Provisions of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) and guidance provided by the Small Business Administration’s (SBA) subsequently issued Interim Final Rule (IFR) on the Paycheck Protection Program (PPP) have clarified changes to the PPP and enhanced options for current PPP borrowers. In addition, on December 9, 2020, the SBA issued additional guidance (FAQ 53) associated with its review of loan forgiveness applications and, specifically, its new Loan Necessity Questionnaires for borrowers that received loans of more than $2 million.

Updates and Clarifications to the PPP for Current Borrowers

Clarification and Expansion of Eligible Expenses

The Economic Aid Act provides welcome clarification on eligible payroll expenses. Specifically, the new law makes clear that other employer-provided group insurance benefits are included as eligible payroll costs, in part codifying past SBA guidance, which provided that borrowers could include payments for employees’ vision and dental insurance premiums as payroll expenses. In addition, the Economic Aid Act specifically lists payments by employers for group life and disability insurance premiums as eligible payroll costs.

The Economic Aid Act also added four additional categories of eligible non-payroll expenses:

• Certain operations expenditures, such as payments for business software, cloud computing services, or other human resources and accounting needs

• Property damage costs, including costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance

• Supplier costs, i.e., expenditures that a borrower made to a supplier of goods pursuant to a contract, purchase order, or order for goods in effect before the borrower’s applicable PPP loan disbursement that were essential to the borrower’s operations at the time the expense was incurred

• Worker protection expenditures, such as the purchase of personal protective equipment for employees and other operating or capital expenditures to facilitate the adaptation of the borrower’s business activities to comply with federal, state, or local government requirements or guidance with respect to the COVID-19 pandemic

In addition, the Economic Aid Act clarifies that borrowers may not pay loan agent fees with PPP loan funds, as these are not eligible expenses. This rule applies to all PPP loans made before, on, or after the date of the Economic Aid Act’s enactment, including forgiveness of such loans.

Clarification for Current Borrowers That Are Now Eligible for Larger Loans

Under the Economic Aid Act, current PPP borrowers may now be eligible for larger loans. The IFR specifically addresses partnerships, seasonal employers, and certain borrowers that previously received a PPP loan of a lesser amount and may now be eligible for a higher loan amount.

• If a partnership previously received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partnership compensation, the lender can electronically submit a request to increase the borrower’s PPP loan amount to include partner compensation, even if the loan has been fully disbursed and other required forms have been submitted.

• For seasonal employers that would qualify for a higher maximum loan amount under the Economic Aid Act, the lender can electronically submit a request to increase the borrower’s PPP loan amount, even if the original loan was disbursed and other required forms were submitted.

The IFR also lists the following categories of borrowers that can reapply or request an increase in their PPP loan amount:

• A borrower that returns its entire PPP loan disbursement may reapply for a PPP loan in the amount that the borrower is now eligible for under the current rules.

• A borrower that returns part of its PPP loan disbursement may reapply for a PPP loan amount equal to the difference between the amount retained and the amount previously approved.

• A borrower that has not accepted the full amount of the PPP loan for which it was approved may request an increase in the amount of the PPP loan up to the amount previously approved.

All requests for increases in loan amounts must be submitted electronically on or before March 31, 2021, and are subject to availability of funds. The IFR also permits lenders to make a single, additional disbursement of the increased loan proceeds in these circumstances, notwithstanding the SBA’s April 28, 2020 IFR, which required lenders to make a one-time, full disbursement of each PPP loan within 10 calendar days of that loan’s approval.

Pursuant to the Economic Aid Act, the SBA is required to release additional guidance to implement these rules later this month, and the SBA has already indicated that this information will be forthcoming in an IFR on loan forgiveness.

Changes to Interest Rates for Current Borrowers

The SBA noted that a current borrower that received a PPP loan made prior to the date of the new law may take advantage of the new interest rate rules upon the mutual agreement of the lender and the borrower. The non-compounding and non-adjusting interest rate for First and Second Draw PPP Loans are discussed here and here, respectively.

Tax Changes for Current Borrowers

The Economic Aid Act codifies past Internal Revenue Service (IRS) guidance confirming that PPP loans are not includible in a borrower’s gross income. Significantly, the new law also changes the tax treatment of eligible PPP expenses. Under prior IRS guidance, payments for eligible PPP expenses, which would ordinarily be tax deductible as business expenses, were not tax deductible if the funds used to pay those business expenses were proceeds from a forgiven PPP loan. Pursuant to the Economic Act Aid, borrowers with expenses incurred and paid for by PPP loans that would otherwise qualify as tax-deductible business expenses may deduct those business expenses, even if the loan is forgiven.

