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  • Boodell & Domanskis, LLC - Chicago Business Law

    Paycheck Protection Program – “Second Draw” Loans

    On December 21, 2020, Congress passed the “Consolidated Appropriations Act, 2021” (the “CAA”) and it was signed into law by President Trump on December 27, 2020. The CAA enhances and expands certain provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”) and changes the Paycheck Protection Program (PPP) administered by the U.S. Department of the Treasury’s Small Business Administration (SBA) by

    • authorizing a second round of PPP loans and
    • expanding PPP borrower eligibility in some instances, while implementing changes to PPP loans that will impact both new and existing PPP borrowers.

    The SBA is expected to issue new guidance in the coming days to address the particulars of the revitalized PPP and to answer questions that have arisen since the date of enactment of the Act.

    PPP “Second Draw” Loans

    • for smaller and harder-hit businesses
    • a maximum amount of $2 million.

    Eligibility

    • Employ not more than 300 employees (SBA affiliation rules apply in determining the number of employees)
    • Have used or will use the full amount of their first PPP loan; and
    • Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same quarter in 2019.

    Special provisions

    • Guidance to Prioritize Underserved Communities – The CAA directs the SBA administrator to issue guidance addressing barriers to access to capital for underserved communities no later than 10 days after the date of the Act’s enactment.
    • Churches and Religion Organizations – The CAA makes it clear that the prohibition on eligibility for businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting, does not apply for initial and second draw PPP loans.

    Loan Terms

    • In general, PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the one year prior to the loan or the calendar year.
    • No loan can be greater than $2 million.
    • Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times their average monthly payroll costs.
    • For loans of not more than $150,000, the borrower entity may submit a certification attesting that it meets the revenue loss requirements on or before the date the entity submits its loan forgiveness application.

    Loan Forgiveness

    • Borrowers of a PPP second draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, operations expenditures, property damage costs, supplier costs, and worker protection expenditures incurred during the covered period.
    • Borrowers are still required to use at least 60% of PPP loan proceeds on eligible payroll costs in order to receive full forgiveness.

    “Covered Period” for Loan Forgiveness

    • In calculating the amount of eligible expenses paid or incurred that would qualify for loan forgiveness, borrowers who received loans before June 5, 2020, could choose between an eight-week period in CARES or a 24-week period contemplated by the new PPP legislation.
    • The duration of the “covered period” impacts the amount of expenses that could be included in the borrower’s forgiveness calculation and also impacts the measurement period for potential reductions to loan forgiveness that are based on changes in full-time employee equivalents (FTEs) or salary or hourly wage reductions.
    • Borrowers who received their first loan on or after June 5, 2020, were required to use the longer 24-week “covered period.”
    • The CAA provides that PPP borrowers will be provided the option to choose between an eight-week covered period and a 24-week covered period.

    Additional Eligible Expenses

    • Covered operations expenditures – include the payments for any software, cloud computing, and other human resources and accounting needs.
    • Covered property damage costs – include property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
    • Covered supplier costs – include payments to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that were essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
    • Covered worker protection expenditure – include personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration.
    • Loans made under the first round of PPP are eligible to use the expanded forgivable expenses, except for borrowers who have already had their loans forgiven.

    Lender Safe Harbor

    Under the Act, a lender may rely on any certification or documentation submitted by a borrower for an initial or second draw PPP loan and that no enforcement action may be taken against the lender, and the lender will not be subject to any penalties relating to loan origination or forgiveness, if:

    • the lender acts in good faith relating to loan origination or forgiveness; and
    • all relevant federal, state, local and other statutory and regulatory requirements are satisfied.

    Simplified Approach to Small Loans (under $150,000.00)

    • The CAA creates a simplified application process for loans under $150,000.
    • A borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length and includes a description of the number of employees the borrower was able to retain because of the covered loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
    • Unlike larger loans that require borrowers to retain relevant supporting documentation for six years, for loans of up to $150,000, borrowers will only be required to retain applicable documents for four years, as to employment records, or three years as to other records. These changes are retroactive to the passage of the CARES Act.
    • The CAA requires the SBA administrator to release guidance to lenders within 17 days of enactment that allows borrowers who returned all or part of their PPP loan to reapply for the maximum amount applicable, so long that they have not received forgiveness.

    PLEASE NOTE: This summary is based on currently available information that may change over time.

    We are available to answer your questions about any general issues concerning your business.

    If you need assistance navigating these uncertain times, please reach out to us. Our law office has remained open and continues to serve our clients. We are available by telephone, email and Zoom.

     

    Should you have any questions or wish to schedule a consultation concerning the topics in this article, please contact Audra Karalius at akaralius@boodlaw.com.

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