Original article written by legacy firm, Harris Group Advisors (2021)
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act or Act), signed into law on December 27, 2020, as a part of the Consolidated Appropriations Act, 2021, makes additional funds available under the Paycheck Protection Program (PPP) and expands eligibility for PPP loans.
On January 6, 2021, the federal Small Business Administration (SBA) released interpretations of the new provisions:
- Interim Final Rule (IFR), “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended,” which consolidates the rules for original PPP loans, including the modifications made by the Act;
- IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans,” which contains guidance for businesses that previously received a PPP loan and are seeking a second loan; and
- Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns, which sets out the commitment to reserve at least the first two days of the PPP application window exclusively for applications from community financial institutions that serve minority- and women-owned businesses.
On January 8, 2021, the SBA released applications for the new loans, as well as overviews of the loans and two procedural notices:
- SBA Form 2483 – First Draw Borrower Application
- SBA Form 2484 – First Draw Lender Guaranty Application
- SBA Form 2483-SD – Second Draw Borrower Application
- SBA Form 2484-SD – Second Draw Lender Guaranty Application
- Overview of First Draw PPP Loans
- Overview of Second Draw PPP Loans
- 5000-20074, Modifications to SBA Forms 3506, 3507, and 750 CA (for purposes of PPP only) (effective January 6, 2021)
- 5000-20075, Repeal of EIDL Advance Deduction Requirement for SBA Loan Forgiveness Remittances to PPP Lenders (effective January 8, 2021).
In a joint statement with the U.S. Department of the Treasury, the SBA also announced on January 8 that the PPP would reopen on January 11, 2021. To expand access, the SBA first accepted PPP applications from community lenders before opening to all lenders.
This alert summarizes key points of the Act and SBA guidance as of January 10, 2021, with a simple table of main features.
Overview
Congress originally created the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020. The program helps small businesses that suffered disruptions and shutdowns during the coronavirus pandemic stay operational by providing federally guaranteed loans to retain staff at pre-COVID levels. One key benefit: borrowers may have their loans forgiven in whole or in part if they meet specific requirements.
The Economic Aid Act adds $284B to PPP loans, with set-asides for very small businesses and low-income area borrowers. The SBA will end the program on March 31, 2021, or when it exhausts the funds—whichever comes first.
Eligibility and Key Provisions for First and Second Draw PPP Loans
First draw loans are available to entities that were in operation on February 15, 2020, including specific nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors that make the required certification regarding economic necessity and:
- Did not receive a prior PPP loan and meet the definition of a small business by:
- Eligible businesses and their affiliates must employ fewer than 500 employees, unless special rules apply that count employees by location—such as for NAICS codes 72 (restaurants and hospitality) and 511110 or 5151 (news organizations). For housing cooperatives, eligible Internal Revenue Code Section 501(c)(6) organizations, or eligible destination marketing organizations, the employee limit drops to 300
- Meeting the SBA’s size standards for industries that allow it to exceed 500 employees
- Qualifying under the SBA’s alternative size standard, if as of March 27, 2020, it (1) had a maximum tangible net worth of not more than $15 million, and (2) an average net income after US federal income taxes of not more than $5 million for the last two fiscal years before the date of the application
- The borrower received a 2020 loan that the SBA did not forgive by December 27, 2020, and now qualifies for a larger draw because:
- Having returned all or part of the PPP loan,
- The borrower did not draw the entire loan amount that the lender approved,
- Failing to include any compensation for its partners in the original application, or
- Being a seasonal employer that now qualifies for an increased loan amount under the new provisions.
Second Draw Loan Requirements and Criteria
Lenders offer second draw loans to a more select group only if borrowers have used or will use the full amount of the first draw loan for authorized purposes. To qualify for a second draw loan, the employer must:
- Borrowers must have 300 or fewer employees, unless location-based exceptions apply (e.g., NAICS 72, 511110, 5151, or SBA franchises).;
- Demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020; and
- Make the required certification regarding economic necessity.
The Act clarifies how to tax forgiven PPP loans and the expenses that support their forgiveness.Borrowers must follow their accounting method for forgiven PPP expenses and exclude PPP and EIDL amounts from taxable income.
