While we were all busy watching the IRS try to pivot for the changes to the Employee Retention Credit, the Small Business administration ("SBA") was making some changes of its own to the Paycheck Protection Loan Program (“PPP”). The reason for the change in this case is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”), otherwise known as Title III of Division N of the Consolidated Appropriations Act, 2021 (“CAA”).
Among the changes released March 3 are:
- New First Draw application form
- New Second Draw application form
- A separate Second Draw application form for Schedule C filers using gross income to calculate the loan amount.
- Updated FAQs (which, by the way, are still being revised to reflect the “Interim Final Rule on Revisions to Loan Amount Calculation and Eligibility posted on SBA’s website on March 3, 2021” according to a big red banner at the top of the page)
- A new Interim Final Rule (“IFR”) on loan amount calculation and eligibility (see above)
The major changes in the FAQs deal with loan necessity as well as some interpretive changes to the application process.
Loan Necessity – Question 46 has been updated regarding loan necessity. Among other things:
- First and Second Draw loans will be evaluated independently.
- As before, all first draw loans with a principal balance of less than $2,000,000 will be deemed to have met the criteria.
- And, because all Second Draw loan borrowers must demonstrate a 25% reduction in gross revenues, the FAQs say all such borrowers will be deemed to have made the necessity certification in good faith.
--Interestingly, it doesn’t say Second Draw borrowers will automatically meet the criteria because their loans can’t exceed $2 million.
Time Period to Determine Number of Employees – Question 14 clarifies that the borrower may use the average employment over the time period used to calculate the loan for purposes of applying employee-based size standards.
- Alternatively, borrowers can use the SBA’s usual calculation – the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months)
- On the other hand, seasonal employers MUST use the average number of employees per pay period during the 12-calendar week period the borrower used to calculate its payroll costs
New FAQs Question/Answer – Among the new questions added to the FAQs is Question 63, which discusses what method may be used to count employees to qualify for a Second Draw PPP loan. The rules, apparently, are very restrictive:
- Borrowers can’t use either the SBA’s established size standards or the alternative size standard.
- It is literally a count of no more than 300 employees – full and part-time, not full-time equivalent (from Question 36) – including employees of all affiliates.
--The only exceptions are restaurant and hospitality businesses, certain news organizations and nonprofit public broadcasting entities.
New IFR on Revisions to Loan Amount Calculation and Eligibility
In an effort to make PPP loans more broadly available to small businesses, the Biden administration created an alternative methodology for determining payroll costs for sole proprietors and independent contractors. The original Coronavirus Aid, Relief, and Economic Security ("CARES") Act language defining payroll costs for these borrowers includes “income” and “net earnings from self-employment.” The administration and SBA have now decided that it is consistent with Congressional intent for income to mean gross income.
- For this purpose, gross income is the amount the borrower reports on line 7 of Schedule C.
- The IFR contains alternative formulas for borrowers who have employees and who wish to use gross income to represent owner compensation.
|IMPORTANT: Due to concerns about potential fraud, the IFR says that the safe harbor for loans with an original principal balance of less than $2 million and the loan necessity certification safe harbor will not apply to Schedule C filers who use gross income to calculate PPP First Draw loans if they report more than $150,000 of gross income.|
Those who received a PPP loan before March 3, 2021 based on net self-employment income are not permitted to reapply based on gross income.
We expect the SBA will issue further guidance on these and similar topics. In the meantime, please contact your Friedman LLP advisor with any questions.