8559 / What are the paycheck protection loans and economic injury disaster loans for small business owners?

EIDLs¹ were available through the Small Business Administration (SBA), and, even pre-COVID-19, contained favorable terms such as 30-year repayment periods, 3.75 percent interest rates and deferral of the first month’s payments. The relief made it easier to qualify if the business existed as of January 31, 2020. The SBA could grant the loan based on the business’ credit score without a tax return and regardless of past bankruptcies—and the average annual receipts tests did not apply. For loans of less than $200,000, no personal guarantee or real estate collateral was required.

Paycheck protection loans (PPP loans)² were available to employers with fewer than 500 employees that were in operation before February 15, 2020. These loans maxed out at (a) $10 million or (b) 2.5 times the employer’s average monthly payroll costs during the one-year period ending the date the loan was made. Loan terms for amounts not forgiven included: interest rates of up to 4 percent, 10-year repayment terms, payment deferrals for six to 12 months and waiver of personal guarantee and collateral requirements.

Under the CARES Act, part of the paycheck protection loan could be forgiven when used during the eight weeks following the loan origination date for operating costs like payroll costs, rent, mortgage interest, interest on outstanding debt, utilities, employee retirement benefits and health insurance costs. The Paycheck Protection Program Flexibility Act (PPPFA) extended the eight-week period to 24 weeks from the date the lender made the first loan payment to the small business owner.

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Planning Point: Under the Consolidated Appropriations Act of 2021, all borrowers can choose the length of their own covered period. Borrowers were entitled to choose a covered period that is as short as eight weeks or as long as 24 weeks. The clock started to run on the date the second draw loan proceeds were disbursed.

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Compensation that exceeded $100,000 per employee, as pro-rated for the period, was excluded from the definition of payroll costs. See Q . Loan forgiveness did require the employer to maintain the same average number of employees during the first eight-weeks of the loan, based on the eight-week period spanning from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 15, 2020 (loan forgiveness was pro-rated, not entirely eliminated, for employers who reduced staffing). Reducing compensation for employees earning under $100,000 by more than 25 percent could also reduce the amount forgiven. The PPPFA gave employers until December 31, 2020 to bring workers back to work/restore wage levels to continue to qualify for loan forgiveness (extended from an earlier June 30, 2020 deadline).

PPPFA also created a new exemption for employers who were legitimately unable to restore employment numbers to pre-COVID levels. The exemption was designed to reflect the reality that some employees may not be available or willing to return to work. Employers were not subject to a proportionate reduction in loan forgiveness based on reductions that occurred under either (or both) of two scenarios during February 15, 2020 and December 31, 2020.

First, reductions in the number of full-time equivalent employees did not jeopardize loan forgiveness if the employer could document (1) an inability to rehire employees who were employees as of February 15, 2020 and (2) was unable to hire similarly qualified replacement employees. To preserve their right to loan forgiveness, employers should maintain written documents that show (1) an offer was made to an employee, (2) at the same salary, wage and hour levels as the last pay period prior to the separation or reduction in hours and (3) the offer was rejected. The employer was also required to inform the state unemployment agency of the offer and rejection within 30 days after the rejection is received.

Reductions in loan forgiveness were also disregarded if the employer could not return to the same level of business activity as before February 1, 2020 because of a need to comply with HHS, CDS or OSHA rules established between March 1, 2020 and December 31, 2020 (related to customer or employee safety initiatives).

Second Draw PPP Loans

Congress authorized a round of “second draw” PPP loans for certain businesses who had already spent their loan proceeds by December 31, 2021.

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Planning Point: Business owners could apply for a second draw loan even if they had not fully spent their initial loan proceeds. However, second round loans were not disbursed until all first draw funds were exhausted.

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Second draw PPP loans were available through March 31, 2021. To qualify, the business must:

have 300 or fewer employees,

not be permanently closed (temporarily closed businesses could apply),

demonstrate at least a 25 percent reduction in gross receipts when comparing the same quarter in 2019 to 2020 (see below),

have used all of their initial PPP loan proceeds.

Second draw PPP loans were available for up to 2.5 times average monthly payroll costs for the year prior to the loan. Restaurants and other hospitality businesses could qualify to borrow up to 3.5 times their average monthly payroll costs. However, PPP loans were capped at $2 million regardless of the business’ payroll costs. The $2 million cap applied to both initial loans and second draw loans.

The SBA rules defined “gross receipts” broadly, to include all revenue from any sources, including sales, interest, dividends, rent, royalties, etc. The SBA also clarified that amounts that were forgiven for the business’ initial PPP loan were not included in gross receipts for 2020.

Recognizing that very small businesses might not have quarterly information readily available, if the business existed for all of 2019, the SBA allowed the business to determine whether it experienced a 25 percent reduction by comparing annual receipts in 2020 to 2019. Business owners who elected to use this method were required to submit annual tax forms to verify the required decline.

The list of “qualifying” uses for PPP loan proceeds was also expanded under CAA 2021. Proceeds could be used to cover payroll costs and operating expenses. They could also be used to pay for personal protective equipment and modifications to the business necessary to adapt the business to meet new health and safety standards. These types of capital expenditures might include physical barriers, ventilation systems, expansion of outdoor spaces, health screening facilities and more.

PPP funds could also be forgiven if used to repair damage caused by protests and other disturbances in 2020, as long as the damage was not covered by insurance. Proceeds could be used to cover supplier costs, which included expenses related to contracts and other purchase orders for supplies that were in effect before the business took out the second draw loan.

Payments for operations expenses like cloud computing services, business software, accounting or HR needs also qualified.

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Planning Point: Some business owners were eligible for larger loan amounts under the rules released in 2021. The SBA allowed those businesses to request an increase in their loans if eligible, either by returning all or a portion of the loan or requesting an increase if the business had not yet accepted the loan proceeds. Those requests were made electronically to the SBA no later than March 31, 2021.

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Planning Point: From the inception of the program, there was controversy over whether certain businesses were entitled to the loans. In FAQ, Treasury stated that most companies with adequate sources of alternative liquidity were likely not eligible for PPP loans. In order to qualify for initial loans, PPP borrowers were required to provide a good faith certification stating that economic conditions and uncertainty made the loan necessary to support ongoing operations (second draw borrowers were generally required to prove they experienced a revenue decline). While Treasury guidance specifically pointed to public companies with substantial market value and access to the capital markets, the guidance could also impact businesses who had adequate alternative liquidity to support operations. PPP borrowers who found they could make the certification in good faith were permitted to return the funds.

If the initial loan amount did not exceed $2 million, the SBA announced that it would assume the loan was taken in good faith.

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