Congress Passes PPP 3.0, including Second Draw PPP Loans (summary)

Both the House and Senate have now passed the $900M stimulus bill that includes $285 Billion for first and second draw PPP loans, and it heads to the president for signature.  It is not clear when that will happen, or when SBA will reopen the PPP application portal as the Act gives them 10 days to issue implementing regulations for the new provisions here.  

The high level summary is that:

•          Expenses paid with PPP proceeds are (finally) deductible.

•          The PPP program is funded for applications through March 31, 2021.

•          For first time borrowers the eligibility requirements, process and loan terms generally remain the same, with some additional flexibility around the length of the covered period and seasonal employers get some additional flexibility.

•          The bill creates a new “Second Draw PPP” facility allowing second PPP loans of up to $2.0M for borrowers who:

o got a first PPP loan and have used “or will use”(?) all of that first PPP loan,

o   have less than 300 employees,

o   can demonstrate a 25% decline in revenue for any quarter in 2020 vs the same quarter in 2019 (or vs. Q1 2020 for newcos), and

o   aren’t engaged in lobbying, and aren’t affiliated with China.

•          Creates simplified applications and forgiveness for loans under $150k.

•          Expands affiliation waiver an loan availability for news organizations.

•          Creates grants of up to $10M for live venue operators, promoters, theatrical producers, museums, movie theaters and talent representatives, subject to some pretty detailed eligibility requirements described below.

The full text of the bill is linked above.  The House Democrats released a helpful summary of the key provisions (Yes, I just used “House Democrats” and “helpful” in the same sentence unironically).  I’ve pasted their relevant PPP summaries below, which I’ve lightly edited for clarity and brevity and to which I’ve added a few explanatory and editorial notes.  

Note that we are still digesting some of this, so stay tuned for updates.  We are planning at least one webinar on this, but probably will wait until after the first of the year when the SBA implementing regulations come out and dealflow returns to a more survivable pace.   In the meantime, please let us know if you have questions on any of this.


Sec. 276. Clarification of tax treatment of Paycheck Protection Program loans.

The provision clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies thatdeductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

Sec. 278. [Provides the same treatment as above foremergency EIDL grants, certain loan repayment assistance, Targeted EIDL advances and Grants for Shuttered Venue Operators.]

Title III – Continuing the Paycheck Protection Program and Other Small Business Support

Section 301; 302: Short Title; Definitions.

Section 303: Emergency Rulemaking Authority.

• Requires the SBA Administrator to establish regulations to carry out this title no later than10 days after enactment of this title.

(TRG: This makes the holidays challenging for the SBA regulation drafting team.)

Section 304: Additional Eligible Expenses.

• Makes the following expenses allowable and forgivable uses for Paycheck Protection Program funds:

o Covered operations expenditures. Payment for any software, cloud computing, and other human resources and accounting needs.

o Covered property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.

o Covered supplier costs. Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are 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.

o Covered worker protection expenditure. 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. 

• Allows loans made under PPP before, on, or after the enactment of this act to be eligible to utilize the expanded forgivable expensesexcept for borrowers who have already had their loans forgiven. (TRG: Many of the new provisions apply retroactively to all PPP loans, while a few (like this one) apply retroactively to all loans except those already forgiven.  This means that SBA may shut down their forgiveness process for some period of time while they adapt to these new provisions.)

Section 305: Hold Harmless.

• Provides that 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 shall not be subject to any penalties relating to loan origination or forgiveness if (1) the lender acts in good faith relating to loan origination or forgiveness; and (2) all relevant federal, state, local and other statutory and regulatory requirements are satisfied. 

Section 306: Selection of Covered Period for Forgiveness.

• Allows the borrower to choose a covered period of anywhere from 8 to 24 weeks after origination.

TRG:  This is helpful change that eliminates an ongoing ambiguity about whether FTE and comp measures had to be maintained by Borrowers wanting to use a shorter forgiveness period  (i.e., this means that they do NOT need to be maintained through the prior 24-week period).

Section 307: Simplified Application.

• Creates a simplified application process for loans under $150,000 such that:

o 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, 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. (TRG: it appears that this estimated total amount could be less than 60% of the loan amount.)

·         The borrower must also attest that borrower accurately provided the required certification and complied with Paycheck Protection Program loan requirements.

·         SBA must establish this form within 24 days of enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. 

