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Second Draw PPP Loans Now Available

The Consolidated Appropriations Act, 2021 (CAA) signed into law by President Trump on December 27, 2020, includes Division N, Title III, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which continues the Paycheck Protection Program (PPP) and other small business support programs. Title III provides a number of revisions to the PPP, reopens the program and allows for certain existing borrowers to apply for Second Draw PPP Loans.

On January 6, 2021, the U.S. Small Business Administration (SBA) posted a new interim final (IFR) on Second Draw Loans, providing guidance on the provisions of section 311 of the Economic Aid Act, which authorizes the SBA to guarantee Second Draw PPP Loans, under generally the same terms and conditions available under the PPP established by the CARES Act. Second Draw PPP Loans are subject to SBA’s and the Department of the Treasury’s Consolidated First Draw PPP IFR issued concurrently with this IFR [read more] and all PPP loan program requirements, except as specified in this IFR. The key differences (i.e., loan terms, eligibility requirements and application process) between First Draw PPP Loans and Second Draw PPP Loans are described below.

For more information on Second Draw PPP Loans, download the slides or view the recording our special webinar “Applying for PPP” on January 12.

Section 311: Paycheck Protection Program Second Draw Loans

Creates a second loan from the Paycheck Protection Program, called a “PPP second draw” loan for smaller and harder-hit businesses, with a maximum amount of $2 million.

Eligible Borrowers

An applicant is eligible for a Second Draw PPP Loan if it is a business concern, 501(c)(3) nonprofit organization eligible for a First Draw PPP Loan, 501(c)(19) veterans organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization that :
- - was in operation on February 15, 2020;
  - has used, or will use, the full amount of its First Draw PPP Loan (including the amount of any increase on such First Draw PPP Loan);
  - employs not more than 300 employees, unless it satisfies the alternative criteria for businesses with a NAICS code beginning with 72 or eligible news organizations with more than one physical location; and
  - experienced a reduction in revenue in calendar year 2020, measured as follows:
    - - the applicant had gross receipts¹ during the first, second, third, or fourth quarter in 2020 that demonstrate at least a 25% reduction from the applicant’s gross receipts during the same quarter in 2019.
      - if the applicant was not in business during all or part of 2019, the IFR lays out rules for demonstrating the applicable reduction in gross receipts based on comparing any quarter in 2020 to quarters the business was in operation in 2019.
      - an applicant that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019, and the borrower submits copies of its annual tax forms substantiating the revenue decline.

Ineligible borrowers include: entities excluded from eligibility under the Consolidated First Draw PPP IFR, as well as entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public document, entities affiliated with entities in the People’s Republic of China or Hong Kong, registrants under the Foreign Agents Registration Act, and entities that receive a grant under the Shuttered Venue Operator Grant program.

Affiliation Rules

Eligibility for Second Draw PPP Loans is governed by the same affiliations rules (and waivers) as First Draw PPP Loans. As with First Draw PPP Loans, in most cases, a borrower is considered together with its affiliates to determine eligibility for the PPP.
- - The affiliation rules are waived for:
    - - business concerns with a NAICS code beginning with 72 qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees; and
      - eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.

The IFR also provides rules for calculating the gross receipts of a borrower with affiliates.

Maximum Loan Amount ($2 million)

An eligible entity may only receive one Second Draw PPP Loan.

In general, borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan (2019) or calendar year 2020 (at the election of the borrower).
- - A borrower in the Accommodation and Food Services sector that has reported a NAICS code beginning with 72 as its business activity code on its most recent IRS income tax return, may receive a loan amount of up to 3.5 times the average monthly payroll costs.
  - Seasonal employers as defined in the Consolidated First Draw PPP IFR are required to use a 12-week period between February 15, 2019 and February 15, 2020 to calculate their maximum loan amount.

The SBA has posted new guidance to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation that is required support each set of calculations) for purposes of determining the amount of a Second Draw PPP Loan: Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide (1/19/21)

Loan Forgiveness

Borrowers of a Second Draw PPP loan will be eligible for loan forgiveness equal to the sum of their payroll costs, as well as nonpayroll (i.e., covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures) incurred during the covered period. The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness will continue to apply.

Loan forgiveness of Second Draw PPP Loans and the loan review process for Second Draw PPP Loans are generally subject to the IFRs regarding Loan Forgiveness and SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, as modified to conform to the Economic Aid Act by the Consolidated First Draw PPP IFR.

Unresolved Issues with Borrower’s First Draw PPP Loan

If a First Draw PPP Loan is under review pursuant to PPP rules and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount received by the borrower, the lender will receive notification from SBA when the lender submits an application for guaranty of a Second Draw PPP Loan (“unresolved borrower”).

If the lender receives notification that the borrower for a Second Draw PPP Loan is an unresolved borrower, the lender will not receive an SBA loan number. SBA will resolve the issue related to the unresolved borrower expeditiously and will notify the lender of the process to obtain an SBA loan number for the Second Draw PPP Loan, if appropriate.

Loan Application and Documentation Requirements

The applicant must submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form including the required certifications and documentation.

The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans.
- - However, no additional documentation to substantiate payroll costs will be required if the applicant:
    1. 1. used calendar year 2019 figures to determine its First Draw PPP Loan amount,
      2. used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and
      3. 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.

In such cases, additional documentation is not required because the lender already has the relevant documentation supporting the borrower’s payroll costs. The lender may request additional documentation, however, if on further review the lender concludes that it would be useful in conducting the lender’s good-faith review of the borrower’s loan amount calculation.

For loans with a principal amount 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.
- - Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.

For loans with a principal amount of $150,000 or less, 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 loan forgiveness, as required under the Economic Aid Act.

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¹ Gross receipts includes 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.

For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986.

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For additional information on the new stimulus provisions included in the Consolidated Appropriations Act, 2021, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com