Update to Paycheck Protection Program Second Draw Loans

Schneider Downs continues to track the evolving landscape of federal financial programs offered in the wake of the business disruption caused by the coronavirus crisis.  On December 21, 2020, the Consolidated Appropriations Act (the Act) was passed by both houses of Congress.  See our article for a high-level summary of some of the provisions included in the Act.  One of the provisions was the inclusion of a second round of Paycheck Protection Program loans, which has been titled under the Act, Paycheck Protection Program Second Draw Loans (PPP2). 

Update:  On January 6, 2021, the U.S. Small Business Administration (SBA) released a new Interim Final Rule (IFR) that includes the implementation guidance of Section 311 of the Economic Aid to Hard-Hit Businesses, Nonprofits, and Venues Act (the Economic Aid Act).  The Economic Aid Act was a component of the Act that includes the approval of second-round draws of the Paycheck Protection Program.  The information below has been updated for revisions that resulted from the issuance of the SBA’s IFR (revisions/updates are presented in italics).   

Who’s Eligible?

Under PPP2, eligible employers are those entities, including nonprofit organizations, housing cooperatives, veterans’ organizations, Tribal business entities, eligible self-employed individuals, sole proprietors, independent contractors or small agricultural cooperatives, that:

  • Were in operation on February 15, 2020; AND
  • Have fewer than 300 employees; AND
  • Had a reduction of gross receipts during the first, second or third quarter in 2020 in excess of 25% from gross receipts during the same quarter in 2019.  For applications submitted on or after January 1, 2021, applications may include the fourth quarter of 2020 in comparison to the same quarter in 2019.

Update: The SBA provided a definition of gross receipts that is consistent with the definition of receipts in 13 C.F.R. 121.104.  Under the IFR, gross receipts include 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. It does not include proceeds from transactions between a concern and its domestic and foreign affiliates. Gross receipts also does not include forgiveness attained pursuant to the first round draws during 2020. 

Also, under the IFR, a borrower is deemed to have met the revenue reduction requirement if the business was in operation for all four quarters of 2019 and experienced a decline in revenue in excess of 25% in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.  Borrowers with loans greater than $150,000 are required to substantiate the revenue decline with their application; however, others are provided a relief that does not require the substantiation until filing for forgiveness. 

The IFR also provides rules for businesses that have acquired or divested a business during 2020. 

If an applicant was not in operation during the first or second quarter of 2019, the applicant will compare its applicable 2020 quarter to the third quarter of 2019.  If the applicant was not in operation during the third quarter of 2019, the applicant will compare its applicable 2020 quarter to the fourth quarter of 2019.  Applicants that were not in operation during the fourth quarter of 2019 will compare their second, third or fourth quarter (only if the application is on or after January 1, 2021) to their first quarter of 2020. 

For business with more than one physical location that operate under a North American Industry Classification System (NAICS) code beginning with 72 (typically restaurants and hotels), if they meet the reduction of quarterly gross receipts above, they can employ up to 300 employees per physical location. 

The same affiliation rules (and waiver of affiliation rules for businesses under NAICS 72 and franchises with a franchise identifier code) apply to the determination of employees that were established under the CARES Act apply to PPP2 loans.   

Eligible entities are still required to make a good-faith certification that:

  1. the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and
  2. funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. (It appears that the bill has not updated certification to included newly eligible costs that are described below.  This may be a future revision by the Treasury and SBA.) 

Eligible entities are entitled to only one PPP2 loan.  

Who’s not eligible?

The following businesses are not eligible for a loan under PPP2:

  • Under Title 13, Section 120.110, certain businesses are not eligible for SBA business loans or PPP2 loans except for:
    • nonprofit business and businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting, which have been allowed under the Act.
  • Any business that is primarily engaged in political or lobbying activities, research or engaging in advocacy for public policy or political strategy.
  • Any business that receives a “Shuttered Venue Operator Grant” under the Act.
  • Certain entities that are 20% or more owned, directly or indirectly, by entities organized under the People’s Republic of China or Special Administrative Region of Hong Kong. 
  • Entities that retain a member of the board of directors with a person who is a resident of the People’s Republic of China. 
  • Agents representing the interests of foreign powers in a "political or quasi-political capacity" that are registered under the Foreign Registration Act of 1938. 
  • A business that did not receive a loan under the original PPP loan; however, they may still apply for a first draw.  Also, those that did receive a PPP loan must have used or will use the full amount of the loan received under the original PPP on or before disbursement of PPP2.  (Update:  Under the IFR, the SBA defined the term “full amount” as including any increase to a first round draw that has been requested by a borrower in accordance with the Economic Aid Act.  Also, a business that received a first draw under the CARES Act and was not eligible is not eligible for a second round draw.  If a borrower’s first round draw is currently being reviewed for allowable forgiveness and the eligibility of the borrower is unresolved, the SBA will expedite the review under the IFR.)
  • Update:  Businesses that the President, Vice President, head of an Executive department, or member of Congress, or the spouse of such persons owns, controls or holds at least a 20% interest in any class of equity.
  • Update:  Entities that are permanently closed. 

