What Was Third-Round Paycheck Protection Program (PPP) Funding?

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The Consolidated Appropriations Act of 2021 (CAA) was signed into law on December 27, 2020, and included new funding for the Paycheck Protection Program (PPP), which expired on August 8, 2020.

The PPP was a U.S. loan program established to help small businesses affected by the economic slowdown associated with the COVID-19 pandemic to pay the wages of employees and certain other expenses. It was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and originally included $349 billion in funding; however, that money was gone within less than two weeks, resulting in the second round of funding totaling $310 billion.

After round two loans ended in August 2020, the Consolidated Appropriations Act of 2021 (CAA) authorized the third round of PPP loans. Round three funding of $284 billion expanded on the original PPP goals of providing loans to businesses for payroll and other costs to help them remain viable and allow their workers to pay their bills; however, those funds were depleted, and as of May 31, 2021, the PPP was no longer available.

Key Takeaways

• A third round of Paycheck Protection Program (PPP) loans was authorized by the passage of H.R. 133—Consolidated Appropriations Act, 2021 into law on December 27, 2020.
• Based on the CARES Act, the first-draw PPP loans were available for the lesser of $10 million or 2.5 times a company’s average monthly payroll.
• Second-draw loans were up to $2 million and not more than 2.5 times average monthly payroll.
• 100% of a PPP loan could be forgiven if guidelines were followed.
• Passage of the PPP Flexibility Act of 2020 relaxed many PPP loan guidelines.

The table below outlines all three rounds of PPP loan funding.

Sources: U.S. Congress ; Congressional Research Service ; U.S. Small Business Administration

Changes to the PPP Announced by the Biden Administration

On February 22, 2021, the White House announced five changes to the Paycheck Protection Program (PPP). One change had a set term of two weeks. The other four were to be effective until at least the end of March 2021.

These changes were designed to make PPP funds available to very small businesses and others that had been inadequately helped by the program, according to the Biden administration.

• Beginning on February 24, 2021, through March 9, 2021, businesses with fewer than 20 employees were permitted to apply for PPP funding.
• The formula used to calculate PPP loans was revised to provide more funding for sole proprietors, independent contractors, and self-employed individuals. An additional $1 billion was allocated for these individuals in low- and moderate-income (LMI) areas.
• Eligibility for PPP funding was extended to small business owners with non-fraud-related felonies as long as the applicant was not incarcerated at the time of the application.
• Business owners with delinquent federal student loans were eligible for a PPP loan.
• Noncitizens who were lawful U.S. residents were also eligible and allowed to use their Individual Taxpayer Identification Numbers (ITINs) to apply.

February 24, 2021

The starting date for a 14-day period, ordered by the Biden administration, during which only businesses with fewer than 20 employees could apply for a PPP loan.

First-Draw vs. Second-Draw Loans

The CAA provided for two types of round three PPP loans. The first type was initial or first-draw loans up to $10 million for entities that had never received a PPP loan. The second type was second-draw loans of up to $2 million for entities that had received PPP loans.

Following guidance from the U.S. Small Business Administration (SBA) and the Treasury Department, community financial institutions including Community Development Financial Institutions (CDFIs) began making first-draw PPP loans on January 11, 2021, and second-draw loans on January 13, 2021.

Small lenders with less than $1 billion in assets were slated to begin making both first- and second-draw loans on January 15, 2021. All approved PPP lenders could begin lending on January 19, 2021.

PPP Third-Round General Terms and Conditions

Both first- and second-draw PPP loans were subject to the same general terms and conditions as original PPP loans under the CARES Act with one exception. Those terms were as follows:

• Loans were 100% guaranteed by the government.
• No collateral was required.
• No personal guarantees were required.
• The interest rate for all loans was 1%.
• Loans originally had a two-year term, but maturity was made five years by the Paycheck Protection Program Flexibility Act.

PPP Third-Round Eligible Entities

While there were key differences between first- and second-draw PPP loans, the types of eligible entities were the same.

• Small businesses with 500 or fewer employees (300 or fewer for second-draw loans)
• Businesses categorized as “Accommodation or Food Services” such as restaurants and hotels with 500 or fewer employees per location (300 or fewer for second-draw loans)
• Independently owned franchises
• Self-employed workers, independent contractors, gig workers, and sole proprietors
• 501(c)(3) businesses or tax-exempt nonprofit organizations; tax-exempt 501(c)(19) veterans organizations; and 31(b)(2)(C) tribal business concerns
• Housing cooperatives; eligible section 501(c)(6) organizations; or eligible destination marketing organizations with 300 or fewer employees
• News organizations that were majority-owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151 with 500 or fewer employees
• Business must have been in operation on February 15, 2020

Additional Second-Draw Requirements

Second-draw PPP loans had some restrictions that first-draw loans didn’t have. Businesses couldn’t receive a second-draw loan of up to $2 million unless they met the following conditions:

• They had received and used (or expected to use) all proceeds from the first-draw loan by the time they received (or expected to receive) the second-draw loan proceeds
• They had 300 or fewer employees
• They could demonstrate that they experienced a loss of at least 25% of gross receipts in any quarter during 2020 compared with the same quarter in 2019
• They spent all proceeds from their first-draw loan on eligible expenses

Second-Draw Borrower Exclusions

Round three guidelines excluded businesses from a second-draw loan if a company was:

• Permanently closed
• Ineligible under existing SBA regulations
• Primarily engaged in lobbying or other political activities
• Certain entities organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong
• Included a board member who was a resident of the People’s Republic of China
• Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612);
• A recipient of a shuttered venue operator grant under Section 324 of the Economic Aid Act
• Entities in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person owns, controls, or holds at least 20 percent of any class of equity
• A publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934

On March 30, 2021, the Paycheck Protection Program Extension Act was signed into law. It gave applicants until May 31, 2021, to apply for a PPP loan, extended the covered period to June 30, 2021, and gave lenders until that date to process loans.