·         Additionally, borrowers are required to retain relevant records related to employment for four years and other records for three years.

·         The Administrator may review and audit these loans to ensure against fraud.

o Applies to loans made before, on, or after the date of enactment, including the forgiveness of the loan.

Section 308: Specific Group Insurance Payments as Payroll Costs.

• Clarifies that other employer-provided group insurance benefits are included in payroll costs. This includes, group life, disability, vision, or dental insurance.

• Applies to loans made before, on, or after the date of enactment, including the forgiveness of the loan.

Section 310: Clarification of and Additional Limitations on Eligibility.

• Clarifies that a business or organization that was not in operation on February 15, 2020 shall not be eligible for an initial PPP loan and a second draw PPP loan.

• Prohibits eligible entities that receive a grant under the Shuttered Venue Operator Grants from obtaining a PPP loan.

Section 311: Paycheck Protection Program Second Draw Loans.

• Creates a second loan from the Paycheck Protection Program, called a “PPP second draw” loan for smaller and harder-hit businesses, with a maximum amount of $2 million.

• Eligibility. In order to receive a Paycheck Protection Program loan under this section, eligible entities must: o Employ not more than 300 employees; (TRG:  There is no specific guidance on how (or when) the employee counts will be measured.  We need the implementing regs for this, but it seems likely that this may be measured as of the date of the original PPP loan application which was calculated using the average over the 12 months preceding that original application.)

o Have used or will use the full amount of their first PPP; and (TRG: “will use” creates significant ambiguity here…)

o Demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter.

·         Provides applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019.

·         Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

·         (TRG: basically a 25% reduction YOY for any quarter in 2020 vs the corresponding quarter in 2019 OR for new business vs Q1 2020.)

• Eligible entities must be businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. (TRG: same as the original PPP eligibility, subject to the new exclusions below.)

• Ineligible entities include: entities listed in 13 C.F.R. 120.110 (TRG: same exclusions (and exceptions therefrom) as apply to initial PPP loans) subsequent regulations except for

·         entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public document, 

·         entities affiliated with entities in the People’s Republic of China;

·         registrants under the Foreign Agents Registration Act; and

·         entities that receive a grant under the Shuttered Venue Operator Grant program.

• Loan terms. In general, borrowers may receive a loan amount of up to 2.5Xthe average monthly payroll costs in the one year prior to the loan or the calendar year. No loan can be greaterthan $2 million. 

o Seasonal employers may calculate their maximum loan amount based on any 12-week period beginning February 15, 2019 through February 15, 2020.

o New entities may receive loans of up to 2.5X the sum of average monthly payroll costs.

o Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs.

o Businesses with multiple locations that were eligible entities under the initial PPP requirements [are still eligible if they have no more than] 300 employees per physical location.

o Waivers of affiliation rules that applied during initial PPP loans apply to a second loan. (TRG: NAICS 72, franchises, SBIC, etc.)

o An eligible entity may only receive one PPP second draw loan.

o For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits their loan forgiveness application and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.

• Loan forgiveness. Same as the original PPP, including the 60/40 split.

• Churches and religion organizations. Expresses the sense of Congress that the Administrator’s guidance clarifying the eligibility of churches and religious organizations was proper and prohibits the application of regulations otherwise rendering ineligible businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs. Codifies that the prohibition on eligibility in 13 CFR 120.110(k) shall not apply for initial or second draw loans.

• Forgiveness Reductions.  Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25 percent. Extends existing safe harbors on restoring FTE and salaries and wages. 

·         Allows the SBA and Treasury Department to jointly modify any date in section 7A(d) consistent with the purposes of the Paycheck Protection Program. (TRG: Not entirely sure what this means, but I think it’s just a housekeeping change that hopefully won’t result in mischief or confusion.)

Section 312: Increased Ability for Paycheck Protection Program Borrowers to Request an Increase in Loan Amount Due to Updated Regulations.

·         Requires the Administrator to release guidance to lenders within 17 days of enactment that allows borrowers who returned all or part of their PPP loan toreapply for the maximum amount applicable so long that they have not received forgiveness.

·         Additionally, this section allows borrowers whose loan calculations have increased due to changes in interim final rules to work with lenders to modify their loan value regardless of whether the loan has been fully disbursed, or if Form 1502 has already been submitted. 

