The SBA announced late last night an Interim Final Rule (IFR) related to the Second Draw PPP Loans.
As with the First Draw PPP loans, funds are limited and Congress has approved $284 billion in new loans. The IFR is effective immediately and the last day to apply for and receive a PPP loan is March 31, 2021.
Eligibility requirements
To qualify for a Second Draw PPP loan, you will need to meet five requirements:
· You're a business, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization, eligible for a First Draw PPP Loan, veteran’s organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or eligible nonprofit news organization that was in operation on or before February 15, 2020 that:
· Has 300 or fewer employees, unless you're a business that satisfies the North American Industry Classification System (“NAICS”) code beginning with 72 (including hotels and restaurants) or an eligible news organization with more than one physical location.
· Experienced a revenue reduction of 25% or greater in 2020 relative to 2019 (more on this below).
· Received a First Draw PPP Loan
· Have 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 to the borrower
The 25% reduction requirement
This can be calculated in two ways :
· Compare quarterly gross receipts for one quarter in 2020 with gross receipts for the corresponding quarter in 2019. If a reduction of 25% or greater is experienced, the Company is eligible for the Second Draw PPP loan, or
· If you were in operation in all four quarters, compare the annual receipts of 2019 versus that of 2020 to determine if you met a 25% reduction
Defining Gross Receipts
The SBA defines gross receipts as ‘all revenue in whatever form received or accrued’ from whatever source including sales of products or services, interest, dividends, rents, royalties, fees or commission, reduced by returns or allowances. Forgiven First Draw PPP loans are not included in the 2020 gross receipts. For sole proprietorships, independent contractors or self-employed individuals your calculations are generally the same as documents required for First Draw PPP loans.
Payroll Cost Calculation
The maximum loan amount for a Second Round PPP Loan is equal to the lesser of two and half months of borrower’s average monthly payroll costs or $2million. If employees earn more than $100,000 per annum the amounts in excess of $100,000 needs to be deducted in the payroll calculation.
For borrowers assigned a NAICS code beginning with 72 (hotels and restaurants amongst others), the Economic Aid Act provides that the maximum loan amount is equal to three and a half months of payroll costs.
The Economic Aid Cat also provides that businesses that are part of a single corporate group shall not received more than $4,000,000 of Second Draw PPP Loans in the aggregate.
Sole Proprietorships
If the borrower has income from self employment and filed a Form 1040, Schedule C, the maximum loan amount is calculated as the lesser of :
- The sum of (i) net profit of the borrower in 2019 or 2020 (as reported on IRS Form 1040 Schedule C) that is not more than $100,000, divided by 12 (ii) the average total monthly payment for employees payroll costs incurred or paid MULTIPLIED by 2.5 or
- $2 million
Partnerships
The maximum amount of a Second Draw PPP loan to a borrower that files taxes as a partnership is calculated as the lesser of
- The sum of (i) self-employment of individual general partners in 2019 or 2020 (as reported on IRS Form 1065 K-1), that is not more than $100,000 divided by 12, (ii) the average total monthly payment for employees payroll costs incurred or paid MULTIPLIED by 2.5 or
- $2 million
What qualifies as payroll costs
Payroll costs consist of compensation to employees, in the form of salary, wages, commission, tips, payments for vacation, parental, family, medical, or sick leave, payment for the provision of employee benefits consisting of group health care or group life, disability, vision or dental insurance including insurance premiums and retirements, payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earning from self-employment, or similar compensation
Second Draw PPP Loan Application and Documentation Requirements
The applicant must submit to the lender SBA Form 2483-SD or the lender’s equivalent form.
Companies have an option of using either their 2020 or 2019 payroll numbers for their Second Draw PPP loan application. However, no additional documentation to substantiate payroll costs will be requires if the applicant
(i) Used calendar year 2019 figures to determine its First Draw PPP loan amount
(ii) Used Calendar Year 2019 figures to determine its Second Draw PPP loan amount (instead of 2020
(iii) The lender for the applicant’s Second Draw PPP loan is the same as the lender that made the applicant’s First Draw PPP loan
The lender may request additional documentation, but this will vary depending on the lender.
For loans greater than $150,000 the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. For loans less than $150,000 such documentation is not required at the time the borrower submits its application for a loan but must be submitted on or before the date the borrower applies for forgiveness.
Terms of loans
The terms of the loan are similar to the First Draw PPP loan
· Guarantee percentage is 100%
· No collateral will be required
· No personal guarantees will be required
· Interest rate will be 1%
· Maturity is 5 years
Forgiveness and eligible costs
PPP borrowers can have their first- and second-draw loans forgiven if the funds are used on eligible costs. As with the first round of the PPP, the costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities. In addition, the following costs are now eligible:
· Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
· Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
· Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
· Covered operating expenditures, which refer to payments for any 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.
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period between eight or 24 weeks.
Simplified forgiveness
Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA has yet to create the simplified application form but must do so by Jan. 20. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
Those are some of the highlights of the Second Draw PPP Loans. As always, consult us for guidance on your specific situation. We will continue to provide updates as they are available.