPP loan and the SBA has stated that it will issue additional guidance on the process to reapply or request a loan increase. We will update you on that guidance when available.

Second Draw Loans

Perhaps the most significant change to the PPP made by the Economic Aid Act is the ability for certain existing PPP borrowers to obtain a Second Draw Loan. Second Draw Loans are generally subject to the same terms and conditions as First Draw Loans (for example, SBA guarantees 100% of the loans, no collateral is required, no personal guarantee is required, the maturity is five years, etc.), but there are several key differences in eligibility requirements.

To be eligible for a Second Draw Loan, in addition to the initial eligibility rules,[7] a borrower must satisfy the following:

  1. Size Limit. The borrower must employ not more than 300 employees (as opposed to the 500-employee threshold that applies for First Draw Loan eligibility).[8] SBA’s affiliation rules that applied for size determination purposes prior to the Economic Aid Act continue to apply for Second Draw Loan eligibility determinations. A business entity that is assigned a NAICS code beginning either with 72 (accommodation or food services) or 511110 or 5151 (certain news organizations) satisfies this requirement if it employs no more than 300 employees per physical location.[9]
  2. Use of First Draw Loan. The borrower must have used, or will have used, the full amount of the borrower’s First Draw Loan on or before the date the Second Draw Loan is disbursed. The Second Draw Rule further requires that the borrower must have used the full amount of its First Draw Loan on eligible expenses.
  3. Revenue Reduction. The Borrower must demonstrate a 25% or greater reduction in quarterly gross receipts during a fiscal quarter in 2020 relative to the corresponding quarter in 2019.[10] Alternatively, the Second Draw Rule adds that a borrower that was in operation for all four quarters in 2019 can submit annual tax forms showing a 25% or greater annual reduction in gross receipts in 2020 compared to 2019. For Second Draw Loans of $150,000 or less, eligible borrowers can submit a certification attesting that it meets the applicable revenue loss requirements. The Second Draw Rule incorporates the definition the SBA generally uses for size determination purposes, e., gross receipts include “all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” [11] Gross receipts do not include any forgiveness amount of a First Draw Loan that a borrower received in calendar year 2020.[12]

Any entity that is ineligible to receive a First Draw Loan is also ineligible for a Second Draw Loan. The Economic Aid Act and Second Draw Rule also expressly prohibit the following types of business concerns obtaining a Second Draw Loan:

  • A business concern that was not in operation on February 15, 2020;
  • Any entities that are not permitted to obtain a 7(a) SBA loan (excluding non-profit businesses and religious organizations);[13]
  • Entities primarily engaged in political and lobbying activities;
  • Publicly-traded businesses;
  • Any business concern that is organized in or associated with (based on operations, equity ownership or board membership) the People’s Republic of China or Special Administrative Region of Hong Kong;
  • Entities that receive a grant under the Shuttered Venue Operator Grant program; or
  • An entity that has permanently closed (although businesses that have temporarily closed or suspended operations are not excluded).

If a borrower satisfies the more-stringent eligibility criteria above, it will generally be able to receive a Second Draw Loan equal to the lesser of (a) 2.5 times its average monthly payroll costs; and (b) $2 million (as opposed to the $10 million cap on First Draw Loans). An otherwise-eligible borrower assigned a NAICS code beginning with 72, however, may receive a Second Draw Loan equal to the lesser of 3.5 times its average monthly payroll costs or $2 million. The relevant time period for calculating a borrower’s average monthly payroll costs for a Second Draw Loan is either the 12-month period prior to the application (which the Second Draw Rule permits borrowers to calculate simply based on calendar year 2020 in lieu of the precise 12-month period) or calendar year 2019.

Eligible borrowers may receive only one Second Draw Loan. Additionally, businesses that are part of a single corporate group[14] cannot receive more than $4 million of Second Draw Loans in the aggregate.

Once received, Second Draw Loans are generally subject to the same rules and are eligible for loan forgiveness in the same manner as other PPP loans. Notably, borrowers are still required to use at least 60% of the proceeds on covered payroll costs to be eligible for complete forgiveness.

Changes Applicable to all PPP Loans (First Draw and Second Draw) Regardless of When Disbursed

The Economic Aid Act and the Implementing Rules makes a number of significant changes that broadly apply to both new First Draw Loans and Second Draw Loans as well as, in some cases, to existing First Draw Loans where forgiveness has not yet been remitted.