Section 313: Calculation of Maximum Loan Amount for Farmers and Ranchers under the Paycheck Protection Program.

• Establishes a specific loan calculation for the first round of Paycheck Protection Program loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, who report income and expenses on a Schedule F, and were in business as of February 15, 2020. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. 

• Applies to PPP loans before, on, or after the date of enactment, except for loans that have already been forgiven.

Section 314: Farm Credit System Institutions.  [OMITTED]

Section 315: Definition of a Seasonal Employer.

• Defines a seasonal employer to be an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.

• Applies to any loan made before, on or after enactment including the forgiveness of the loan.

Section 316: Housing Cooperatives.

• Extends PPP eligibility to housing cooperatives defined in section 216(b) of the Internal Revenue Code of 1986 and which employ no more than 300 employees.

Section 317: Eligibility of News Organizations for Loans under the Paycheck Protection Program.

• Makes eligible FCC license holders and newspapers with more than one physical location, as long as the business has no more than 500 employees per physical location or the applicable SBA size standard; and makes eligible section 511 public colleges and universities that have a public broadcasting station if:

o The organization certifies that the loan will support locally focused oremergency information. 

• Waives affiliation rules for newspapers, TV and radio broadcasters, and public broadcasters, as long as the organization has no more than 500 employees per physical location or the applicable SBA size standard. 

• Waives the prohibition against publicly-traded news organizations from being eligible if the business certifies that the loan will support locally focused or emergency content. TRG:  Interestingly, this section also refers to subsidiaries of public companies, but the actual prohibition in 342 below does NOT seem to apply to subs.

Section 318: Eligibility of 501(c)(6) and Destination Marketing Organizations for Loan Under the Paycheck Protection Program.

• Expands eligibility to receive a Paycheck Protection Program loan to include the following organizations:

o 501(c)(6) organizations if: 

§ The organization does not receive more than 15 percent of receipts from lobbying;

§ The lobbying activities do not comprise more than 15 percent of activities;

§ The cost of lobbying activities of the organization did not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020 and

§ The organization has 300 or fewer employees.

§ Professional sports leagues or organizations with the purpose of promoting or participating in a political campaign or other political activities are not eligible under this section.

o Destination Marketing Organizations if: 

§ The organization does not receive more than 15 percent of receipts from lobbying;

§ The lobbying activities do not comprise more than 15 percent of activities;

§ The organization has 300 or fewer employees; and

§ That destination marketing organization is registered as a 501(c) organization, a quasi-government entity, or a political subdivision of a state or local government.

Section 319: Prohibition on Use of Loan Proceeds for Lobbying Activities.

• Prohibits any eligible entity from using proceeds of the covered loan for lobbying activities, as defined by the Lobbying Disclosure Act, lobbying expenditures related to state or local campaigns, and expenditures to influence the enactment of legislation, appropriations, or regulations.

Section 320: Bankruptcy Provisions. 

• Establishes a special procedure in the bankruptcy process if the Administrator determines certain small business debtors are eligible for Paycheck Protection Program loans. It requires court approval for Paycheck Protection Program loans to these debtors and requires any such loan be given a superpriority claim in the bankruptcy process, providing additional protection to taxpayers and participating banks. The provisions in this section would take effect only upon a written determination by the Administrator that certain small business debtors are eligible for Paycheck Protection Program loans and would sunset two years from the date of enactment.

TRG:  Note that the superpriority provisions only appear to apply to PPP loans incurred by a debtor already in a bankruptcy proceeding at the time the PPP is incurred, and thus do NOT appear to PPP borrowers who filed for bankruptcy protection after incurring the loan.

Section 321: Oversight. 

• Requires the SBA to comply with GAO requests no later than 15 days, and requires the SBA to submit a detailed justification to Senate and House Small Business Committees if they are unable to comply with the request. It also would require the Secretary of the Treasury and SBA Administrator to testify within 120 days of enactment of this Act and not less than twice per year for the next two years to the Senate and House Small Business Committees. 

Section 322: Conflicts of Interest.

• Requires the President, Vice President, the head of an Executive department, or a Member of Congress as well as their spouse that has received a PPP loan to disclose this status at forgiveness or 30 days thereafter. It would also prohibit the covered individuals from receiving a loan in the future.

Section 323: Commitment Authority and Appropriations.

• Extends the time of the program to March 31, 2021.

