Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

On December 27, 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was signed into law providing nearly $900 billion in emergency coronavirus relief to families, workers, small businesses, and organizations impacted by the health crisis.  This new legislation includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) which provides a multitude of benefits to small businesses designed to mollify the economic repercussions imposed by the COVID-19 pandemic.  The Act enhances the Paycheck Protection Program (“PPP”) previously introduced by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as it includes new forms of relief for businesses.  A few highlights of the Act are as follows:

PPP Second Draw Loan:  Under the Act, PPP loans will be available to businesses with 500 or fewer employees that have not previously received a PPP loan to help with, among other things, payroll, rent, utilities, and healthcare costs. Moreover, particularly hard-hit businesses that previously borrowed under the CARES Act may be eligible to receive a second PPP loan.  To receive a PPP second draw loan, eligible borrowers must: (i) have less than 300 employees; (ii) have previously used or will use the full amount of their first PPP; and (iii) demonstrate at least a 25 percent reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter.  Borrowers who returned all or part of the initial PPP loan may reapply if they have not yet received forgiveness.  The amount of any additional PPP loan that a borrower may obtain is 2.5 times its average monthly payroll costs, except entities in industries assigned to NAICS Code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times of their average monthly payroll costs.  All second draw loans, however, are capped at $2 million per borrower.

Expansion of Forgivable Expenses:  Previously, the CARES Act provided that PPP borrowers were eligible for loan forgiveness equal to the sum of their payroll costs, in addition to covered mortgage interest, rent, and utility payments.  The new Act expands these forgivable expenses to include certain COVID-related expenses, which include, but are not limited to, supplier costs on existing contracts and purchase orders, including the cost for perishable goods and technology operations expenditures; costs incurred for personal protective equipment, costs incurred as a result of complying with federal and state health and safety guidelines; and costs related to property damage resulting from public disturbances occurring within the past year.  The Act further clarifies that business expenses paid with forgiven PPP loans are tax-deductible, thereby overriding the IRS’s previously issued guidance on tax deductibility of expenses paid for with PPP loan proceeds.

Full Loan Forgiveness:  To be eligible for full loan forgiveness, the Act provides that borrowers may now self-select a covered period of between 8 and 24 weeks from when the loan was received (rather than having to pick either 8 or 24 weeks) and that such covered period can extend through March 31, 2021.  The Act also creates a simplified forgiveness application for borrowers who received loans of $150,000 or less. 

Bankruptcy:  With respect to bankruptcy, the CAA makes certain interim amendments to the Bankruptcy Code that contemplate a corporate debtor’s eligibility to receive CARES Act funding.  Pursuant to the CAA, a corporate debtor may file a motion with the bankruptcy court to obtain CARES Act funding, and the court must hold a hearing within 7 days.  If the court authorizes the loan, then, to the extent it is not forgiven, it will be treated as a priority claim ahead of administrative expenses under section 507(a) of the Code.  These amendments will expire two years after the CAA becomes law.