If you missed yesterday’s Paycheck Protection Program (PPP) news, it’s understandable. In a day when the Georgia runoff shifted control of the Senate and mass chaos erupted in the Capitol, the SBA’s late night announcement of Interim Final Rules (IFR) might very well have slipped under your radar. If you’re counting, we’re approaching nearly 30 Interim Final Rules, along with over 11 pages of FAQs. Here’s what you need to know on the latest regulations regarding Second Draw PPP loans.
Before we dig in, let’s clarify some important terms. The rules refer to first round PPP Loans as “First Draw PPP Loans” and this second round as “Second Draw PPP Loans.” You may remember the SBA had just 10-short days to get this information out. So, kudos to them for making the deadline.
The IFR takes effect immediately. Lenders will now determine how soon you can apply, and we know that you’ll have less than three months to do so. The last day to apply for and receive a PPP Loan is March 31, 2021. As with the First Draw PPP Loans, funds are limited. Congress has approved $284 billion in new loans. That’s less than the $349 billion first round, which, you may recall, was gone in just under two weeks. Congress then allocated an additional $320 billion. And while those funds didn’t run out, it was likely because of all of the confusion in the program. Now that forgiveness and tax rules are clearer, the money is likely to go much faster.
The SBA is taking some steps to ensure the hardest hit communities don’t miss out as they did last time: Some of those steps include:
- Accepting PPP loan applications only from community financial institutions or at least the first two days when the PPP loan portal reopens
- Direct Lender Match borrower inquiries to small lenders who can aid traditionally underserved communities
- Match small businesses through Lender Match with Certified Development Companies (CDC), Farm Credit System lenders, microloan intermediaries and traditional small asset size lenders.
In short, if you qualify, it’s best to get in as early as you can. Hopefully, you’ve gotten your documents in order and lined up your banking relationship.
To qualify for a Second Draw PPP Loan, you have 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:
- Has 300 or fewer employees, unless you’re a business that satisfies the North American Industry Classification System (“NAICS”) code beginning with 72 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 SBA also lists those that don’t qualify for Second Draw PPP Loans, most notably publicly traded companies and any person who received the new grant for shuttered venue operators.
The 25% reduction requirement
The 25% revenue reduction is the new twist, and you can calculate it in a few ways. You can compare your quarterly gross receipts for one quarter in 2020 with gross receipts for the corresponding quarter of 2019. Here’s the example they use in the IFR: 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.
Alternatively, if you were in operation in all four quarters of 2019, you can qualify if the annual receipts show a 25% or greater reduction in 2020 compared to 2019. But even if you didn’t e experience a 25 percent annual decline in revenues, or weren’t in operation in all four quarters of 2019, you may still meet the revenue reduction requirement under one of the quarterly measurements.
For businesses that were not operating during the first, second or third quarter of 2019 but were operating in the fourth quarter, you had gross receipts in the first, second, third or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the fourth quarter of 2019 can still qualify.
Lastly, if you weren’t operating at all in 2019, but were in operating before February 15, 2020 and had gross receipts during the second, third, or fourth quarter of 2020 that demonstrate a 25 percent reduction from the first quarter, you can also still qualify.
Defining gross receipts
The SBA defines gross receipts 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.” For sole proprietorships, independent contractor or self-employed individuals you can look to “gross income” on your Schedule C. For everyone else you can see “total income” plus costs of goods sold, excluding net capital gains or losses as these are terms defined and reported on your tax return.
The SBA laid out separate rules for gross receipts for affiliates and businesses with more than one physical location. See section (c)(2)(ii) or page 23 of the pdf and (c)(4) or page 24 of the pdf for those rules.
The maximum amount of the loan is the lesser of two and half months of your average monthly payroll costs or a $2 million cap. The two and a half months salary calculation is the same as for First Draw loans, but the cap has been reduced to $2 million.
You do have a bit more flexibility in the relative time period for calculating your payroll costs. You can use either calendar year 2020 or calendar year 2019. If you’re not self-employed (including sole-proprietors and independent contractors), you can use the precise 1-year period before the date on which the loan is made, if you chose not to use 2019 or 2020 to calculate payroll costs
You’ll want to make sure to run all scenarios to see, which one gets you the most amount of loan. This is especially important for Schedule C filers since your payroll amount is based on net income. You might be in a situation this year where your gross income is down 25% but because of the reduction in expenses, your net profit is up.
Additionally, borrowers with NAICS code beginning with 72 at the time of disbursement can use 3.5 months of payroll costs.
One of the most fascinating parts of the IFR was the documentation requirement. The documentation required to substantiate your payroll cost calculation is generally the same as documents required for First Draw PPP Loans. Because of that, you won’t need to submit additional documentation to substantiate payroll costs if you:
- used calendar year 2019 figures to determine its First Draw PPP Loan amount,
- used the calendar year 2019 figures to determine its Second Draw PPP Loan amount, and
- the lender for the same for the applicant’s Second Draw PPP Loan is the same as the lender for the first draw loan
The information isn’t required because presumably your lender already has it. In addition to not having to submit any documentation, for loans under $150k, you don’t have to provide documentation of the 25% reduction with the application. You just need to provide it at the time of applying for forgiveness.
If you don’t meet the above criteria or are applying for more a principal amount greater than $150,000, you must submit documentation that proves your 25% or greater revenue reduction in 2020 relative to 2019. That documentation can include relevant tax forms (e.g., Form 941s), including annual tax forms (e.g., Schedule C, Form 1065, Form 1120S), or if relevant tax forms are not available, quarterly financial statements or bank statements.
The terms and conditions of the Second Draw PPP Loans are subject to the same terms and conditions as First Draw PPP Loans. These include but are not limited to:
- The SBA guaranteeing 100% of the loans
- No collateral required
- No personal guarantees required
- 1% interest rate calculated on a non-compounding, non-adjustable rate
- 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 borrower eligibility
Second Draw PPP Loans are also eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans. So, for the vast majority of borrowers (those of you borrowing less than $150,000), you can apply for forgiveness with a one-page attestation, which should be out in the next few weeks. Keep in mind, though, as I mentioned above, you will be required to provide documentation of revenue reduction if you didn’t supply that documentation at the time of the loan application.
Those are some of the highlights of the Second Draw PPP Loans. As always, consult your tax professional for guidance on your specific situation. Also, keep an eye out for additional updates.