On Dec. 27th 2020, President Donald Trump signed a $1.4 trillion spending bill and accompanying $900 billion economic stimulus package into law. The new stimulus bill follows the $2.2 trillion CARES Act from March—the largest economic relief bill in American history—and will re-up a number of key benefits from that legislation, including the popular Paycheck Protection Program of forgivable loans for small businesses
Section 311 of the Economic Aid Act added a new temporary section 7(a)(37) to the Small Business Act (15 U.S.C. 636(a)(37)). This new section authorizes the U.S. Small Business Administration (SBA or the Administration) to guarantee Paycheck Protection Program Second Draw Loans (PPP Second Draw Program), under generally the same terms and conditions available under the Paycheck Protection Program (PPP) established under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Under section 311, SBA may guarantee loans under the PPP Second Draw Program through March 31, 2021 (“Second Draw PPP Loans”) to borrowers that previously received a PPP loan under section 7(a)(36) of the Small Business Act (“First Draw PPP Loans”) and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.
According to the SBA “The first round of the PPP supported the employment of 51 million American workers and over 80 percent of small business payroll across all 50 states and territories. More than 87 percent of loans have been for $150,000 or less, with an average loan size of $101,000 – demonstrating the accessibility of the PPP to even the smallest businesses…”
This round, the SBA is taking even more steps to ensure that everyone has a fair chance, with
- A new round of Paycheck Protection Program (PPP) loans
- More permissive rules on deducting expenses that were paid with PPP Loan funds
- The opportunity for a second PPP loan for certain businesses
- A simplified PPP Forgiveness application
- Expansion of PPP-covered expenses
- More flexible covered periods, and more.
The following will include valuable information and next steps for small business owners. However, the most important point to be made is: if you qualify, get in as early as possible.
In order 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 is the newest variant to the PPP loan requirements, Forbes provides an example on how to calculate it:
“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.”
However, if you were not operating during the first, second or third quarter of 2019 but were operating during the fourth quarter, you can still qualify if you have gross receipts from the second, third or fourth quarter in 2020 that demonstrate at least a 25 percent reduction from the first quarter of 2020.
Finally, if you were not in operation at all in 2019 but were operating before February 15, 2020 and can provide gross receipts that demonstrate a 25 percent reduction from the first quarter of 2020, you can also still qualify.
It is important to note that 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.”
In addition, the SBA has provided separate guidelines regarding gross receipts for affiliates and businesses with more than one location. (Located here.)
Another important point to note is that you don’t need to include any forgiveness amount of the First Draw PPP Loan received in calendar year 2020 in your gross receipts.
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.
This time, there is a bit more wiggle room when it comes to determining your payroll costs; you can use either calendar year 2020 or calendar year 2019.
“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.”
When it comes to forgiveness 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 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.
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