As companies of all types and sizes continue to deal with the potential legal implications of the COVID-19 pandemic for their businesses, Jackson Walker provides insights and resources on the COVID-19 Legal Resources & Insights site.

By Lindsey Berwick & John Wittenberg

On Monday, December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA), which contains a $900 billion COVID-19 relief package that, among many other initiatives, reauthorizes and modifies the Paycheck Protection Program (PPP). The PPP, implemented by section 1102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, expanded the Small Business Administration (SBA) 7(a) loan program to provide up to $349 billion—increased by an additional $310 billion on April 24, 2020—in 100% federally-guaranteed loans to small employers and eligible self-employed individuals impacted by COVID-19. The CAA was signed into law on December 27, 2020.

Title III of Division N of the CAA, entitled Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (EAA), allocates an additional $284 billion to a reauthorized and revised the PPP. SBA released initial guidance for the reauthorized PPP on January 5, 2021, in the form of two new Interim Final Rules. Interim Final Rule 2021-0001 (IFR 1) details the amended terms of the PPP pursuant to the EAA and governs new first draw PPP loans made under the EAA (First Draw PPP Loans), as well as loan forgiveness applications for existing PPP loans where the loan forgiveness payment has not been remitted (Existing PPP Loans). Interim Final Rule 2021-0002 (IFR 2) details the terms of second draw PPP Loans (Second Draw PPP Loans).

Key Differences Between First Draw and Second Draw PPP Loans

The key differences between First Draw PPP Loans and Second Draw PPP Loans are as follows:

First Draw PPP Loans

Eligible applicants that did not receive a PPP loan prior to August 8, 2020, may apply for a First Draw PPP Loan on or before March 31, 2021. In addition to business concerns previously eligible for PPP loans, and subject to certain size standards, eligibility criteria, and additional restrictions described below, housing cooperatives, eligible section 501(c)(6) organizations, eligible destination marketing organizations, and news organizations are now eligible to apply for a First Draw PPP Loan. The primary terms of the First Draw PPP Loans are as follows:

Eligible Borrowers

• • Type and Size Requirements for Eligible Borrowers
    • Small business concerns qualified under the applicable revenue-based size standard established by SBA^[1] for the borrower’s industry or under SBA alternative size standard.^[2]
    • Business concerns with not more than 500 employees^[3] or, if applicable, the size standard in number of employees established by SBA.
    • Independent contractors, eligible self-employed individuals, and sole proprietors.
    • Nonprofit organizations [501(c)(3) of the Internal Revenue Code (IRC)] with not more than 500 employees.
    • Veterans organizations [501(c)(19) of IRC] with not more than 500 employees.
    • Tribal business concerns [31(b)(2)(C) of the Small Business Act] with not more than 500 employees.
    • Housing cooperatives with not more than 300 employees.
    • 501(c)(6) organizations that:
      • do not receive more than 15% of its receipts from lobbying activities;
      • the lobbying activities of the organization do not comprise more than 15% of the total activities of the organization;
      • the cost of the lobbying activities did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020; and
      • employ not more than 300 employees.
    • Destination marketing organizations that:
      • do not receive more than 15% of its receipts from lobbying activities;
      • the lobbying activities do not comprise more than 15% of the total activities of the organization;
      • the cost of the lobbying activities did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020;
      • employ not more than 300 employees; and
      • qualifies as a 501(c) organization within the IRC and is exempt from taxation under section 501(a) of the IRC; or is a quasi-governmental entity or is a political subdivision of a State or local government, including any instrumentality of those entities.
    • Nonprofit news organizations that:
      • are majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151;
      • employ no more than 500 employees (or, if applicable, the size standard in number of employees established by SBA in 13 C.F.R. 121.201 for the borrower’s industry) per location; and
      • can make a good faith certification that proceeds of the loan will be used to support expenses at the component of the organization that produces or distributes locally focused or emergency information.
  • Other Eligibility Requirements
    • Operation Requirement
      • Borrowers must have been in operation on February 15, 2020, and either had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC or were an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.
      • A seasonal business will be considered to have “been in operation as of February 15, 2020”, if the business was in operation for any 12-week period between February 15, 2019, and February 15, 2020.
    • Affiliation
      • SBA’s affiliation rules (and previous exemptions, waivers and exceptions thereto) continue to apply.
      • Employees of an applicant’s domestic and foreign affiliates must be included for purposes of calculating the applicant’s employee headcount if no exemption or waiver applies to such applicant.
    • Partners & Partnerships
      • Partners in a partnership are not eligible for a PPP loan, individually as a self-employed individual.
      • Self-employment income of general active partners may be reported as a payroll cost (up to $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred) on a PPP loan application filed by or on behalf of the partnership.
    • Hospitals: Hospitals that receive less than 50% of its funding from state or local government sources, exclusive of Medicaid, may still be eligible notwithstanding ownership by a state or local government if it is otherwise eligible to receive a PPP loan as a business concern or nonprofit organization.

