On January 6, 2021, the Small Business Administration released additional guidance relating to the Paycheck Protection Program (PPP) Second Draw Loans. This program was made available as part of the Consolidated Appropriations Act of 2021 under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act signed into law on December 27, 2020. By providing expeditious relief to America’s small businesses, this program aims to fulfill its bigger goal of providing continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic.
Eligibility
The second draw loans are generally subject to the same terms and conditions as the First Draw PPP Loans. The terms that are the same include but are not limited to the following:
- The guarantee percentage is 100 percent
- No collateral will be required
- No personal guarantees will be required
- The interest rate will be 100 basis points or one percent, calculation on a non-compounding, non-adjustable basis
- The maturity is five years
- All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds
There are some terms and conditions, including but not limited to terms relating to eligibility and a borrower’s maximum loan amount, that apply to Second Draw PPP Loans and do not apply to First Draw PPP loans, regardless of when the First Draw PPP loan was made.
New Eligibility Requirements
The eligibility requirements are narrower for Second Draw PPP Loans with conditions such as:
- The borrower can only have 300 or fewer employees and
- For business entities with an NAICS code beginning with 72 or certain news organizations, the above limit of 300 or fewer employees applies per physical location.
- Has to experience a 25% or more reduction in gross revenues when comparing annual or corresponding quarters for 2020 against 2019.
- An eligible borrower must have received a First Draw PPP Loan and
- Has used, or will use, the full amount of the First Draw PPP Loan on or before receiving the Second Draw PPP Loan proceeds.
- The full amount of the borrower’s First Draw PPP Loan includes the amount of any increase on such First Draw PPP Loan made pursuant to the Economic Aid Act.
Excluded Entities
The following entities are excluded from being eligible for Second Draw PPP Loans:
- Ineligible entities to have received First Draw PPP Loans under the CARES Act or Consolidated First Draw PPP IFR.
- A business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents;
- 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;
- 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 person or entity that receives a grant for shuttered venue operators 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; or
- 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 (15 U.S.C. 78f).
Revenue Reduction
Borrowers must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019 to qualify for this program. The revenue reduction must be calculated by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. The guidance issued by the SBA included the following example: “For example, a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters, and is, therefore, eligible for a Second Draw PPP loan (assuming all other eligibility criteria are met).”
If a borrower was in operation for all four quarters of 2019, they are deemed to have experienced a reduction in revenue if they experienced a reduction in annual receipts of 25% or greater in 2020 versus 2019. Copies of the 2019 and 2020 annual tax returns would need to be submitted to substantiate the reductions. If annual tax returns do not show a reduction of 25% or greater, or if the business was not operational all four quarters of 2019, a borrower can still meet this requirement by using the quarterly comparison. As long as one quarter in 2020, when compared to 2019, saw a reduction of 25% or greater, a borrower can meet this requirement of the loan program.
For the purposes of the Second Draw PPP Loan gross receipts for a for-profit business are outlined as all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including form the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. Generally receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
Any amount received from the First Draw PPP Loan or Economic Injury Disaster Loan advances should be excluded from a borrower’s gross receipts.
Gross receipts do not include the following:
- Taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees);
- Proceeds from transactions between a concern and its domestic or foreign affiliates; and
- Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
For the purposes of the Second Draw PPP Loan gross receipts for non-profit organizations are outlined as the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, but is not limited to:
- The gross amount received as contributions, gifts, grants, and similar amounts
without reduction for the expenses of raising and collecting such amounts, - The gross amount received as dues or assessments from members or affiliated
organizations without reduction for expenses attributable to the receipt of such
amounts, - Gross sales or receipts from business activities (including business activities
unrelated to the purpose for which the organization qualifies for exemption, the net
income or loss from which may be required to be reported on Form 990-T), - The gross amount received from the sale of assets without reduction for cost or
other basis and expenses of sale, and - The gross amount received as investment income, such as interest, dividends, rents,
and royalties.
Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.
Any amount received from the First Draw PPP Loan or Economic Injury Disaster Loan advances should be excluded from a borrower’s gross receipts.
Payroll Cost Calculation
The maximum loan amount is equal to the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million. There are some harder-hit borrowers that will qualify for 3.5 times average monthly payroll costs. Borrowers with a NAICS code beginning with 72 (accommodations & restaurants), seasonal businesses, and new entities that did not exist for the full twelve-month period preceding the Second Draw PPP Loan qualify for the 3.5 times average monthly payroll instead of 2.5 times.
Average monthly payroll can be calculated using either calendar year 2019 or the twelve-month period prior to when the loan is made. To simplify this calculation, the SBA has allowed a borrower to use calendar year 2020 as the twelve-month period prior to when the loan is made, although the precise twelve-month period prior can also be used (excluded for self-employed or independent contractors). The average monthly payroll costs calculation and limitations are the same as with the First Draw PPP Loan.
Second Draw PPP Loan Application and Documentation Requirements
When applying for the Second Draw PPP Loan a borrower will need to complete Form 2483-SD (not released as of 1/8) to their lender. If the borrower is using the same lender as the First Draw PPP Loan and is choosing to use calendar year 2019 for their payroll calculation, they do not have to resubmit the payroll documentation needed as it was provided with the First Draw application. If a borrower has switched lenders, or wants to choose a different payroll period than the First Draw Application, then they will need to provide documentation such as payroll reports for that period chosen, evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, quarterly payroll tax returns (Federal & State) for the same period and relevant documentation based on entity type.
For loans with a principal amount greater than $150,000, the borrower will need to also submit documentation to adequately establish a reduction of revenue of 25% or greater in 2020 relative to 2019. Only one set of the outlined documentation below is required:
- Quarterly financial statements for the entity. If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.
- Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
- Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
Payroll documentation to substantiate the amount of the loan requested must still be provided with the Second Draw PPP Loan application.
Loans with a principal amount of $150,000 or less are not required to submit the documentation to support a revenue reduction at the time of application for the loan but must provide that documentation on or before the date the borrower applies for loan forgiveness. The SBA may request this information at any time from when the application is submitted. We recommend having this information readily available to comply with any requests to furnish this documentation.
If a borrower’s First Draw PPP Loan is under review by SBA and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount received the lender will not be able to obtain an SBA loan number when submitting the application for the Second Draw PPP Loan. The submitting of the application will alert the SBA and they will try to resolve the issues related to unresolved borrowers expeditiously. The SBA will set aside available appropriations to fund Second Draw PPP Loans applied for by unresolved borrowers in the event they are approved.
Loan Forgiveness
Loan forgiveness for Second Draw PPP Loans will generally follow the forgiveness process for First Draw PPP Loans under interim final rules regarding Loan Forgiveness and SBA Loan Review Procedures and Related Borrower and Lender Responsibilities as modified to conform to the Economic Aid Act by the Consolidated First Draw PPP IFR.
The SBA guidance described in this summary can be found here.
The SBA guidance on how to calculate revenue reduction, maximum Second Draw PPP loan amounts, and what documentation should be provided can be found here.
If you have any questions, please reach out to your Sciarabba Walker contact person or email info@swcllp.com.