Required Certifications for PPP Loans

Businesses were required to certify that pandemic-related economic uncertainty made the loan request necessary to support ongoing operations and that funds would be used as required. This included using no more than 40% for non-payroll costs to be eligible for foregiveness. This requirement applied to both first- and second-draw PPP loans.

Special New Set-Aside Funding

Round three included special set-aside funding for specific groups of first- and second-draw borrowers.

• $15 billion for lending by community financial institutions
• $15 billion for lending by insured depository institutions, credit unions, and farm credit system institutions with consolidated assets of less than $10 billion
• $35 billion for new first-draw PPP borrowers
• $15 billion and $25 billion for first- and second-draw PPP loans for borrowers with 10 employees or fewer, or for loans of less than $250,000 to borrowers in low- or moderate-income neighborhoods

Application Dates for a Third-Round PPP Loan

As noted above, applications for round three first-draw PPP loans from approved community financial institutions started on January 11, 2021. Second-draw applications began on January 13, 2021. That was followed by first- and second-draw loans from small lenders with less than $1 billion in assets on January 15, 2021. All SBA 7(a) lenders were approved to accept first- and second-draw applications starting on January 19, 2021.

Third-Round PPP Application Deadline

The Consolidated Appropriations Act, 2021 extended the Paycheck Protection Program through March 31, 2021, or until funds ran out. Congress extended the Paycheck Protection Program’s application deadline through May 31, 2021. Funds were exhausted in early May 2021. At this point the PPP was no longer available.

The amount of funds made available in the third round totaled $284 billion. Maximum loans of $10 million were available to first-draw borrowers, and loans up to $2 million were offered to second-draw, small business owners.

Application Process for a Third-Round PPP Loan

New first- and second-draw loans followed a pattern similar to that followed with previous PPP loans. Business owners could download and fill out the loan application from the SBA website.

The first-draw application and second-draw application were each seven pages long, including instructions.

Covered Period for Third-Round PPP

Round one and round two PPP loans stipulated that the period during which a business had to use its loan proceeds (the covered period) was eight weeks, beginning on the date when the business received its loan proceeds. That was later expanded to 24 weeks.

Round three allowed a business to choose either eight weeks or 24 weeks, giving it a bit more control over how to handle any needed reductions in workforce, once PPP funds were depleted.

60%

The percentage of both first- and second-draw PPP loans that had to be used for payroll expenses in order to qualify for loan forgiveness.

Use of Third-Round PPP Funds

The CAA expanded the types of expenses for which a business could use round three PPP funds. This also applied to existing PPP loan funds (unless the business already had obtained forgiveness).

In addition to payroll, rent, covered mortgage interest, and utilities, the Paycheck Protection Program allowed a business to use loan proceeds for:

• Certain operations expenses including business software; business-related cloud computing services; product or service delivery; payroll processing, payment, and tracking costs; human resources (HR) and billing functions; tracking of supplies, inventory, records, and expenses
• Covered property damage costs including costs related to damage or vandalism caused by looting or public disturbances in 2020 that were not covered by insurance or other compensation
• Listed supplier costs including payments to a supplier of goods that were essential to operations and made pursuant to a contract or order in effect anytime before the covered period or, with respect to perishable goods, in effect anytime during the covered period
• Covered worker protection expenses including operating or capital expenditures required to comply with requirements or guidance issued by the U.S. Centers for Disease Control and Prevention (CDC), Department of Health and Human Services (HHS), Occupational Safety and Health Administration (OSHA), or any state or local government during the period beginning March 1, 2020, and ending on the date when the national emergency expired

Tax Treatment of Third-Round PPP Loans

Round three PPP loans were not included in a company’s taxable income. If a loan was forgiven, expenses paid with the proceeds of the loan were tax deductible. Further, this rule applied to new, existing, and previous PPP loans. In addition, any income tax basis increase that resulted from a PPP loan remained even if the PPP loan was eventually forgiven.

Any PPP loans that were wrongfully forgiven either due to omission or misrepresentation by the taxpayer will be treated as taxable income, as the Internal Revenue Service (IRS) announced in August 2022. The IRS is encouraging anyone to whom this guidance applies to file, if necessary, an amended return.

What Was the Total Amount of Funding for the Paycheck Protection Program (PPP) Loans?

Total funding for PPP loans included $349 billion appropriated by the CARES Act, $310 billion from the PPP and Health Care Enhancement Act, and $284 billion from the Consolidated Appropriations Act (CAA). This comes to $943 billion in total PPP funding.

Are PPP Loans Still Available?

No. The Paycheck Protection Program officially ended on May 31, 2021, which was the final application deadline. All funds were exhausted prior to the deadline in early May 2021. There are no plans to reopen the PPP.

Were Round 3 PPP Loans to Be Used Exclusively for Payroll?

No. PPP loan recipients could use only up to 40% of loan proceeds for non-payroll costs if they wished to have the loan forgiven. Additionally, non-payroll spending had to be within a list of authorized uses.

The Bottom Line

On December 27, 2020, the Consolidated Appropriations Act of 2021 became law. It included new funding for the Paycheck Protection Program (PPP), which had expired on August 8, 2020. The PPP was established to help businesses during times of financial difficulty caused by the COVID-19 pandemic.

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