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Consolidated Appropriations Act of 2021 Brings Changes to PPP

January 8, 2021
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As a new year begins, Paycheck Protection Program (PPP) borrowers have a new set of considerations in what seems to be an everchanging PPP process thanks to the Consolidated Appropriations Act of 2021 (“Act”) that was signed into law on December 27, 2020. While some PPP borrowers have done better than expected in 2020 and entered into the forgiveness phase of the loan process, there are still many borrowers that continue to struggle and the Act provides some much-needed relief.

We will review how this Act helps:

  • current PPP borrowers reach full forgiveness on existing loans by expanding eligible expense categories,
  • eligible borrowers to reapply for the initial rounds of PPP loans,
  • eligible borrowers to access a new round of PPP loans, and
  • all borrowers through tax changes and further simplification and clarification of the forgiveness process.

Expansion of Eligible Expenses

While previous extension of the covered period from 8 to 24 weeks has allowed most PPP borrowers to meet the necessary forgiveness threshold of eligible expenses, there are still businesses that have been severely impacted by the pandemic such that they still come up short with regard to the spending of covered expenses during a 24-week period.

The Act expanded the permitted uses of PPP funds (covered expenses) retroactive to the elected covered period to be inclusive of the following additional expense categories:

  • Covered operations costs – Includes payments for any software or cloud service that facilitates business operations, product or service delivery, processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting and tracking of supplies, inventory, records, and expenses.
  • Covered property damage costs - Includes payments for costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
  • Covered supplier costs - Includes payments for payments made to a supplier for goods that are essential to the operation of the PPP borrower at the time at which the expenditure is made, or is made pursuant to a contract or purchase order in effect any time before the applicable covered period or with respect to perishable goods, in effect before or at any time during the covered period.
  • Covered worker protection expenditures - Includes payments for operating or capital expenditure to facilitate the adaptation of business activities to comply with requirements established or guidance issued by the DHS, CDC, OSHA, or equivalent state or local guidance, such as personal protective equipment.
  • Covered non-cash compensation payroll costs – Expanded to include employer payments for group life and disability insurance expenses.

The expansion of these eligible cost categories will allow current PPP borrowers that have not yet applied for forgiveness and cannot currently reach full utilization of the PPP proceeds for covered expenses the ability to include these additional categories as covered expenses in their application for forgiveness.

Definition of Covered Period

The Act clarified a provision in the CARES Act as amended by the PPP Flexibility Act to define the covered period for PPP loans as follows:

Covered Period means the period beginning on the date of the origination of the covered loan and ending on a date selected by the eligible recipient of the covered loan that occurs during the period beginning on the date that is 8 weeks after such date of origination and ending on the date that is 24 weeks after such date of origination.

This clarification of the selection of the covered period allows PPP loan borrowers to choose the timeline of their covered period and does not mandate either an 8 week or a 24 week period but allows for a period of any time between those two benchmarks and the Act provides for the calculation of limitations related to shorter covered periods.

Reapplying for the Initial PPP Loan Rounds (“First Draw”)

The Act allocated $35B to eligible recipients that have not previously received a PPP loan, returned a loan previously qualified for, or current PPP borrowers that have not received forgiveness the ability to request an increase in their loan amount due to updated regulations. This provision covers the following situations:

  • an eligible recipient that has not previously received a First Draw PPP loan,
  • an eligible recipient that returned all or part of an included covered loan may reapply for a covered loan for an amount equal to the difference between the amount retained and the maximum amount applicable,
  • an eligible recipient that did not accept the full amount of an included covered loan may request a modification to increase the amount of the covered loan to the maximum amount applicable, or
  • an eligible recipient of an included covered loan that is eligible for an increased covered loan amount as a result of any interim final rule that allows for covered loan increases may submit a request for an increase in the included covered loan amount.

This provision is useful for borrowers that are affected by the updated regulations and have the ability to take advantage of the potential loan increases with sufficient eligible covered expenses in the covered period to still obtain full forgiveness. Eligible recipients will be able to apply for new or adjusted PPP loans from these funds through March 31, 2021.

