The persistence of the COVID-19 pandemic has created challenging business conditions in Michigan and across the U.S. The second wave of infections has forced many state and local government agencies to again implement restrictive orders to curb virus transmission. While necessary, the orders have created an additional dimension of complexity for many charting a course back to profitability. Just as the stress hit an all-time high, Congress passed the Consolidated Appropriations Act, 2021, which provides comprehensive relief to businesses, extends the authority to make Paycheck Protection Program (PPP) loans through March 31, 2021, guarantees a PPP Second Draw Program and revises some PPP requirements. While welcome news, foreign-owned or controlled businesses in the U.S. are wondering if they will be able to receive an initial or second PPP loan this time around. The recently released Interim Final Rule for PPP1 and PPP2 provides important details to consider. To help clients, prospects, and others, Clayton & McKervey has provided a summary of the key considerations below.
Affiliation & Eligibility Requirements
The Small Business Administration (SBA) Affiliations rules apply in determining eligibility for this PPP round. Four tests of affiliations are applied clearly to PPP loans and include control between entities determined by 50% or more ownership and overlap in management. In most cases, the PPP applicant is considered together with its domestic and foreign affiliates to determine eligibility as a small business concern.
Size eligibility requirements are different depending on whether it is the first or second PPP loan for an applicant. In order to qualify for a first time PPP loan, an applicant must not employ more than 500 employees or must meet the SBA employee-based size standard for the applicant’s industry, if higher.
Eligibility for a Second Draw PPP loan is narrower. To qualify, an applicant must not employ more than 300 employees, have experienced a revenue reduction of 25% or greater in 2020 relative to 2019, and has used (or will use) all first round PPP loan funds. The revenue reduction is calculated by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the gross receipts for the corresponding quarter of 2019. A borrower in operation for all four quarters of 2019 can meet the required revenue reduction if it experienced a reduction in annual receipt of 25% or greater in 2020 compared to 2019 and submits copies of annual tax forms substantiating the revenue decline.
Special rules apply to businesses in certain industries based on applicable NAICS codes which are not addressed in this article.
Other Foreign Control Restrictions on Eligibility
The Second Draw PPP eligibility includes an exclusion for any applicant which:
- Is owned directly or indirectly not less than 20% by
- An entity organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or
- An entity with significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong
- Retains as a member of the board of directors a person who is a resident of the People’s Republic of China, or
- Is primarily engaged in political or lobbying activities including research or advocacy in public policy or political strategy. This includes any entity that is self-described as a think tank.
First Time – Loan Amount Calculations
The maximum loan amount for first time borrowers is $10M and is determined using a payroll-based formula. To make the calculation, an applicant should aggregate all payroll costs from either 2019, or 2020. Next, they should subtract any compensation paid in an excess of $100,000 annually, then calculate the monthly average payroll cost by dividing employee compensation by 12, finally multiply the average monthly payroll costs by 12.
Second Draw – Loan Amount Calculations
The maximum loan amount is equal to the lesser of two and a half months of average monthly payroll or $2M. An important exception is for hotels, restaurants, and other businesses with a NAICS code starting with 72, as they are permitted to use three and a half months. There were also minor changes made to the calculation process for ranchers, farmers, and partnerships. When making the calculation the relevant period is either the 12-months prior to loan application or 2019.
The loan terms for both loans are largely the same. No personal guarantees are required, the interest rate is 1% and is calculated on a non-compounding basis, maturity is five years, and all applications will be processed relying on the applicant’s business and economic certifications.
Applying for a Loan
The SBA has already started accepting applications for first-time and second draw PPP loan applicants. The first time and second draw loan applications are available on the SBA’s website and contain detailed certification and other supplementary information.
The changes made to the Paycheck Protection Program mean many foreign-owned businesses are eligible to apply. If you have questions about the information outlined above or need assistance with the application process, Clayton & McKervey can help. Our international team works with foreign-owned companies and excelled in assisting them obtain PPP loans in 2020. For additional information call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.