In previous posts, we have summarized the SBA’s Paycheck Protection Program (“PPP”) and certain related matters, including determination of borrower eligibility and steps borrowers can take to maximize loan forgiveness Click Here To View Previous Post. Following the overwhelming demand of the first round of PPP lending and the continuing need to assist businesses that have been financially impacted by the ongoing coronavirus pandemic, the recently enacted Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) has extended the PPP to include a second round of funding to certain businesses that received funding under the original PPP. Known as “Second Draw PPP Loans”, these subsequent loans are meant to support smaller and harder hit businesses with up to $2 million for payroll and other eligible expenses.
General Terms
Second Draw PPP Loans are generally subject to the same loan terms as the initial PPP loans (“First Draw PPP Loans”). These include, but are not limited to the following:
- The loans are fully guaranteed by the SBA.
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate will be 1%, calculated on a non-compounding, non-adjustable basis.
- The maturity is five years.
- Lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.
- Loan proceeds may be spent over an 8- to 24-week period following disbursement (the “Covered Period”).
New Eligibility Limits
Although generally subject to the same terms and conditions as First Draw PPP Loans, there are a few noteworthy distinctions to Second Draw PPP Loans regarding borrower eligibility, which have been narrowed from the First Draw PPP Loans requirements. The following eligibility requirements apply to all borrowers seeking a Second Draw PPP Loan:
- Borrower previously received a First Draw PPP Loan.
- Borrower experienced a 25% or greater revenue reduction in one quarter in 2020 as compared to the corresponding quarter in 2019.
- Borrower has 300 or fewer employees.
- Borrower has used, or will use, the full amount of the First Draw PPP
Loan on or before the expected date on which the Second Draw PPP
Loan is disbursed.
Revenue Reduction
In order to determine a borrower’s revenue reduction for Second Draw PPP Loan eligibility, the borrower must compare its quarterly “gross receipts” for one quarter in 2020 with its “gross receipts” for the corresponding quarter of 2019. 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). Alternatively, the borrower may compare annual gross receipts in 2020 with annual gross receipts in 2019.
While the Economic Aid Act did not include a definition of gross receipts for purposes of determining a borrower’s revenue reduction, in an interim final rule issued on January 6, 2021 (“IFR”) the SBA provided the following definition of gross receipts (which definition also appears in the Second Draw PPP Loan application): [1]
“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. 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. 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 and excluding 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.”
Note that 2020 gross receipts exclude any First Draw PPP Loan forgiveness amount, which is consistent with the rule that forgiven PPP loans do not constitute taxable income. Furthermore, the gross receipts of a borrower must be aggregated with gross receipts of its affiliates.
Maximum Loan Amount
The maximum loan amount for a Second Draw PPP Loan is equal to the lesser of two-and-a-half months of the borrower’s average monthly payroll costs or $2 million. Eligible hotels and restaurants may receive a Second Draw PPP Loan up to 3.5 times monthly payroll costs up to $2 million. Subject to exceptions for seasonal businesses, average monthly payroll may be calculated using either calendar year 2019 or 2020.
Expansion of Covered Expenses
Under First Draw PPP Loans, proceeds were to be used for payroll costs up to 60% and non-payroll costs such as rent, covered mortgage interests and utilities of 40% in order to qualify for 100% forgiveness. Pursuant to the Economic Aid Act, Second Draw PPP Loan proceeds may also be utilized for the following additional forgivable non-payroll costs, with the cap remaining at 40%:
- Operation Expenditures: business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
- Supplier Costs: payments to suppliers of goods that are essential to operations at the time made pursuant to an order or contract in effect prior to the Covered Period (or, for perishable goods, in effect before or during the Covered Period).
- Property Damage: costs related to any public disturbances that occurred in 2020, to the extent not covered by insurance or other compensation.
- Worker Protection Costs: costs related to compliance with federal, state or local regulations related to worker or customer safety in response to the COVID-19 pandemic, such as the purchase of PPE or the purchase and installation of air filtration and ventilation systems.
Forgiveness
Generally, Second Draw PPP Loans are eligible for up to 100% loan forgiveness under the same terms as First Draw PPP Loans. As with First Draw PPP Loans, Second Draw PPP Loans qualify for full forgiveness if during the Covered Period: (i) employee and compensation levels are maintained in the same manner as required for the First Draw PPP Loan; (ii) the loan proceeds are spent on payroll costs and other eligible expenses described above; and (iii) at least 60% of the proceeds are spent on payroll costs.