Ineligible Borrowers

• • Applicants engaged in any activity that is illegal under Federal, state, or local law.
  • Household employers (individuals who employ household employees such as nannies or housekeepers).
  • Owner of 20% or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.
  • Applicant, or any business owned or controlled by the applicant or any of its owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
  • Applicant was not in operation on February 15, 2020.
  • The President, the Vice President, the head of an Executive Department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the applicant’s business.^[4]
  • Applicant received or will receive a grant under the Shuttered Venue Operator Grant program under section 324 of the EAA.
  • Applicant is an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934.
  • Applicant’s business has permanently closed (applicants that have temporarily closed or temporarily suspended their business remain eligible).
  • Applicants who are, or whose owners are, the debtor in a bankruptcy proceeding, either when their application is submitted or at any time before the loan is disbursed.
  • Hedge funds and private equity firms.

Loan Terms

• • Loan Amount
    • The lesser of $10 million or 2.5x average monthly payroll costs.
    • Businesses that are part of a single corporate group may not receive more than $20 million of First Draw PPP Loans in the aggregate.
  • Maturity: 5 years.
  • Interest Rate: 1% per annum.
  • Principal and Interest Deferment: Deferment of principal and interest until the date on which SBA remits the loan forgiveness amount on the loan to the lender (or the date of notification that no forgiveness is allowed) if a loan forgiveness application is submitted to the lender within 10 months after the end of the loan forgiveness covered period. If a borrower fails to submit to its lender a loan forgiveness application within 10 months after the end of the loan forgiveness covered period, the borrower must begin paying principal and interest after that period.
  • Guaranty: No personal guarantees are required.
  • Collateral: No collateral is required (i.e., unsecured).

Eligible Payroll Costs

• • Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation.
  • Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips).
  • Payment for vacation, parental, family, medical, or sick leave.
  • Allowance for separation or dismissal.
  • Payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement.
  • Payment of state and local taxes assessed on compensation of employees.
  • For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

Use of PPP Loan Proceeds

• • Eligible payroll costs.
  • Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums.
  • Mortgage interest payments (but not mortgage prepayments or principal payments) incurred before February 15, 2020.
  • Rent payments on leases dated before February 15, 2020.
  • Utility payments for services that began before February 15, 2020.
  • Interest payments on any other debt obligations that were incurred before February 15, 2020.
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020.
  • Covered operations expenditures (payments 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).
  • Covered property damage costs (costs 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 supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that:
    • are essential to the operations of the borrower when the expenditure is made; and
    • is made pursuant to a contract, order, or purchase order (i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan).
  • Covered worker protection expenditures.^[5]
  • Under no circumstances may PPP funds be used to support non-U.S. workers or operations.

Application

• • Applicants must submit Paycheck Protection Program Borrower Application Form (SBA Form 2483).
  • Applicants must also submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records.

Good Faith Certification

Each applicant must certify in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the applicant. Any borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

Forgiveness

• • The amount of loan forgiveness can be up to the full principal amount of the PPP loan and any accrued interest.
  • At least 60% of the PPP loan proceeds must be used for payroll costs.
  • The “Loan Forgiveness Covered Period” begins on the date the lender disburses the PPP loan and ends on any date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.
  • Payroll costs that are qualified wages taken into account in determining the Employee Retention Tax Credit are not eligible for loan forgiveness.

