Spending Bill Revives Paycheck Protection Program for US Small Businesses

1/5/2021 (Updated 1/26/2021)

The US Congress has passed a spending bill that includes $285 billion to extend and expand the Paycheck Protection Program, providing new first-time loans and adding second-draw loans to help support small businesses. This LawFlash discusses the new stimulus package that is part of the Consolidated Appropriations Act, highlighting key provisions and guidance for businesses seeking to participate in the revived program.

Congress passed the Consolidated Appropriations Act, 2021 (CAA), a $2.3 trillion spending bill including $900 billion as a COVID-19 pandemic relief package, on December 21, 2020. A portion of the $900 billion relief package extends and expands the Paycheck Protection Program (PPP), a stimulus effort originally introduced by Congress as part of the CARES Act in March 2020. US President Donald Trump signed the CAA into law on December 27, 2020. The bill provides the Small Business Administration (SBA) 10 days to integrate and implement the new legislation into its guidance and updated regulations.


  • Effective January 6, 2021, the SBA announced interim final rules (IFR) detailing its guidance on the PPP extension and PPP second draw.
  • Effective January 19, 2021, the SBA announced guidance regarding the process for calculating (1) the 25% revenue reduction that is required for businesses to be eligible for second-draw loans and (2) the maximum loan amount for second-draw loans. Also on January 19, the SBA released an IFR discussing loan forgiveness requirements and loan forgiveness procedures. To highlight an important procedural note, the SBA instructs borrowers applying for forgiveness of a second-draw loan amount greater than $150,000 that their first-draw loan forgiveness application must be submitted before or simultaneously with the second-draw forgiveness application.
  • The SBA has begun to circulate an affiliation worksheet, Form 3511, to borrowers requesting disclosure of their affiliates’ financial information (e.g., average annual receipts, tangible net worth, average net income). The SBA has designated Form 3511 for internal use only and, as a result, has not made the worksheet publicly available. We anticipate that Form 3511 will become a standard component of the forgiveness process for borrowers with affiliates.


The new relief package revives the PPP with roughly $285 billion, reopening and strengthening the program for first-time and second-time borrowers and extending the lifetime of the program to March 31, 2021. Second-time borrowers are now eligible for second PPP loans (PPP second draws), subject to certain qualifying requirements discussed below. As with the PPP’s first iteration, which closed last August, the aid will provide forgivable loans to small business organizations and other entities, including some nonprofits (now including 501(c)(6) organizations) and independent contractors.

The relief package also allocates funding to support smaller and minority-owned businesses that may have struggled to gain access to PPP funds in the first iteration of the program. The new bill allocates $15 billion each to (1) community lenders and (2) small depository lenders for initial PPP loans and PPP second draws. Both of these channels are intended to serve as key pipelines for loans in minority and rural communities. In addition, the package specifically earmarks $35 billion for first-time borrowers, $15 billion of which is to fund loans for smaller, first-time borrowers with 10 or fewer employees or loans of less than $250,000 in low-income areas. $25 billion is allocated for second-draw PPP loans for smaller borrowers with 10 or fewer employees or loans of less than $250,000 in low-income areas. These provisions highlight Congress’s intent to provide aid to small businesses in the hardest-hit communities and to struggling businesses without access to more traditional loan pipelines.

PPP Tax Deductions

In addition, the relief package includes a highly anticipated technical correction clarifying that the Internal Revenue Service (IRS) cannot deny the deduction of expenses paid with proceeds of a PPP loan that is later forgiven. Not only does the technical correction override prior IRS and Treasury guidance on expense deductibility, but it also clarifies that, in the case of a partnership or S corporation, the excluded loan forgiveness income shall be treated as tax-exempt income that is allocated to the partners or shareholders. This treatment applies to original PPP loans as well as PPP second draws.

The technical correction helps many taxpayers who faced uncertainty in calculating their estimated tax payments and in preparing their financial accounting disclosures. Allowing these expenditures as tax deductions avoids coordination issues with how the deductions would have coordinated with other tax rules, such as the research and development tax credit, qualified business income deduction, and other payroll-based credits; permits taxpayers to update their tax projections for year-end; and possibly reduces outstanding fourth quarter tax payments.