How much of a loan amount is a business eligible for?

The amount that businesses are eligible to receive will also be consistent with the formula from the first round of loans.  Generally, the maximum amount is the lesser of $2,000,000 or 2.5x the businesses monthly payroll costs for calendar year 2019, or the one-year period before the date on which the loan is made. 

Update:  Eligible recipients may use their 2020 payroll costs to determine the loan amount, which the SBA believes will be a simplified approach in relation to the one-year period before the date of the loan that was included in the Economic Aid Act.  However, an eligible recipient using the 2020 payroll costs will need to submit with its loan application document to support the loan.  Borrowers that are using the 2019 payroll costs are not required to resubmit the document if they are using the same lender as their first draw loan. 

Seasonal employers are required to use any 12-week period between February 15, 2019 and February 15, 2020 to compute monthly payroll but are still eligible for up to $2,000,000.  New entities, i.e., those not in existence for the one-year period to February 15, 2020, have special rules also. 

NAICS 72 entities are eligible for the lesser of $2,000,000 and 3.5x their monthly payroll costs.

Update:  Corporate groups are limited to $4,000,000 of second round draw loans in the aggregate, which is considerably less than the first round limitation, but consistent with decrease in the maximum loan amount from $10,000,000 to $2,000,000 under the second round draw. 

Gross Receipts and Simplified Certification of Revenue

For loans less than $150,000, borrowers may certify that that they meet the loss of revenue requirement under the Act.  Upon filing for forgiveness, the company will be required to submit the documentation of the revenue loss.  For nonprofit organizations and veterans’ organizations, gross receipts are those within the meaning of Section 6033 of the Internal Revenue Code of 1986.

Update:  For loans greater than $150,000, borrowers will be required to substantiate the decline of revenue at the application date.  Documentation for the revenue decline may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.  Quarterly income statements may also be sufficient.       

Loan Forgiveness

Borrowers that use the PPP2 loan proceeds during the covered period may be eligible for forgiveness.  There is more flexibility in PPP2 than the original PPP1 loan covered.  For PPP2, the covered period will start from the loan origination date and span a minimum of eight weeks up to 24 weeks.  A borrower may elect a covered that is between eight weeks and 24 weeks also.    

The amount to which a borrower is entitled to is equal to the following costs incurred or expenditures made during the covered period:

  1. Payroll costs, excluding:
    1. those taken into account for determining the employee retention credit
    2. qualified wages taken into account in determining the credit allowed under subsection (a) or (d) of section 303 of the Taxpayer Certainty and Disaster Relief Act of 2020, which is a general employee retention credit for a qualified disaster.
  2. Payment of interest on any covered mortgage
  3. Any covered operations expenditure
  4. Any covered property damage cost
  5. Any payment on any covered rent obligation
  6. Any covered utility payment
  7. Any covered supplier cost
  8. Any covered worker protection expenditure

Limitation on Forgiveness

Similar to the first round of the PPP, there may be a limit to the amount of forgiveness that a borrower is eligible for.  Those are:

  1. The reduction associated with maintaining headcount; and
  2. The borrower is required to use at least 60% of the loan proceeds on payroll costs.  Forgiveness will be a limited to the quotient obtained by dividing the amount of payroll costs incurred by 0.60.

Availability and Rules

The SBA has 10 days from the enactment of the Act to issue guidance addressing barriers to accessing capital for minority, underserved, veteran, and women-owned business concerns for the purpose of ensuring equitable access to covered loans.

Under the original PPP, loans were available until August 8, 2020.  Once the Act becomes effective, loans for entities still eligible for PPP1 loans and second draws will be available until March 31, 2021 or until the funds have been exhausted.  The total available funds for PPP1 and PPP2 is $806.45 billion.  As of August 8, 2020, $525.01 billion was distributed during the first round. 

If you need more information or assistance regarding your PPP loan, visit our website at schneiderdowns.com/ppp, reach out to any of your contacts at Schneider Downs or contact Joel Rosenthal at [email protected].

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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