Increases to First Draw PPP Loans

Existing PPP Loans received prior to the enactment of the EAA may be amended to increase the loan amount for certain borrowers, including partnerships, seasonal employers, farmers and ranchers, and other eligible borrowers who returned all or a portion, or did not accept the full amount, of an Existing PPP Loan. The primary terms for increases to Existing PPP Loans are as follows:

General Terms and Conditions

• • Increases may only be made by the Lender of Record.^[6]
  • If SBA has remitted a forgiveness payment to the lender on an Existing PPP Loan, no loan increases or reapplications are allowed.
  • Borrowers eligible for an increase in their Existing PPP Loan as a result of any interim final rule that allowed for loan increases may submit a request for an increase in the included covered loan amount even if (a) the initial covered loan amount has been fully disbursed, or (b) the lender of the initial covered loan has submitted to the Administration a Form 1502 report related to the covered loan.
  • The borrower must provide the lender with required documentation to support the calculation of the increase.
  • In no event can the increased loan amount exceed the maximum PPP loan amount ($10 million for an individual borrower or $20 million for a corporate group).
  • Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds.

Eligibility

• • If a borrower returned all of their PPP loan, the borrower may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules.
  • If a borrower returned part of a PPP loan, the borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
  • If a borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.

Partnerships, Seasonal Employers, and Farmers & Ranchers

• • Partnerships may be eligible for an increase in their Existing PPP Loan if the amount of the Existing PPP Loan only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation.
  • Seasonal Employers may be eligible for an increase in their Existing PPP Loan if the Existing PPP Loan was received before December 27, 2020, and such employer would be eligible for a higher maximum loan amount under section 336 of the EAA, which allows a seasonal employer to determine its maximum loan amount by using the employer’s average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.
  • Farmers & Ranchers may be eligible for an increase in their Existing PPP Loan if such employer would be eligible for a higher maximum loan amount under section 313 of the EAA, which states that farmers and ranchers may calculate their maximum loan amount using 2019 as their base period. This allows farmers and ranchers to elect either 2019 or 2020 as their base period.

Second Draw PPP Loans

Certain eligible borrowers that previously received a PPP loan may apply for a Second Draw PPP Loan of up to $2 million with the same general loan terms as First Draw PPP Loans. Second Draw PPP Loans on or before March 31, 2021. The primary terms of the Second Draw PPP Loans are as follows:

Eligible Borrowers

The same eligibility requirements for First Draw PPP Loans apply to Second Draw PPP Loans, and, in addition, applicants of Second Draw PPP Loans shall have:

• • 300 or fewer employees;^[3]
    • A single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) is eligible to receive a Second Draw PPP Loan if it employs no more than 300 employees per physical location and meets the revenue reduction requirements and otherwise satisfies the other eligibility criteria.
    • SBA’s alternative size standard for calculating the number of employees is not available for Second Draw PPP Loans.
  • Experienced a revenue reduction of 25% or greater in 2020 relative to 2019;
  • Received a First Draw PPP Loan; and
  • Used (or will use) the full amount of the First Draw PPP Loan (inclusive of any increase in loan amount) on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower on eligible expenses.

Ineligible Borrowers

• • Applicants primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents.
  • Certain entities organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong.
  • Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612).
  • The President, the Vice President, the head of an Executive Department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the applicant’s business.^[4]
  • Applicant received or will receive a grant under the Shuttered Venue Operator Grant program under section 324 of the EAA.
  • Applicant is an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934.
  • Applicant’s business has permanently closed (applicants that have temporarily closed or temporarily suspended their business remain eligible).

Loan Terms

• • Loan Amount
    • The lesser of $2 million or 2.5x average monthly payroll costs.
    • For eligible borrowers assigned a NAICS code beginning with 72 at the time of disbursement of the Second Draw PPP Loan, the maximum loan amount is equal to 5x average monthly payroll costs.
    • For farmers and ranchers, any employee payroll costs should be subtracted from the farmer’s or rancher’s gross income to avoid double-counting amounts that represent pay to the employees of the farmer or rancher.
    • Payroll costs may be based upon either calendar year 2019 or calendar year 2020, or in the case of borrowers who are not self-employed, sole proprietors, or independent contractors, the 12-month period prior to when the Second Draw PPP Loan is made.
    • Businesses that are part of a single corporate group may not receive more than $4 million of Second Draw PPP Loans in the aggregate.
  • Maturity: 5 years.
  • Interest Rate: 1% per annum.
  • Principal and Interest Deferment: Deferment of principal and interest until the date on which SBA remits the loan forgiveness amount on the loan to the lender (or the date of notification that no forgiveness is allowed) if a loan forgiveness application is submitted to the lender within 10 months after the end of the loan forgiveness covered period. If a borrower fails to submit to its lender a loan forgiveness application within 10 months after the end of the loan forgiveness covered period, the borrower must begin paying principal and interest after that period.
  • Guaranty: No personal guarantees are required.
  • Collateral: No collateral is required (i.e., unsecured).