Loan Eligibility
As explained above, the Act allows certain previously excluded entities to apply for first draw PPP loans. The Act and SBA guidance clearly state that some businesses are ineligible for the new round of PPP loans, including:
- Publicly traded businesses and entities;
- Debtors in a bankruptcy proceeding;
- Permanently closed entities do not qualify for a loan. However, businesses that temporarily closed or suspended operations remain eligible if they meet other requirements;
- Business concerns or entities primarily engaged in political or lobbying activities;
- Businesses tied to China or Hong Kong with 20% ownership or a China-based board member are ineligible;
- Persons required to submit a registration statement under Section 2 of the Foreign Agents Registration Act;
- Persons that receive a grant for shuttered venue operators under Section 324 of the Economic Aid Act;
- Businesses controlled by top U.S. officials or their spouses are ineligible; and
- Entities that previously received a second-draw PPP loan.
Maximum PPP Loan Amounts
First draw loans use the CARES Act formula: 2.5× monthly payroll, capped at $10M per borrower and $20M per corporate group.
Most borrowers calculate second draw loans using 2.5 times their average monthly payroll costs. Restaurants, hotels, and similar businesses (NAICS 72) may use a 3.5× factor. Second draw PPP loans cap at $2M per borrower, $4M per group.
The borrower may use average monthly payroll from 2019, 2020, or the year before applying. Special rules apply to seasonal employers and those who were not in business during the 2019 tax year. The SBA has updated the definition of payroll costs to include life and disability coverage paid by the employer.
Revenue Reduction Needed for Second Draws
To qualify for a second draw PPP loan, borrowers must show a 25% revenue drop between comparable 2019 and 2020 quarters. Those operating all four quarters may use annual tax returns; others can qualify using quarterly comparisons.
The IFR defines gross receipts as total income plus COGS, excluding capital gains, remittances like sales tax, and intercompany transfers. However, they generally may not exclude receipts collected as reimbursements for subcontractor costs or customer-requested purchases.
For loans exceeding $150,000, the applicant must submit documentation that substantiates a 25% revenue reduction. Borrowers do not need to submit documentation with loan applications under $150,000, but they must provide it to receive forgiveness. If a borrower does not apply for forgiveness, they must provide the requested documentation if requested by the SBA.
Reduced Payroll Documentation
PPP applicants must submit documents proving eligibility and payroll, such as tax filings, 1099s, Schedules C/F, or bank records.
If the same lender uses 2019 payroll figures for both PPP loans, no extra payroll documents are needed. If using a different payroll period or lender, borrowers may need to submit updated payroll records.
Use of Loan Proceeds
Lawmakers expanded PPP-eligible expenses beyond payroll, health care, rent, and utilities to also include:
- Covered operations expenditure, i.e., payments for business software or cloud computing services needed to keep business operations running (for example, HR, accounting, payables, inventory, etc.);
- Covered property damage costs not covered by insurance attributable to looting and vandalism during public disturbances that took place during 2020;
- Covered supplier costs, i.e., expenditures for goods that are essential to operations under an obligation made before the covered period. Expenditures for perishable goods qualify even if the obligation arises during the covered period.
- Covered worker protection expenditure is necessary to ensure that the business complies with guidance regarding COVID-19 sanitation, safety, or social distancing standards; and
- Life and disability benefits (also increases payroll for calculating the maximum loan amount).
Loan Forgiveness and Simplified Procedure for Loans that Do Not Exceed $150,000
Borrowers may receive PPP loan forgiveness if they maintain employee headcount and wage levels, use the funds for eligible expenses (such as payroll and other specified costs) within 24 weeks of receiving the loan, and spend at least 60% of the loan on payroll costs. Although the Act did not change the forgiveness parameters, it did expand the types of expenses eligible for forgiveness as outlined above. Applicants for forgiveness can choose any period between eight and 24 weeks after the loan disbursement. The end of the selected covered period determines when borrowers must meet safe harbor requirements.
Under the Act, EIDL grants do not reduce the amount of PPP loan forgiveness. The SBA will return the deducted EIDL advance with interest to the lender for loans it has already forgiven. The PPP lender is responsible for notifying the borrower of the reconciliation payment due to it.
The Act allows lenders to forgive any PPP loan of $150,000 or less based solely on a borrower’s application that states how many employees they retained using the loan, the estimated amount spent on payroll, and the total loan amount. The borrower must also attest that they accurately provided the required certification, complied with the law’s requirements, and will retain employment records for four years and other supporting documents for three years to prove compliance. These records remain subject to audit by the SBA.