• Sets the authorization level for PPP at $806.5 billion. 

• Separates regular 7(a) and PPP loans to ensure the continued operation of the 7(a) program by setting an authorization level of $75 billion and clarifies the 7(a) program level and secondary market cap. 

• Direct appropriations:

o $284.45 billion for PPP, including the following set-asides:

§ Lenders: 

  o $15 billion for PPP loans (initial and second draw) issued by community financial institutions, including community development

financial institutions (CDFIs) and minority depository intuitions (MDIs);

o $15 billion for PPP loans (initial and second draw) issued by certain small depository institutions.

§ Borrowers: 

o $35 billion for first-time borrowers, $15 billion of which for smaller, first-time borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas;

o $25 billion for second draw PPP loans for smaller borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas.

§ After 25 days, the SBA Administrator may adjust the set-asides as necessary.

o $25 million for the Minority Business Development Centers program under the Minority Business Development Agency (MBDA);

o $50 million for PPP auditing and fraud mitigation purposes;

o $20 billion for the Targeted EIDL Advance program, of which $20 million for the Inspector General;

o $57 million for the Microloan program as described in section 29;

o $1.9 billion to carry out sections 26, 27, and 28;

o $3.5 billion for the Debt Relief program as described in section 25;

o $15 billion for grants for live venues as described in section 24.

Section 324: Grants for Shuttered Venue Operators.

• Authorizes $15 billion for the SBA to make grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25 percent reduction in revenues.

(TRG:  Each of the above categories has detailed definitions and eligibility limitations (such as charging a ticket, cover or admission fee) that would likely exclude most restaurants, bars and other venues that only occasionally host live performances or movie nights and excludes operators that:

•          Are subs of public companies;

•          That operate in more than 1 country, more than 10 states and have more than 500 employees (in each case with affiliates);

•          Receive a PPP loan after this Actis enacted (so it appears than entities who got a prior PPP loan may be eligible); or

•          Present live performances, depictions or displays of a “prurient sexual nature.”  

• There is a set-aside of $2 billion for eligible entities that employ not more than 50 full-time employees, and any amounts from this set-aside remaining after sixty days from the date of implementation of this program shall become available to all eligible applicants under this section.

• The SBA may make an initial grant of up to $10 million dollars to an eligible person or entity and a supplemental grant that is equal to 50 percent of the initial grant. 

•          In the initial 14-day period of implementation of the program, grants shall only be awarded to eligible entities that have faced 90 percent or greater revenue loss.

•          In the 14-day period following the initial 14-day period, grants shall only be awarded to eligible entities that have faced 70 percent or greater revenue loss.

•          After these two periods, grants shall be awarded to all other eligible entities.

• Such grants shall be used for specified expenses such as payroll costs, rent, utilities, and personal protective equipment.


Section 325: Extension of the debt relief program.

Section 326: Modifications to 7(a) Loan Programs.

Section 327: Temporary Fee Reductions.

Section 328: Low-Interest Refinancing.

Section 329: Recovery Assistance under the Microloan Program.

            Section 330: Extension of Participation in 8(a) Program.

Section 331: Targeted EIDL Advance for Small Business Continuity, Adaptation, and Resiliency.

Section 332: Emergency EIDL Grants.

Section 333: Repeal of EIDL Advance Deduction.

Section 334: Flexibility in Deferral of Payments of 7(a) Loans.

Section 335: Documentation Required for Certain Eligible Recipients.

• Allows more flexibility for the Administration to accept documentation beyond those enumerated in the CARES Act to determine eligibility for sole proprietors and the self-employed. 

Section 336: Election of 12-week Period by Seasonal Employers.

• Expands the seasonal period to any 12-weeksbetween February 15, 2019 and February 15, 2020.

• Applies to loans before, on, or after the date of enactment, except for loans for which the borrower has already received forgiveness.

Section 337: Inclusion of Certain Refinancing in Nonrecourse Requirements.

• Ensures applicants cannot be held liable if they didn’t understand they had recourse against them at the time they took the PPP and EIDL loans after a refinancing. (TRG: There’s no “didn’t understand” requirement here.  This simply reinforces that PPP loan proceeds that were used to refinance a prior 7(a) loan incurred from Jan 31, 2020 until the start of the original PPP program are nonrecourse, just as if they were used for any other permitted purpose.)