Ultimately, the bill seeks to inject additional support into the economy as the nation struggles to withstand the strain of surging COVID-19 cases ahead of domestic vaccination efforts. While there were compromises on both sides of the political map, lawmakers prioritized the need for near-term aid to support those businesses most in need.


Initial Loan Eligibility

  • First-time borrowers under the new PPP extension will be subject to the program’s original eligibility rules.
    • However, as discussed below, publicly traded companies are no longer eligible for PPP loans.
  • The legislation clarifies that a business or organization that was not in operation on February 15, 2020 is not eligible for a PPP loan.
  • The SBA must release guidance to lenders within 17 days of enactment to allow borrowers that returned all or part of their PPP loans to reapply for the maximum amount applicable.
  • Clarification as of January 26, 2021:
    • On January 13, 2021, the SBA released a procedural notice to lenders describing the process by which borrowers may either reapply for a first-draw PPP loan or request an increase to a previously approved loan. This SBA guidance applies to eligible borrowers that (1) fully repaid a first-draw PPP loan, (2) returned part of a first-draw PPP loan, or (3) did not accept the full amount of a first-draw PPP loan for which they were approved.

Publicly Traded Companies Now Ineligible for PPP Loans

  • Clarification as of January 26, 2021:
    • Although no entity that issues publicly traded securities (an Issuer) is eligible for a PPP loan, the new legislation includes an express carve-out for news organizations that are subsidiaries of an Issuer. Therefore, a news organization will not be disqualified from obtaining a PPP loan solely because its parent company is an Issuer that itself would be ineligible.
    • Despite the explicit news organization carve-out, it remains unclear whether other subsidiaries of Issuers are categorically banned from receiving PPP loans.
  • The new legislation generally prohibits new PPP loans for publicly traded companies, even if they otherwise could establish eligibility and the need for this kind of relief.
  • This is a change to the statutory eligibility for PPP loans, as publicly traded companies were not ineligible for the program when it was first enacted as part of the CARES Act.
    • The existence—and the amount—of federally subsidized loans to publicly traded companies was widely discussed (and debated) after the SBA and the media released early loan recipient data identifying publicly traded companies that received PPP loans.
    • After some of this coverage, SBA FAQs clarified that PPP loan applicants had to certify “necessity” for the loan by “taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
    • In light of this guidance from the SBA, some public companies returned the PPP loans they received, but others retained the loan funds. The new legislation marks a different approach to this issue by outright prohibiting new PPP loans to publicly traded companies.

Allowable and Forgivable Expenses for PPP Loans

  • Effective retroactively as of the date of the CARES Act, March 27, 2020, loan forgiveness will be nontaxable and—a notable change from the original PPP—business expenses paid with PPP loan funds will be tax deductible.
    • Gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan.
    • Deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and the tax basis and other attributes of the borrower’s assets will not be reduced as a result of loan forgiveness.
  • The following additional expenses are allowable and forgivable uses for PPP funds. The legislation allows loans made under PPP before, on, or after the enactment of the new legislation to be eligible to utilize these expanded forgivable expenses except for borrowers that have already had their loans forgiven. The legislation adds these expense categories as new definitions to Section 7A of the Small Business Act:
    • Covered operations expenditures: Payment for any software, cloud computing, and other human resources or accounting needs.
    • Covered property damages costs: Those costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
    • 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 the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
    • Covered worker protection expenditures: Includes personal protective equipment (PPE) and adaptive investments to help a loan recipient comply with federal (or equivalent state and local) health and safety guidelines related to COVID-19 during the period between March 1, 2020 and the end of the national emergency declaration.
  • The new legislation clarifies that employer-provided group insurance benefits—including group life, disability, vision, or dental insurance—are included as payroll costs for purposes of the 60%/40% allocation between payroll and nonpayroll costs required for loan forgiveness.
  • Loans made under the PPP before, on, or after the enactment of the new stimulus bill will be eligible to use the expanded forgivable expenses, except for borrowers that have already had their loans forgiven.

