As we start the new year, and hope that we’ve seen the worst of the Pandemic, the economic effects of the pandemic continue to be felt hardest by small businesses and the self-employed. As a response, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was signed into law last month. Accordingly, beginning on January 11, 2021, the Economic Aid Act reopens the Paycheck Protection Program (“PPP”) application process, and provides borrowers with greater flexibility in using PPP Loan proceeds as well as expanding the types of expenses eligible for loan forgiveness.
A Second Bite at the Apple
For all those that missed out on the first round of PPP money, the Economic Aid Act allows first-time borrowers, even those that had a prior application denied, to submit an application for a First Draw PPP Loan. Application for First Draw PPP Loans will be accepted through March 31, 2021.
There are important distinctions between the qualifications of First Draw Loan eligibility from that of a Second Draw PPP Loan. However, in all cases, borrowers must belong to one of the following groups:
- All businesses with 500 employees or less
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profit organizations, including faith-based organizations, business leagues, chambers of commerce, and boards of trades.
Most first-time borrowers can borrow up to the average monthly payroll costs (multiplied by 2.5), so long as it does not exceed $10 million. Restaurants, hotels, and other hospitality businesses may receive up to 3.5 times average monthly payroll.
The funds for the first round of PPP money quickly ran out when the program first opened to small businesses in April 2020. Since the pot was replenished on April 27th, there has been plenty of cash and businesses have been slow to take advantage.
Going Back to the Well – Round Two
Under the new act, those that have already benefited from a First Draw PPP Loan can go back to the well for a second draw of PPP money. To re-apply and receive a Second Draw PPP Loan of up to $2 million, borrowers meet the following criteria:
- The borrower has less than 300 employees.
- The borrower must have at least a 25% reduction in revenue in at least one quarter in 2020 when compared to the same quarter in 2019.
- The borrower received the initial PPP fund disbursement and must have used (or plan to use) the full amount of the PPP loan.
PPP Loan Forgiveness
The PPP Loan does not have to be repaid so long as the funds are used for:
- No less than 60% was used for Payroll costs, which is defined as:
- Salary, wages, commissions, or tips for employee/owner (up to $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, sick leave, health care benefits (including premiums) and payment of retirement benefits;
- Allowance for separation or dismissal;
- State and local taxes assessed on compensation; and
- Sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
- Non-payroll operating expenses, such as:
- Interest on mortgage obligations;
- Rent under lease agreements; and
- Utilities (electricity, gas, water transportation, telephone, or internet)
Expanded Permitted Uses of PPP Money
The Economic Aid Act has expanded the permissible use of PPP loan proceeds to include:
- Covered supplier cost – expenditures made to a supplier of goods for goods that are essential to the borrower’s business operations
- Covered property damage cost - Expenditures related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- Covered worker protection – expenditures related to protective equipment and adaptive investments to help a loan recipient comply with federal or state health and safety guidelines related to Covid 19 during the period between 3/1/2020 and the end of the national emergency declaration
- Covered operations cost - Expenditures for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
PPP Loans and Bankruptcy
Under the CARES Act, a debtor in bankruptcy was disqualified from participation in the PPP Loan program. It hardly seemed fair that those in the grimmest circumstances would be precluded from desperately needed cash. Under the Economic Aid Act, borrowers in bankruptcy are now eligible to apply for PPP money. The loan must still be approved by the Bankruptcy Court and payments are treated as an administrative claim, meaning that the loan and the payments are preferred over most other creditors, and to the extent that they are not forgiven, must be paid in full.
The law firm of Scura, Wigfield, Heyer, Stevens & Cammarota have a team of attorneys devoted to helping small business debtors and individuals avail themselves of the protections and tools bankruptcy provides. Attorneys at the firm are available for free consultations to potential clients and eager to offer assistance to fellow practitioners looking for guidance in the world of bankruptcy.