The SBA will release the simplified loan forgiveness application, following which lenders will need to modify their systems to make an electronic version available to eligible borrowers.
Preparing to Apply for a PPP Loan
Entities that expect to apply for a PPP loan should begin to proactively prepare and gather all of the necessary financial information and related documentation so they can apply as soon as their lender reopens its application process. The borrower can file the application before receiving or applying for forgiveness, as long as they plan to spend the original loan before receiving the second draw PPP loan disbursement. If the loan request does not exceed $150,000, the borrower does not need to submit revenue reduction documentation until they apply for forgiveness or the SBA requests it—whichever comes first. A borrower can apply before filing the 2020 tax return that substantiates the 25% revenue reduction. Submit quarterly financial statements or bank statements if you don’t have the relevant tax forms available.
Experts expect these loans to exceed available funding, so we recommend filing applications as early as possible.
Key Differences Between First and Second Draw PPP Loans
| Issue | First Draw PPP Loan (Did Not Receive PPP Loan in 2020 or Qualifies for an Adjustment) | Second Draw PPP Loan (Received a PPP Loan in 2020 or First Draw PPP Loan in 2021) |
| Last Day to Apply | Earlier of March 31, 2021 or exhaustion of funds | Earlier of March 31, 2021 or exhaustion of funds |
| Eligibility Requirements for 2021 PPP Loan | – In operation on February 15, 2020 – Did not receive a 2020 PPP loan or – Received a 2020 loan that was not forgiven by December 27, 2020 and qualifies for a larger draw on account of: > Having returned all or part of the PPP loan, > Having not drawn the entire loan amount that the lender approved, > Failing to include any compensation for its partners in the original application, or > Being a seasonal employer that now qualifies for an increased loan amount under the new provisions. – Business concern, independent contractor, eligible self- employed individual, sole proprietor, nonprofit organization eligible for a 2020 PPP loan, veterans’ organization, tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization not conducting substantial lobbying activities or destination marketing organization, or an eligible nonprofit news organization – Meets the “small business” definition: > Generally, 500 employees including affiliates or SBA Industry Standard based on size/revenue > 500 employees reduced to 300 for eligible Section 501(c)(6) organization, destination marketing organizations, housing cooperatives > A business can qualify under the alternative size standard, if as of March 27, 2020, it (1) had a maximum tangible net worth of not more than $15 million, and (2) had an average net income after US federal income taxes of not more than $5 million for the last two fiscal years before the date of the application | – Previously received a first draw PPP loan in 2020 or 2021 – Used, or will use, the full amount of its first draw PPP loan received in 2020 or 2021 on authorized uses on or before the disbursement date of the second draw PPP loan – Employs, along with its affiliates, not more than 300 employees, unless it satisfies the alternative criteria for businesses with a North American Industry Classification System (NAICS) code beginning with 72 (restaurants and hospitality) and 511110 or 5151 (eligible news organizations) – Experienced at least a 25% reduction in 2020 gross receipts when compared to 2019 gross receipts, measured as follows: > If in operation all quarters in 2019, compare gross receipts reported on the 2019 tax return to the gross receipts for the 2020 tax return, or > Compare any quarter in 2020 to the same quarter in 2019 |
| Affiliation Rules | Borrowers are considered, along with their affiliated businesses, for the purpose of determining eligibility for a PPP loan. In ascertaining the number of employees, employee counts include those of the borrower and its affiliates, although the affiliation rules are waived for: > A business concern with not more than 500 employees that, as of the date on which the covered loan is disbursed, is assigned a NAICS code beginning with 72; (i) any business concern (including any station that broadcasts pursuant to a license that employs not more than 300 employees, per physical location of such business concern and is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 or 5151; or (ii) any nonprofit organization that is assigned a NAICS code beginning with 5151; and > A business concern operating as a franchise that the Administration assigns a franchise identifier code. | Same as the first draw except “300” is substituted each time “500” employees appear |
| Necessity for Certification | The borrower must certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” | Continues to be a requirement (notwithstanding the implication that the 25% revenue reduction illustrates necessity) |