Affiliation Rules Applicable to Second Draw PPP Loans

• • Generally, the same affiliation rules (including the exemptions, exceptions and waivers) that apply to First Draw PPP Loans apply to Second Draw PPP Loans, including the previously-stated exemptions, exceptions and waivers thereof.
  • Business concerns with a NAICS code beginning with 72 qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees.
  • Eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.
  • The religious exemption to the affiliation also applies to Second Draw PPP Loans.

Reduction in Revenue

The reduction in revenue test is calculated by comparing the applicant’s quarterly gross receipts for one quarter in 2020 with the applicant’s gross receipts for the corresponding quarter of 2019. If the applicant was in operation in all four quarters of 2019, the applicant will be deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 if the applicant submits copies of its annual tax forms substantiating the revenue decline.

On January 19, 2021, SBA released guidance to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation that is required to support each set of calculations) for purposes of determining their eligibility for and amount of a Second Draw PPP Loan.

Gross Receipts

• • General Rule: Receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on Internal Revenue Service (“IRS”) tax return forms.
  • Affiliates
    • Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.
    • If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern, and the aggregation applies for the entire period of measurement, not just the period after the affiliation arose.
    • If a concern acquired a segregable division of another business concern during 2020, gross receipts do not include the receipts of the acquired division prior to the acquisition.
    • Gross receipts of a former affiliate are not included, and this exclusion of gross receipts of such former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased.
    • If a borrower sold a segregable division during 2020, the gross receipts will continue to include the receipts of the division that was sold.
  • Inclusions
    • All revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
    • All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
  • Exclusions
    • Taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees).
    • Proceeds from transactions between a concern and its domestic or foreign affiliates.
    • Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
    • Any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020.
  • Calculation of Gross Receipts for Nonprofits
    • For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, eligible 501(c) organization, or eligible destination marketing organization, “gross receipts” has the meaning in section 6033 of the IRC, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts.
    • Specific Inclusions
      • The gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts.
      • The gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts.
      • The gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T).
      • The gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale.
      • The gross amount received as investment income, such as interest, dividends, rents, and royalties.

Application

• • Applicants must submit Paycheck Protection Program (SBA Form 2483-SD).
  • Applicants must also submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records.
  • No additional documentation to substantiate payroll costs will be required if the applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount, and (iii) the lender for the applicant’s Second Draw PPP Loan is the same as the lender that made the applicant’s First Draw PPP Loan.

Certifications

In addition to the certifications required for a First Draw PPP Loan, an applicant for a Second Draw PPP Loan must certify as to the following:

• • The applicant has realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period.
    • For Second Draw PPP Loans greater than $150,000, the applicant must provide documentation to the lender substantiating the decline in gross receipts at the time of application.
    • For Second Draw PPP Loans of $150,000 or less, the applicant must provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness for the Second Draw PPP Loan or upon request from SBA.
  • The applicant received a First Draw PPP Loan, and, before the Second Draw PPP Loan is disbursed, will have used the full loan amount (including any increase) of the First Draw PPP Loan only for eligible expenses.
  • The applicant is not any of the following: a publicly traded company, a business engaged primarily in political or lobbying activities, certain business connected with China or Hong Kong, or a business that receive a Shuttered Venue Operator Grant.

Forgiveness

Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans, except that Second Draw PPP Loan borrowers with a principal amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

Unresolved First Draw PPP Loans

If a borrower’s First Draw PPP Loan is under review by SBA and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount it received, the lender will receive notification from SBA when the lender submits an application for a guaranty of a Second Draw PPP Loan and will not receive an SBA loan number until the issue related to the unresolved borrower’s First Draw PPP Loan is resolved. Pursuant to IFR 2, SBA will resolve issues related to unresolved borrowers expeditiously. Notwithstanding a borrower’s First Draw PPP Loan being under review, such borrower should still apply for a Second Draw PPP Loan so that such loan is ready for funding upon completion of the review, as the PPP remains first come, first served.