Recent Changes to the PPP Loan Forgiveness Process

Borrower’s Selection of Covered Period for Loan Forgiveness

The Economic Aid Act amends the definition of covered period for loan forgiveness, allowing borrowers to select a covered period that ends on any date that occurs between 8 and 24 weeks after the date of the borrower’s PPP loan disbursement, giving borrowers more flexibility in choosing an individually-tailored covered period, and effectively eliminating the earlier notion of an “alternative covered period.”

Expanded and Clarified Categories of Eligible Expenses for Maximum Loan Forgiveness

Fundamentally, the loan forgiveness rules have not changed for current borrowers. Generally, to receive full loan forgiveness, borrowers must use at least 60% of their PPP loans for payroll costs and not more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. However, the broadening of eligible payroll expenses discussed above should help current borrowers meet the requisite thresholds to achieve the maximum amount of loan forgiveness.

Repeal of Economic Injury Disaster Loan (EIDL) Advance Reduction to Forgiveness Amounts

PPP borrowers are no longer required to deduct the amount of their EIDL advance from their PPP loan forgiveness amount. The EIDL advance amount will no longer reduce a borrower’s amount of loan forgiveness and will not be deducted from the forgiveness payment that the SBA remits to the lender. Further, for those borrowers that previously had EIDL advance amounts deducted from their loan forgiveness amounts, the SBA will automatically remit those amounts to their lenders, with interest to the remittance date. The SBA has provided additional information about the procedures for remitting the EIDL advance amounts to PPP lenders in its January 8, 2021 SBA Procedure Notice.

Simplified Loan Forgiveness for Borrowers with Loans of $150,000 or Less

In an effort to reduce the onerous requirements of current loan forgiveness applications, the Economic Aid Act instructs the SBA to create a simplified loan forgiveness application process for borrowers with loans of $150,000 or less. Current borrowers that received loans equal to or less than the threshold will be able to apply for PPP loan forgiveness by submitting a one-page certification to their lenders and would generally not be required to submit the substantial amount of additional documentation that is typically required for PPP loan forgiveness applications. However, the borrower must retain relevant employment records for four years and other records for three years after the borrower submits a loan forgiveness application should the SBA require copies of this documentation.

The SBA has stated that a simplified application will be published later this month. 

Codification of Limited Safe Harbor for PPP Loans Under $2 Million

Previous SBA guidance (FAQ 46) provided that PPP borrowers (and their affiliates) that received PPP loans with an original principal amount of less than $2 million would be deemed to have made the required certification concerning the necessity of their PPP loan request in good faith. The IFR codifies this safe harbor provided under prior SBA guidance.

PPP Loan Necessity Questionnaire

Last October, the SBA announced that it would review all PPP loans of more than $2 million for eligibility, fraud or abuse, and compliance with loan forgiveness requirements. In December, the SBA issued additional guidance regarding this process and provided Loan Necessity Questionnaires (SBA Form 3509 for for-profit borrowers). A borrower’s receipt and request to complete a Loan Necessity Questionnaire does not necessarily mean that the SBA will decide to challenge the borrower’s certification. A borrower must return the completed questionnaire to the lender within 10 business days of receipt, and the information the borrower provides will be used to assist the SBA in verifying the borrower’s certification in its loan application stating that its loan request was necessary.

After reviewing the borrower’s completed questionnaire, the SBA may request additional information to complete its review and, if any additional information is required, the borrower will have an opportunity to provide a narrative response to the SBA explaining the circumstances surrounding its loan necessity certification. Once the SBA reviews any additional information that the borrower submits, it will make a final determination regarding the adequacy of the borrower’s loan necessity certification after assessing the totality of the borrower’s circumstances and considering multiple factors during the time the borrower made its certification, even if subsequent developments resulted in the loan no longer being necessary.

Future SBA Guidance on Loan Forgiveness

A subsequent SBA IFR will address all aspects of loan forgiveness and the loan review process. Future SBA guidance will presumably address outstanding questions for current borrowers, such as providing a process for borrowers to amend loan forgiveness applications to accommodate retroactive changes under the new law.

The table below outlines the expansions to the PPP under the Economic Aid Act that apply retroactively to current borrowers; nonetheless, current borrowers may want to wait for additional SBA guidance and forms before taking advantage of new rules that apply retroactively to them. 

     Expansions of the PPP Program That Retroactively Apply to Current Borrowers

[1] The Economic Aid Act and IFR do not explicitly state that the new covered period definition for loan forgiveness will apply retroactively, although the IFR implies that the option to select a covered period under the new law applies to all current borrowers. Future SBA guidance on PPP loan forgiveness may clarify this ambiguity.