| Excluded Entities | The following are not eligible for a PPP loan: > Publicly traded company > Debtor in bankruptcy proceedings > Entity that has permanently closed > Business concern or entity primarily engaged in political or lobbying activities > Business concern or entity for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong holds directly or indirectly at least 20% of the economic interest of the business or entity or that retain a China-resident person as a member of the entity’s board of directors > Person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938 > Person or entity that receives a grant for shuttered venue operators under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act > Entity in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the entity, where any issuer, the securities of which are listed on an exchange registered as a national securities exchange > Entity that has previously received a second draw PPP loan | Same as first draw even if a first draw PPP loan was received in 2020 |
| Maximum Loan Amount | – Original formulas continue to apply to determine the loan size, i.e., 2.5 times the average monthly payroll costs, with a limit of $10 million per borrower, and an overall limit of $20 million when including loans to members of the same corporate group. – The borrower can elect to use the average monthly payroll costs for calendar year 2019, calendar year 2020 or the one-year period before the loan application. Special rules apply to seasonal employers and those who were not in business during the 2019 tax year. Note that the definition of payroll costs has been changed to include life and disability coverage paid by the employer. | – Generally, the same 2.5 times average monthly payroll costs for most borrowers, but restaurants, hotels and other establishments that provide lodging and/or food for immediate consumption (NAICS code 72 entities) are allowed a factor of 3.5 times average monthly payroll costs. – All second draw PPP loans are capped at a maximum of $2 million per borrower (per location for NAICS code 72, 511110 or 5151) and with an overall limit of $4 million when including loans to members of the same corporate group. – Like first-draw PPP loans, the borrower can elect to use the average monthly payroll costs for either calendar year 2019, calendar year 2020, or the year preceding the loan application. Special rules apply to seasonal employers and those who were not in business during the 2019 tax year. Note that the definition of payroll costs has been changed to include life and disability coverage paid by the employer. |
| Revenue Reduction Documentation | N/A | – For loans exceeding $150,000, the applicant must submit documentation that substantiates a 25% or greater reduction in revenue. – For loans that do not exceed $150,000, documentation is not required with the loan application, but it must be submitted to receive forgiveness. If a borrower does not apply for forgiveness, they must provide the requested documentation if requested by the SBA. |
| Payroll Documentation | Documents must be submitted with the loan application that demonstrate eligibility for the loan and provide evidence of the qualifying payroll amount. This documentation may include payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records. | – Documentation of payroll costs is not required when the same lender that processed the original loan handles the second draw, and the 2019 calendar payroll figures are used for both the original and first draw, as well as the second draw. – If the borrower elects different payroll costs for the second draw, substantiation will be required. – The lender may request additional documentation to facilitate a thorough review of the borrower’s application in good faith. |
| Use of Loan Proceeds | – Payroll costs: Cash payroll, Employer cost of health care, Employer retirement plan contribution, Employer state payroll tax, Life and disability benefits (new) – Non-payroll costs for obligations in existence on February 15, 2020: Interest on mortgages, Rent to unrelated parties, and Utilities – New non-payroll costs: Covered operations expenditure, Covered property damage costs, Covered supplier costs, and Covered worker protection expenditure | Same as the first draw PPP loans |
| Covered Period | – For all loan forgiveness applications filed after December 27, 2020, the covered period: Starts on the disbursement date, and Ends on any day that is at least eight but not more than 24 weeks later (or any time frame in between) than the start date. – The end of the covered period will determine the date on which safe harbors must be satisfied. | Same as the first draw PPP loan rules |
| Loan Forgiveness | – Loan forgiveness must be applied for within 10 months following the end of the selected covered period to avoid loan payments. – The loan may be forgiven to the extent the loan proceeds are spent on the expanded payroll costs and other eligible expenses, as described above, within the covered period. – In addition to the use on qualified expenses, full forgiveness requires full-time equivalent employees and compensation levels to be maintained (full forgiveness may be achieved even with some reduction of full-time equivalent employees or wages/salaries), and at least 60% of the proceeds are spent on payroll costs. | Same as the first draw PPP loan rules |
| Maturity Date and Interest Rate | – 100 basis points (1%) – Five years | Same as the first draw if received in 2021 |
If you have any questions, please don’t hesitate to contact us today for more information.
Original article written by legacy firm, Harris Group Advisors (2021)
