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PPP Update: Second Draw PPP Loan Rules

1/8/21 – Emir Hodzic

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The Small Business Administration (SBA) issued an Interim Final Rule (IFR) on January 6th on Second Draw Loans, which were established through the Economic Aid Act. Second Draw Loans are an extension of the Paycheck Protection Program (PPP), which previously was available April 2020 through August 8, 2020. PPP provided businesses with 2.5 months of employee wages through a maximum five year, 1% loan which would be forgiven if the business maintained employee count and did not cut salary or hourly wages by more than 25% of each individual employee earning less than $100,000 per year. Other stipulations applied in order to obtain 100% forgiveness, such as spending the funds on at least 60% payroll and the remaining 40% being spent on utilities, mortgage interest, and rent.

Second Draw Loans will be available to businesses and nonprofits in 2021. We anticipate that this process will be significantly more streamlined than it was last April due to many lenders having the experience and an established platform to provide these loans to their customers. The SBA loan application form can be found here.

Congress made several modifications to eligibility for a Second Draw Loan and restricted the maximum amount to $2 million from the previous $10 million. Additionally, only businesses with 300 or fewer employees are eligible and must have experienced a 25% or greater revenue reduction in 2020 relative to 2019. Consistent with the first round, business entities that are assigned a NAICS code beginning with 72, the Accommodations and Food Services sector, are eligible if they have 300 or fewer employees per physical location. In order to apply for a Second Draw Loan, the borrower must also have received a First Draw Loan and has used or will have used all of their First Draw Loan before they receive a Second Draw Loan on eligible expenses under the PPP rules.

The revenue reduction requirement has been further clarified by the SBA to mean that an eligible borrower would compare receipts in any one quarter of 2020 with the borrower’s gross receipts of a corresponding 2019 quarter. The SBA further establishes that evidence for that reduction can come in the form of financial statements, tax returns, or bank statements. Borrowers who had an annual reduction of receipts more than 25% of 2020 versus 2019 are also eligible, but would have to submit annual tax returns as evidence of the reduction. To be clear, a borrower that did not have a 25% decline in annual revenue, or that was not in operations for all four quarters of 2019, may still be eligible if they meet the requirement under any one of the calendar quarters.

While the Economic Aid Act did not provide for a definition of gross receipts, this IFR does, and gross receipts are defined as 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 or allowances. Most importantly, the IFR clarifies that PPP loan forgiveness proceeds from the first round are not considered gross receipts for purposes of the Second Draw Loan.

Specifically excluded from the Second Draw Loan are businesses or entities primarily engaged in lobbying or other political activities, as well as entities with ties to the People’s Republic of China, entities which receive grants under another provision of the Economic Aid Act intended for shuttered venue operators (think theaters, concert halls, promoters), and entities in which the President, Vice President, or members of Congress and their spouses own more than 20% of. Publically traded companies are also excluded. Additionally, only one Second Draw Loan is permitted and businesses which have permanently closed are not eligible.

Many borrowers from the First Draw Loan will recall the confusion and difficulty associated with calculating the amount of the loan they are eligible for which is driven by the definition of payroll cost. Section 307 of the Economic Aid Act allows for 2.5 months of payroll cost, except that it gives borrowers a choice of using calendar year 2019 payroll or the last 12 month period prior to when the loan is made, which has also been simplified to mean calendar year 2020. It also allows for those in the Food and Accommodations sector, NAICS code 72, to receive 3.5 times the monthly payroll amount; however, they are still limited to the $2 million maximum under the program. Borrowers under the Second Draw Loan program cannot exceed more than $10 million in total combined with the First Draw Loan, and corporate groups are limited to $4 million in Second Draw Loans.  

The SBA announced that its portal to accept the new round of applications for loans will open up on January 11th, however it is limited to only First Draw Loans and will only be accepting those applications from lenders who are considered community financial institutions. On January 13th, small businesses can begin applying for a Second Draw Loan however those will also first be available through community financial institutions with a promise of opening it up to all participating lenders shortly thereafter.

The substantiation of payroll cost has been made quite a bit easier for Second Draw Loans if the borrower uses calendar year 2019 figures instead of calendar year 2020 and obtains the loan through the same lender. In those cases, there is no additional documentation necessary. Borrowers should consider the ease of obtaining the loan through their existing lender versus another lender when applying for a Second Draw Loan.  Still, borrowers will be required to substantiate their revenue reduction threshold of 25%. Interestingly, for loans under $150,000, there is not a requirement for the lender to confirm those revenue reductions. Another notable difference between the first round of PPP loans and Second Draw Loans is that for forgiveness purposes, the borrowers will be able to choose a covered period between eight and 24 weeks, limiting their responsibility for maintaining headcount and wage rates beyond the amount of weeks it takes to achieve full spend. In addition to the IFR dealing with Second Draw Loans, the SBA also issued another IFR on loan forgiveness, which applies both to existing PPP loans and Second Draw Loans, and allows for additional allowable expenses to achieve forgiveness but still maintains the 60 / 40 % balance of payroll cost to other expenses. This provision does now apply to any unforgiven First Draw Loans as well. The loan forgiveness modifications will be discussed further in another article by VonLehman.

How Can VonLehman Help?

VonLehman has established a process where we will assist businesses in filling out their loan forgiveness application and gathering the necessary information to submit to their lenders. We will be utilizing an online platform to facilitate this process, which will produce a completed loan forgiveness application. If you are interested in this service please contact us at info@vlcpa.com.

VonLehman experts have compiled a COVID-19 Resource Center at vlcpa.com, Here, you can find numerous resources, specific to your industry, to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437.