Section 338: Application of Certain Terms through Life of Covered Loan.

• Clarifies that (1) fee waivers; (2) personal guarantee waiver; and (3) deferral eligibility continues past the covered period and attaches for the life of the PPP loan. 

Section 339: Interest Calculation on Covered Loans.

• Clarifies the interest rate on PPP loans is non-compounding and non-adjustable for all new initial Paycheck Protection Program loans and second draw loans.

•          TRG: It’s not immediately clear what “non-adjustable” means here, but I believe it is meant to essentially mean “fixed” and not “floating” … unless it is meant to mean that a default rate wouldn’t apply to “adjust” (i.e., increase) the applicable interest rate.  Also, it’s a little jarring to see the reference to the 4% interest rate here in the statute, which SBA lowered to 1% in its implementing regs.

Section 340: Reimbursement for Processing.

• Provides for PPP lender reimbursement by SBA for new PPP loans.

• Establishes a tiered reimbursement rate for PPP loans: (1) Loans of less than $50,000 that is equal to the lesser of 50 percent of the loan principal or $2,500; (2) loans of more than $50,000 and not more than $350,000 equal to five percent of the loan principal; (3) loans of more than $350,000 and less than $2,00,000 equal to three percent of the loan principal; and (4) loans of more than $2,000,000 equal to one percent. 

• Clarifies lender reimbursement by SBA may be made no later than 5 days post-disbursement.

• Clarifies PPP borrowers who knowingly retained a loan agent may not pay agent fees out of the PPP proceeds. This applies to PPP loan before, on, or after the date of enactment, including during forgiveness of such loan. 

Section 341: Duplication Requirements for Economic Injury Disaster Loan Recipients.

• Permits certain EIDL borrowers to also apply for a PPP loan.

Section 342: Prohibition of Eligibility for Publicly Traded Companies.

• Excludes publicly traded companies from PPP eligibility.

TRG: This does NOT apply retroactively and seems to:

·         only apply to the public issuer itself and not to any of its wholly-owned subsidiaries (though don’t be surprised if SBA applies this to those subs via the implementing regs); and

·         NOT apply to Second Draw PPP Loans (perhaps through a drafting quirk), such that public companies would not be eligible for a first PPP loan, but would be eligible for *second* PPP loan if they had already received and used a first PPP loan (but again, SBA may expand that via the implementing regs).

Section 343: Covered Period for New PPP Loans.

• Extends the covered period for all PPP loans through March 31, 2021.

• Applies to loans made before, on, or after the date of enactment, including the forgiveness of such loan.

TRG:  This is pretty confusing, but should just mean that borrowers can apply for these first and second draw PPP loans through March 31, 2021.

Section 344: Covered Period for Other Purposes.

• Clarifies the applicable period for employee’s salaries of $100,000 on an annualized basis as prorated during the period in which compensation is paid or incurred.

Sections 345-348 OMITTED:

Section 345: Extension of Waiver of Matching Funds Requirement under the Women’s Business Center (WBC).

Section 346: Clarification of Use of CARES Act Funds for Small Business Development Centers (SBDCs).

Section 347: GAO Report

Section 348: Effective Date; Applicability.

Further information;

Following yesterday’s announcement of a bipartisan, bicameral agreement on COVID-19 relief, Congressional leaders have released the legislative text of the $900 billion agreement, which they attached to the FY2021 government funding omnibus legislation. The release of the more than 5,500 pages of combined text comes after Congress announced the agreement on Sunday and passed a 24-hour continuing resolution to avoid a government shutdown and give staff time to finish drafting the text. A copy of the government funding legislation with the COVID-19 relief agreement is available here. Joint explanatory statements for each of the 12 annual appropriations divisions for FY2021 are available here. In addition, House Democrats released the following section-by-section summaries of appropriationsCOVID-19 relief provisions, and authorizing matters.

Given that the current continuing resolution keeping the government funded expires at midnight, the House attached a week-long stopgap funding bill to its rule for the package, which would give more time for the Senate and the President to approve the measure. As of this afternoon, Democratic and Republican leaders anticipate that they have the votes necessary to approve it, though it is worth noting that some members have expressed concerns about having insufficient time to review the package.

The K&L Gates Responding to COVID-19 resource center, which includes a variety of updates from across the firm’s platform, can be found here. Thank you.