By Jordan Mark Kelso and Jonathan W. Hugg, Schnader Harrison Segal & Lewis LLP
The most recent federal emergency legislation expands eligibility for small business loans, and provides a deadline extension to May 31, 2021, giving small businesses time to take action.
It is crucial for business owners to stay up to date regarding their rights and potential benefits under the seemingly endless deluge of laws responding to the last year of economic turmoil. One recently updated initiative is the federal Paycheck Protection Program (“PPP”). The PPP features a loan, backed by the U.S. Small Business Administration (“SBA”), intended to incentivize small businesses to keep their employees on payroll despite business hardship.
The eligibility requirements for small business and nonprofit PPP loans, under the recent American Rescue Plan Act of 2021 (“ARPA”), are essentially the same as they were under the previous Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Under the ARPA (and the CARES Act), most small businesses or nonprofit organizations are potentially eligible to receive a PPP loan if the organization employs 500 employees or fewer. However, some entities could benefit from elevated employee caps established by the SBA for certain industries. For example, businesses in the “Crude Petroleum Extraction” market can qualify with up to 1,250 employees. Check the SBA website to see if your business qualifies for one of these exceptions: https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf .
The ARPA also provides that small businesses or nonprofit organizations with more than one physical location are eligible to receive a PPP loan if they employ no more than 500 employees per physical location. This is an important expansion of PPP eligibility that creates a new class of potential beneficiaries.
However, being eligible for the PPP loan does not necessarily mean that a business will have that loan totally forgiven under the program. First Draw PPP loans made to eligible borrowers only qualify for loan forgiveness if during the applicable covered period following loan disbursement (8-24 weeks): (1) employee and compensation levels are maintained; (2) at least 60 percent of the proceeds are spent on payroll costs; and (3) the remaining loan proceeds are spent on payroll costs or other “eligible expenses.” These “eligible expenses” include, but are not limited to salary, wage, commission, or similar compensation; payment of cash tip or equivalent; or payment for vacation, parental, family, medical, or sick leave. Failure to abide by these and similar requirements, as well as registration directions accompanying the PPP loan itself, will present the risk that a portion or all of a business’s PPP loan will not be forgiven.
The Continued Assistance Act (“CAA”), ARPA and subsequent IRS guidance have settled some previous ambiguity regarding the interplay between the PPP and the Employee Retention Credit (“ERC”). The ERC is a refundable credit against payroll for qualified wages paid by employers who were hurt by the coronavirus but retained their employees. Prior to the passage of the CAA in December, an employer whose 2020 PPP loan was forgiven was then precluded from claiming an ERC. However, under the CAA and ARPA, businesses are now eligible to take the ERC even if they previously received PPP funding and loan forgiveness, as long as the payroll and expenses identified for the ERC were not paid using PPP funds.
Even if your business was previously granted forgiveness for a PPP loan, you may be eligible for a Second Draw PPP loan. Second Draw applicants are eligible if they (1) previously received a First Draw PPP loan and will or have used the full amount only for authorized uses; (2) have no more than 300 employees; and (3) can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020. The same requirements listed above for First Draw PPP loan forgiveness also apply to Second Draw PPP loan forgiveness.
The original deadline to apply for PPP loans under the ARPA was March 31, 2021. However, the PPP Extensions Act was passed by Congress and the President signed it into law on March 30, 2021, extending the deadline to apply for PPP loans to May 31, 2021.
To get started, small businesses and nonprofit organizations can head to the SBA website and begin their PPP process: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program .
For more detailed analysis on a wide range of legal issues, please see Schnader’s COVID-19 Resource Center at www.schnader.com/blog/covid-19-coronavirus-resource-center.
This summary of legal issues is published for informational purposes only. It does not dispense legal advice or create an attorney-client relationship with those who read it. Readers should obtain professional legal advice before taking any legal action.
Jordan Mark Kelso, Associate, Schnader Harrison Segal & Lewis LLP, jkelso@schnader.com. Kelso is an associate in Schnader’s Litigation Services Department.
Jonathan W. Hugg, Partner, Schnader Harrison Segal & Lewis LLP, jhugg@schnader.com. Hugg is co-chair of Schnader’s Financial Services Litigation Group. His practice concentrates on commercial and appellate litigation, with an emphasis on financial institution, real estate, regulatory enforcement, and municipal matters.