New Round of PPP Loans (“Second Draw”)

One of the main components of the Act as it relates to the PPP was the introduction of a new loan round capped at $2M, otherwise known as the Second Draw. Borrowers are eligible for a Second Draw if they meet the following criteria:

  • entity previously received a First Draw PPP loan in accordance with the eligibility criteria in the Consolidated First Draw PPP Interim Final Rule,
  • entity has used, or will use, the full amount of its First Draw PPP loan (including the amount of any increase on such First Draw PPP loan) on authorized uses on or before the expected date on which the Second Draw PPP loan will be disbursed,
  • entity employs 300 people or less employees (affiliation waivers still apply),
  • entity had gross receipts during the first, second, third, or fourth quarter of 2020 that were at least 25% lower than the gross receipts* of the applicant (and affiliates) during the same quarter in 2019,
  • entity was in operation on February 15, 2020 and has not permanently closed.

The calculation of the Second Draw loan is the lesser of 2.5 times** the average total monthly payroll costs incurred or paid by the entity during either the calendar year 2019, calendar year 2020, or the one year period before the date of the loan, or the $2m limit. It is not clear if the alternative size standard still applies the Second Draw. Eligible recipients will be able to apply for the Second Draw through March 31, 2021.

Entities that are ineligible for the Second Draw include:

  • publicly traded companies,
  • companies that were not in operation on February 15, 2020,
  • companies that received a grant under Section 24 of Economic Aid to Hard-Hit Small Businesses (also known as Shuttered Venue Operator Grants),
  • any entity for which a Chinese or Hong Kong entity holds 20% or more direct or indirect interest,
  • entities that have a China resident on its board of directors,
  • anyone registered under the Foreign Agents Registration Act, or
  • certain other grant recipients under the Act.

Other Significant PPP Provisions in the Act

The Act also contains the following provisions that will have a significant tax benefit for borrowers and impact on the forgiveness process:

  • Taxability of the PPP loans - The loan forgiveness was originally intended to be tax free by Congress, but the Internal Revenue Service (“IRS”) offered contradictory guidance that would have effectively rendered the forgiveness as additional 2020 taxable income. The Act overrules the IRS and deems PPP debt forgiveness to be non-taxable once more. (Note: certain states may not follow the federal approach, which bears watching.) Companies should also determine if the additional PPP expenses, which are now deductible, create an issue where 2020 distributions are in excess of basis.
  • Loans less than $150k – The Act provides for a streamlined loan forgiveness process for loans of $150k or less. Borrower with loans less than $150k will not be required to submit any documentation proving compliance with the requirements (but are still required to maintain documentation internally to support the forgiveness calculations).
  • Effect of Economic Injury Disaster Loans (“EIDL”) on PPP loans - The Act eliminates the previous requirement that the loan forgiveness amount would be reduced by the amount of any EIDL advance.
  • Covered seasonal employers – For the calculation of the PPP loan amount the borrower should use the average total monthly payroll cost expenditures for any 12 week period between February 15, 2019 and February 15, 2020.
  • SBA PPP Audits – The SBA is required to provide to Congress audit plans detailing 1) the policies and procedures of the SBA for conducting forgiveness reviews and audits of PPP loans, and 2) the metrics that the SBA will use to determine which PPP loans will be audited.


Finally, the Act enables PPP borrowers to also take advantage of the Employee Retention Tax Credit (“ERTC”), previously it was one or the other. The Act extends the ERTC program to July 2021, and although eligible businesses can partake in both the PPP and ERTC programs simultaneously, they cannot take credit for the same eligible wages for both programs. Taking advantage of both programs would be ideal for business that had significant excess eligible payroll under the PPP program and meet the eligibility for the ERTC program.


*Gross receipts includes all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. The amount of any forgiven First Draw PPP loan shall not be included toward any borrower’s gross receipts.

**Entities with NAICS codes starting with 72 are eligible to utilize 3.5 as the multiplier.