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Updated Paycheck Protection Program: What it Means for Nonprofits

In the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“Economic Aid Act”), included in the omnibus appropriations bill signed into law on December 27, 2020, Congress extended and modified the existing Paycheck Projection Program (PPP) and authorized a new “second draw” program under which some previous PPP loan recipients are eligible to apply for and receive a second PPP loan. 

Both programs are authorized through March 31, 2020, meaning loans can be issued through that date provided funds remain available.  Qualifying 501(c)(3)s are eligible, and certain 501(c)(6)s (trade associations) are now eligible as well. 501(c)(4) organizations remain ineligible for the loans. 

PPP Loan Program for First-Time Applicants

The new round of PPP loans are available to new applicants on much the same terms as the first round, which we detailed in previous posts.  However, the Economic Aid Act made several changes to the program:

Loan Calculation – Qualifying organizations with 500 or fewer employees remain eligible to receive a loan of up to 2.5-times their average monthly payroll costs over a one-year look-back period, up to a cap of $10 million.  A borrower can choose as its one-year look-back period (i) its 2019 tax year, (ii) its 2020 tax year, or (iii) the one-year period immediately before the date the loan is made.  For example, an organization operating on a January-December fiscal year that applies for a PPP loan on February 15, 2021 could choose to calculate its average monthly payroll costs over (i) the 2019 calendar year, (ii) the 2020 calendar year, or (iii) the period of February 15, 2020 – February 14, 2021. 

Permitted Uses – In addition to using PPP loan funds to cover the categories of expenses previously allowed (payroll costs; rent; mortgage/debt interest payments; utilities), borrowers may now also use PPP loan funds to cover other expenditures relating to the COVID-19 emergency, including payments for cloud computing services or other business software or  to facilitate workplace compliance with federal, state, or local regulations or guidance relating to sanitation, social distancing, or other worker safety measures during the COVID-19 emergency.  However, at least 60% of a borrower’s PPP loan funds must still be used to cover payroll costs as opposed to other categories of allowed costs. 

Prohibition on Use of PPP Funds for Lobbying – The Economic Aid Act prohibits the use of PPP funds for certain lobbying activities as defined by the Lobbying Disclosure Act (LDA) and certain other lobbying expenditures, including lobbying of state or local governments.  501(c)(3)s should note that this prohibition extends to efforts to influence executive branch or administrative action that would not typically qualify as lobbying under IRS definitions. 

Loan Forgiveness – As before, a PPP loan may be forgiven if the borrower is able to demonstrate that over a period of time after the loan is disbursed (the “loan forgiveness covered period”) the borrower meets certain employee retention benchmarks.  Under the Economic Aid Act, a borrower’s loan forgiveness covered period begins on the date the loan is disbursed and ends on any date selected by the borrower, so long as that date falls between 8 weeks and 24 weeks after the disbursement.  (For example, a borrower receiving PPP loan funds on March 1, 2021 can select any date from April 26, 2021 and August 16, 2021 as the end-date for the covered period.)  Previously, a borrower had to use an 8-week covered period (under the original version of the PPP) or had to choose between either an 8-week or 24-week covered period (under the PPP as amended in mid-2020). 

Simplified Forgiveness Application for Loans of $150,000 or Less

The Economic Aid Act established a new, simplified application for use by organizations seeking forgiveness of PPP loans not exceeding $150,000.  The streamlined forgiveness application is one page in length, and the borrower is not required to submit supporting documentation. 

PPP Second Draw Loan Program

The new “second draw” loan program makes additional PPP loans available to previous recipients on similar terms to their original loans.  However, not all entities who received a PPP loan are eligible for a “second draw” loan. 

25% Reduction in Gross Receipts – To qualify for a second loan, an organization generally must employ 300 or fewer people and must have experienced a 25% reduction in gross receipts during at least one calendar quarter in 2020 as compared to its gross receipts during the same quarter in 2019, or a 25% reduction in gross receipts for the full year in 2020 as compared to 2019. 

The SBA has issued guidance about how organizations should calculate “gross receipts” for purposes of eligibility for second draw PPP loans and what documentation they will need to provide.  For 501(c)(3)s, “gross receipts” includes the total amount of all contributions, gifts, grants, and dues (without reduction for expenses of raising such funds), as well as gross receipts from related or unrelated business activities, from the sale of assets, and from investment income.  501(c)(3)s must also include the “gross receipts” of affiliates in this calculation for eligibility purposes. 

Ineligibility for Certain Research & Advocacy Organizations – The Economic Aid Act makes ineligible for a second loan any entity “primarily engaged in political 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 otherwise describes itself as a think tank in any public documents.”  Of course, there has not yet been any interpretative guidance from the SBA or a judicial interpretation of the scope of this provision.  Pending such guidance, 501(c)(3)s that can be said to be “organized for” research or advocacy on public policy (for example, organizations whose governing documents reflect such a mission) or that can be said to “primarily” engage in such activities should carefully consider whether they meet the eligibility criteria. 

Other Details – The process for applying for and receiving a second draw loan, and obtaining forgiveness of the loan, are generally similar as for a first draw loan, aside from the additional criteria for eligibility.  The maximum loan amount is still calculated based on 2.5-times the applicant’s average monthly payroll, except that second draw loans are capped at $2 million.

This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.