Greg Corombos: Hi, I'm Greg Corombos, our guest this week on Expert Insights is Sandra Feldman. She's a Publication's Attorney at CT Corporation. And she's here to tell us about round three of the Paycheck Protection Program that was authorized in the COVID relief bill approved by Congress and signed by the President at the end of 2020.
But there are some differences between the first couple rounds of PPP, and what is available now. So, Sandra is here to walk us through some very important distinctions. And Sandra, always good to have you with us. Thanks for being here.
Sandra Feldman: Well, thank you, Greg. And indeed, there's some good news for small businesses that are still struggling because of COVID-19. And that's that the Paycheck Protection Program, or PPP, is back. And I think it's an improved version.
As a brief reminder, the PPP provides eligible small businesses with loans that don't have to be paid back, as long as the loan is used for certain kinds of expenses and mainly use for payroll costs. The original PPP ended in August and was just brought back by Congress in that $900 billion COVID-19 relief bill that Congress and the President kept fighting over and that was finally signed on December 27th. And in the relief bill, Congress allocates $284.5 billion for PPP loans, and the loans will be available until March 31st.
GC: Well, that's a lot of good info right out of the gate, Sandra. So, what would you say is the most important thing small business owners need to know about the 2021 version of PPP?
SF: I think the first thing I would point out is that there are actually two kinds of PPP loans for small businesses. There are what are called first draw loans, which allow for small businesses that didn't receive a PPP loan last year. And their second draw loans, which are for certain eligible small businesses that did receive a PPP loan last year, and that after using up the first loan, unfortunately, find that they need a second loan.
GC: Sandra, you say that only certain businesses can get that second loan. So does that mean it's not available for all of the small businesses that got a PPP loan last year?
SF: That's right. You may remember that the 2020 program received a lot of criticism because businesses that weren't really small or struggling that much, and they had access to funds from other sources, were getting PPP loans.
So this time around, Congress seems more intent on trying to make sure the loans go to businesses that really need them. So, to get a second loan, the borrower has to have 300 or fewer employees, which is still a lot, but it's less than the 500 limit to get a first loan. And it must have experienced a reduction in gross receipts of 25% or more in any quarter of 2020 as compared to the same quarter of 2019.
GC: So how much can a small business get with a second draw loan?
SF: For most businesses, the maximum second draw loan is two and a half times the average monthly payroll from 2019 or 2020. And it's up to $2 million. Although for businesses in the food service or accommodation sectors, like restaurants or hotels, it's three and a half times the average monthly payroll up to $2 million.
GC: You also said that small businesses can apply for their first loan through round three of PPP. So it's not just for repeat applicants, but are the rules for first-time loans the same as they were last year?
SF: Most of the eligibility rules and the loan terms are the same. However, there are a number of important differences between the 2021 version of the PPP, and the 2020 version. And these are changes that can benefit small businesses that are getting their first loan, or that are getting a second draw loan.
GC: And what are some of those beneficial changes?
SF: I'll name a couple. One thing that hasn't changed is that if you want the loan forgiven, it can only be used on eligible expenses. And at least 60% of the loan has to be used for payroll. But the new law adds to the type of expenses that the other 40% can be used for. So now in addition to mortgage interest, rent, and utilities like before, the loan can be used for worker protection costs related to COVID-19, uninsured property damage caused by looting or vandalism in 2020, and certain supplier costs and expenses for operations.
But again, 60% has to be used for payroll costs. And by the way, payroll costs now include expenses for providing group life, disability, vision, and dental insurance, as well as group health as before.
GC: We’re talking with Sandra Feldman. She's a Publication's Attorney at CT Corporation, and we're talking about the third round of the Paycheck Protection Program and what is different this time around.
Sandra, what other changes are there in this third round that could benefit borrowers that small business owners need to be aware of?
SF: Another change I think is helpful to small businesses is that there's more flexibility in choosing what's called the covered period. And that's the period of time after receiving the loan funds that they have to be used for payroll and other eligible expenses.
Last year, a borrower had to choose either eight weeks or 24 weeks as the covered period. Now they can choose any period that's between eight weeks and 24 weeks in which the funds have to be used, and the payroll level maintained.
And I'll mention two more things that should make small businesses that get a PPP loan happy. One is that the new law says that business expenses that were paid for by PPP loans that were forgiven are tax-deductible. And that reverses an IRS ruling from last year that said those expenses couldn't be deducted.
And one more change that should make some small business owner smile is that the Small Business Administration has been mandated to come up with a simple one page application for forgiveness for loans that are under $150,000.
GC: So whether you're a first-time applicant, or this is your second trial loan, how exactly does a small business apply for this kind of help?
SF: The process is basically the same as it was last year, you apply for the loan through a lender that's participating in the PPP. There are separate applications for the first draw loan and the second draw loan. In addition to the application form, there are a number of supporting documents that have to be submitted to the lender. And the documents differ depending upon whether it's a first or a second draw loan. And if it's a second draw loan, whether it's with the same lender as the first loan. And it also depends on the size of the loan. So it's probably best to talk to your lender and find out what's needed. And then to get all those records together before applying for the loan.
Also, if the Small Business applying for a loan is an LLC, or Corporation, in most cases, you'll have to provide your lender with a Certificate of Good Standing, and a certified copy of the Articles of Organization or the Articles of Incorporation. So you want to obtain those documents from the Secretary of State, or whatever your filing office is called, as soon as possible. And by the way, CT can help you get those documents.
And if the LLC or corporation is not in good standing, say because it failed to file an annual report, it will have to be brought back into good standing. And that will not only delay the filing of the loan application but will require the payment of penalties and interest, which is why it's so important to make sure your LLC or Corporation always complies with the annual report and other compliance requirements of its formation state. And I'm sorry about that little sermon there, Greg,
GC: Not a problem at all. That's one of many things you and CT are experts in. So much good information here, Sandra. Anything else about this 2021 version of the paycheck protection program that you really want folks to know?
SF: Just one more thing I wanted to point out. And that's that the Small Business Administration just announced that it's taking steps to ensure increased access to the PPP for minority, veteran, and women-owned businesses. And it's calling on lenders to redouble their efforts to assist borrowers in underserved and disadvantaged communities. And I think that's a very important aspect of the 2021 version of the paycheck Protection Program.
GC: Sandra, small businesses can use all of the good news they can get right now and it sounds like there could be some here in this third round of PPP. Thank you very much for being with us today.
SF: Thank you, Greg.
GC: Sandra Feldman is Publications Attorney at CT Corporation. I'm Greg Corombos. And for more information on this topic, please visit ctcorporation.com