  • Covered Period Flexibility. Whereas borrowers previously had to select either a fixed eight-week or 24-week “covered period” during which PPP loan proceeds were required to be used on permitted purposes to be eligible for forgiveness, a borrower can choose the duration of the covered period as long as it is between eight and 24 weeks. Accordingly, a borrower’s covered period will begin on the date of disbursement of the PPP loan and end on the date selected by the borrower that occurs during the period that is between eight weeks and 24 weeks following the date of disbursement. This change enables the borrower to better align its covered period with the payroll periods in which PPP funds are used, thereby minimizing reductions in loan forgiveness based on decreases in the borrower’s full-time equivalent headcount and employee pay rates, which are measured during the covered period.
  • Tax Deductibility of Expenses Paid with PPP Proceeds. Expenses that are otherwise deductible and are paid with the PPP proceeds that are forgiven can now be deducted for federal income tax purposes. This rule reverses a post-CARES Act IRS ruling that expenses paid with forgiven loans are not tax deductible, and applies to all PPP loans (even if the loans have already been forgiven). For more detailed analysis on this important change, read our alert, “Congress Allows Deduction of Expenses Funded by Forgiven PPP Loan.”
  • Expansion of Forgivable Uses of PPP Loans. Non-payroll forgivable uses of PPP loans now include four additional categories:
  1. “covered operational expenditures” – These include payments for business software or cloud computing service designed to facilitate post-COVID operations;
  2. “covered property damage” – These include expenses related to property damage from public disturbances that occurred in 2020 and were not covered by insurance;
  3. “covered supplier costs” – These include expenditures for the supply of goods that are essential to the borrower’s operations and are made pursuant to a purchase order in effect before the start of the borrower’s covered period; and
  4. “covered worker protections” – These include operating or capital expenditures to facilitate the adaptation of business activities to comply with COVID-19 health and safety guidelines and requirements issued by the HHS, CDC, OSHA or any state equivalent. Qualifying expenditures may include personal protective equipment and other adaptive investments (such as onsite or offsite screening capability, physical barriers, air pressure ventilation or filtration systems or drive-through window facilities), but do not include residential real property or intangible property.
  • New “Payroll” Costs. The Economic Aid Act adds costs related to the continuation of group healthcare, life, disability, vision or dental benefits during periods of paid sick, medical or family leave, and group healthcare, life, disability, vision, or dental insurance premiums to the meaning of forgivable payroll costs.
  • Economic Injury Disaster Loan (EIDL) Advances. The Economic Aid Act repealed the CARES Act provision requiring the SBA to deduct the amount of EIDL advances received by the borrower from the borrower’s maximum forgiveness amount. Accordingly, any EIDL advances will not be deducted from forgiveness payments and any EIDL advances previously deducted from a borrower’s forgiveness will be remitted to the lender together with interest through the remittance date.
  • Borrowers in Bankruptcy. Post-CARES Act SBA rules declared businesses in bankruptcy were ineligible to receive PPP loans. The Economic Aid Act takes a step towards reversing the SBA’s position by amending Sections 364, 503(b), 1191, 1225 and 1325 of the Bankruptcy Code to enable a debtor-in-possession or trustee that is authorized to operate the business of a debtor to apply for and obtain a PPP loan, notwithstanding other legal prohibitions on incurring additional debt. Crucially, however, the Economic Aid Act conditions the effectiveness of that provision on the SBA Administrator’s submission of a written determination that certain businesses in bankruptcy are in fact eligible to receive PPP loans.

For the time being, the First Draw Rule maintains the status quo, oddly without acknowledging Congress’s invitation to make PPP loans available to certain debtors in the Economic Aid Act. Instead, the rule simply states that “if the applicant or owner of the applicant is a debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.” We expect the SBA may issue further guidance on this subject, particularly following the appointment of a new SBA Administrator by the incoming Biden administration. Stay tuned.

  • Simplified Forgiveness. Borrowers that received PPP loans of $150,000 or less are now eligible for full forgiveness if the borrower submits a one-page certification as to the number of employees the borrower was able to retain, the estimated amounts spent on payroll costs and the total PPP loan amount. The SBA is required to complete this simplified application by January 20.
  • SBA Audit Plan. The Economic Aid Act appropriates $50 million directly to the SBA for PPP auditing purposes and directs the SBA to submit plans to Congress detailing the policies and procedures governing their conduct of PPP loan audits and forgiveness reviews. The audit plans are to include the metrics that the SBA will use to determine which PPP loans will be audited. Whether these plans will be made available to the public is unknown.

We will continue to monitor developments and provide updates regarding the reauthorized PPP.

If you have questions or would like more information, please contact Ryan J. Udell (udellr@whiteandwilliams.com; 215.864.7152), Adam J. Chelminiak (chelminiaka@whiteandwilliams.com; 215.864.7078) or another member of the Corporate and Securities Group.

As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.


[1] The SBA has announced that the FAQs will be revised “as quickly as feasible” in order to conform to the changes made by the Economic Aid Act.

[2] See 13 C.F.R. 121.201.

[3] Under the alternative size standard, a business concern may qualify as a small business concern if it (1) has a maximum tangible net worth of not more than $15 million and (2) the average net income after Federal income taxes for the two full fiscal years before the date of the application is not more than $5 million.

[4] This category was added to the list of eligible borrowers by the Economic Aid Act.

[5] This category was added to the list of eligible borrowers by the Economic Aid Act.

[6] One exception being that, in a change from existing rules, the Economic Aid Act now excludes publicly-traded companies from eligibility for any PPP loans (either First Draw Loans or Second Draw Loans).

[7] This includes, importantly, the infamous economic necessity certification. Although not required in the CARES Act, SBA guidance requires applicants to certify that the requested PPP loan is necessary to the applicant after “taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

[8] Note that the alternative size standards that are available for size determination purposes with respect to First Draw Loans do not apply to Second Draw Loans.

[9] This mirrors the rule for First Draw Loans that size determinations for such businesses are measured on a per-location basis, except that the size limit is now 300 employees (rather than 500) and it applies to certain news organizations in addition to entities assigned a NAICS code beginning with 72.

[10] For example, a borrower with gross receipts of $50,000 in the 2nd quarter of 2019 and gross receipts of $30,000 in the 2nd quarter of 2020 has experienced a 40% reduction between the quarters and (assuming other requirements are met) is eligible for a Second Draw Loan.

[11] 13 C.F.R. 121.104(a).

[12] In addition, gross receipts “do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.” 13 C.F.R. 121.104(a). 

[13] These businesses are listed in 13 CFR 120.110.

[14] As with First Draw Loans, businesses are deemed to be part of a single “corporate group” for purposes of Second Draw Loans if they are majority owned, directly or indirectly, by a common parent.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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