PPP Forgiveness Updates

On January 19, 2021, SBA issued the following new updated PPP loan forgiveness applications:

• Revised SBA Form 3508 PPP Loan Forgiveness Application
• Revised SBA Form 3508EZ PPP Loan Forgiveness Application
• Revised SBA Form 3508S PPP Forgiveness Application

In addition, SBA issued an Interim Final Rule (IFR 3) on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act to consolidated previously issued guidance on forgiveness and reflect the revisions required by the EAA.

Tax Matters Update

Contributed to by Ashley Withers

The CAA introduced significant changes regarding the tax treatment of PPP loans that are ultimately forgiven. Now, borrowers that have some or all of their PPP loan forgiven are permitted to deduct otherwise eligible expenses associated with forgiven PPP loan proceeds. Allowing for such deductions is in contravention with the IRS’s previously-issued guidance^[7], which stated that borrowers could not claim such deductions. Therefore, in response to the CAA, the IRS issued Rev. Rul. 2021-02 on January 6, 2021, which provides that forgiven PPP funds are excluded from gross income and expenses remain deductible. The change permitting deductibility is effective for taxable years ending after the date of the enactment of the CARES Act.

In addition, the CAA also provides that any tax basis increase of a borrower’s assets that occurs due to receiving a PPP loan will not be reduced upon forgiveness. The CAA further affirms that forgiven PPP loans remain excluded from eligible taxpayers’ income as provided for under the CARES Act.

More to Come

SBA continues to issue forms, regulations and guidance for the PPP, and we expect an update of SBA’s PPP FAQs will be released in the coming weeks. We continue to monitor developments on these fronts and will provide additional information and updates as events warrant. We also encourage you to check SBA and Treasury’s websites for updates and additional information on the PPP, CARES Act and other governmental stimulus programs.

JW Contacts

For specific assistance or more information concerning the PPP or other COVID-19 stimulus programs, please contact John Wittenberg or Lindsey Berwick. For specific assistance or more information concerning the tax aspects of COVID-19 stimulus programs, please contact Ashley Withers. Additional information on the CARES Act, the PPP and other COVID-19 stimulus may be found at JW.com/Coronavirus.

^[1] See 13 C.F.R. 121.201.
^[2] Under SBA’s alternative size standard, a business concern may qualify as a “small business concern” if it, together with any affiliates: (1) has a maximum tangible net worth of not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of application is not more than $5 million.
^[3] For purposes of loan eligibility, the CARES Act defines the term “employee” to include all individuals employed on a full-time, part-time, or other basis.
^[4] In addition, the SBA and Treasury released Form 3508D, which certain individuals must use to disclose controlling interest in an entity applying for a PPP loans.
^[5] Operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government (COVID Requirements), during the period beginning on March 1, 2020, and ending the date on which the national emergency with respect to the COVID-19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. Such expenditures may include (i) the purchase, maintenance, or renovation of assets that create or expand (a) a drive-through window facility; (b) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (c) a physical barrier such as a sneeze guard; (d) an expansion of additional indoor, outdoor, or combined business space; (d) an onsite or offsite health screening capability; or (e) other assets relating to the compliance with the COVID Requirements; and (ii) the purchase of (a) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (b) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (c) other kinds of personal protective equipment. Such expenditures exclude residential real property or intangible property.
^[6] “Lender of Record” is the Lender that is reflected on SBA’s system as the current owner of the First Draw PPP Loan. If the First Draw PPP Loan was sold after loan origination, the Lender of Record is the Lender that purchased the loan.
^[7] IRS Notice 2020-32, 2020-21 IRB 837 (May 18, 2020); Rev. Rul. 2020-27, 2020-50 IRB 1552 (Nov. 19, 2020); Rev. Proc. 2020-51, 2020-50 IRB 1599 (Nov. 19, 2020).

Related Resources:

• JW Coronavirus Insights & Resources microsite »
• JW Fast Takes podcasts and webinars »

Please note: This article and any resources presented on the Jackson Walker Coronavirus microsite are for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.