Simplified Forgiveness Applications

  • Forgiveness of loans up to $150,000 will only require a one-page online or paper form in which the borrower certifies that it complied with the program’s requirements.

Borrowers in Bankruptcy

  • Clarification as of January 26, 2021:
    • According to the newest IFR, the SBA clarified that debtors in a bankruptcy proceeding are ineligible for PPP loans, declining to enable debtors to avail themselves of the opening provided in the stimulus package described below.
  • Update as of January 26, 2021: Reversing prior SBA guidance, the new stimulus package made certain borrowers in bankruptcy eligible for PPP loans. The language in the stimulus package had provided for the details explained below; however, as noted above, the SBA’s recent IFR declined to extend PPP loan eligibility to bankrupt debtors.
    • The process requires the SBA administrator to submit a written determination that, subject to satisfying all eligibility requirements, certain small business debtors are eligible for PPP loans.
    • The bankruptcy court must approve PPP loans to these debtors by holding a hearing within seven days after the filing and service of the motion to obtain the loan, and any such loan will be given a super-priority administrative expense claim in the bankruptcy process.
    • The super-priority administrative expense treatment of PPP loans obtained during the pendency of a bankruptcy elevates these claims, if unforgiven, to PPP loans obtained prior to the commencement of a bankruptcy case, which, in contrast, are treated as general unsecured claims.
      • In addition, if unforgiven, the super-priority administrative expense treatment of PPP loans obtained during the pendency of a bankruptcy case may render confirmation of a plan of reorganization more difficult. This is because unlike general unsecured claims, the US Bankruptcy Code provides that administrative expenses must be paid in full as part of a confirmed Chapter 11 plan.
    • The provisions in this section would sunset two years from the date of enactment.


PPP Second-Draw Eligibility

  • In order to be eligible to receive a PPP second draw, applicants must satisfy all of the following criteria:
    • Employ no more than 300 employees.
      • Note: Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ no more than 300 employees per physical location in order to be eligible for a PPP second draw.
    • Have used, or can demonstrate a plan to use, the full amount of their entity’s original PPP loan.
    • Demonstrate at least a 25% reduction in revenue in the first, second, or third quarter of 2020 relative to the corresponding 2019 quarter. Applications submitted on or after January 1, 2021 may use revenue from the fourth quarter of 2020 compared to the same quarter in 2019 to satisfy eligibility.
      • As noted above, the business or organization must have been in operation on February 15, 2020 in order to be eligible for any type of PPP loan.
  • An eligible applicant may only receive one PPP second draw loan.

PPP Second-Draw Amounts and Terms

  • PPP second draws will have a maximum loan amount of $2 million for each applicant entity.
  • To calculate the amount of the PPP second draw, borrowers will receive the lesser of (1) an amount of up to 2.5 times the average monthly payroll costs in one year prior to the loan or the calendar year, or (2) $2 million.
    • Notable exception: Applicants in the accommodation and food services industries, as designated by the SBA, are eligible to receive a loan for the lesser of (1) 3.5 times their average monthly payroll or (2) $2 million.
  • Fees are waived for both borrowers and lenders to encourage participation in the program.

PPP Second-Draw Forgiveness

  • Consistent with initial PPP loans, in order to receive full loan forgiveness, borrowers must allocate at least 60% of the PPP funds toward payroll costs (i.e., a 60%/40% cost allocation between payroll and nonpayroll costs).
  • Borrowers of a PPP second-draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments; covered operations expenditures; covered property damage costs; covered supplier costs; and covered worker protection expenditures incurred during the covered period.
  • Similar to the tax treatment for initial PPP loans, loan forgiveness on PPP second draws will be nontaxable, and business expenses paid with PPP second-draw funds will be tax deductible, all effective for tax years ending after the date of enactment of the associated provision of the bill. 


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