First Guidance Issued for New Paycheck Protection Program Loans

January 12, 2021

By: Richard Shapiro

The Small Business Administration (“SBA”) and the Department of the Treasury have begun releasing guidance for the reopened Paycheck Protection Program (“PPP”) for “First Draw” PPP loans and for the new “Second Draw” PPP loans, both provided for under the recently enacted COVID 19 relief package (the "Act"). This alert summarizes the SBA’s top-line overview of the First and Second Draw PPP loans, as well as its Second Draw interim final rule, issued January 6, 2021. More guidance should be forthcoming as the Second Draw moves forward.

PPP Top-Line Overview

First Draw

  • Borrowers can apply until March 31, 2021.
  • All new First Draw PPP Loans will have the same terms regardless of lender or borrower.
  • Loans can be used to help fund payroll costs including benefits, mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
  • First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the eight- to 24-week covered period following loan disbursement (i) employee and compensation levels are maintained; (ii) the loan proceeds are spent on payroll costs and other eligible expenses; and (iii) at least 60% of the proceeds are spent on payroll costs.
  • Who can apply
    • Eligible small entities that together with their affiliates, if applicable, have 500 or fewer employees including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors.
    • Entities with more than 500 employees in certain industries that meet the SBA’s alternative size standard or the SBA’s size standards for those particular industries.
    • Businesses with an NAICS code that begins with “72” (accommodation and food services sector) or eligible news organizations with no more than 500 employees per physical location, as well as housing cooperatives, IRC Sec. 501(c)(6) organizations (e.g., not-for-profit business leagues, chambers of commerce, real-estate boards, boards of trade), or destination marketing organizations with no more than 300 employees.
  • Reapplying and Loan Increases
    • Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020, may (i) reapply for a First Draw PPP loan if they previously returned some or all of their First Draw PPP loan funds; or (ii) under certain circumstances, request to modify their First Draw PPP loan amount if they previously did not accept the full amount for which they are eligible.

Second Draw

  • Certain eligible borrowers that previously received a PPP loan can apply for a Second Draw loan with the same general loan terms as their First Draw PPP loan.
  • Borrowers can apply until March 31, 2021.
  • All Second Draw PPP loans will have the same terms regardless of lender or borrower.
  • Loans can be used to help fund payroll costs including benefits, mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
  • Second Draw PPP loans made to eligible borrowers qualify for full forgiveness if during the eight- to 24-week period following loan disbursement (i) employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan; (ii) the loan proceeds are spent on payroll costs and other eligible expenses; and (iii) at least 60% of the proceeds are spent on payroll costs.
  • A borrower is generally eligible for a Second Draw PPP loan if the borrower:
    • Previously received a First Draw PPP loan and will or has used the full amount only for authorized uses.
    • Has no more than 300 employees.
    • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
  • Maximum loan amount
    • For most borrowers, the maximum loan amount is 2.5 times average monthly 2019 or 2020 payroll costs up to $2 million.
    • For borrowers in the accommodation and food services sector (NAICS Code 72), the maximum loan amount is 3.5 times average monthly 2019 or 2020 payroll costs up to $2 million.

PPP Second Draw Loan Interim Final Rule

Following are highlights of the interim final rule issued January 6, 2021, regarding Second Draw PPP loans:

Terms and Conditions

Second Draw loans are generally subject to the same terms, conditions and requirements as First Draw loans, including but not limited to:

  • No collateral required.
  • No personal guarantees required.
  • Interest rate is 100 basis points (1%), calculated on a non-compounding, non-adjustable basis.
  • Five-year maturity.
  • Lenders permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of funds.

Eligibility Requirements

The eligibility requirements for the Second Draw PPP loan are narrower than the eligibility for First Draw PPP loans. As noted, a borrower is eligible for a Second Draw PPP loan only if it has 300 or fewer employees and has had a revenue reduction in 2020 relative to 2019 (described below). Further, a Second Draw PPP Loan may only be made to an eligible borrower that has received a First Draw PPP loan and has used, or will use, the full amount of the First Draw PPP loan on eligible expenses under the PPP rules on or before the expected date on which the Second Draw PPP loan is disbursed to the borrower. Note: A lender must make disbursement of the loan within 10 calendar days of loan approval. The full amount of the borrower’s First Draw PPP loan includes the amount of any increase in the First Draw PPP loan made pursuant to the Act.

Revenue Reduction Requirement

To be eligible for a Second Draw PPP loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. This is calculated by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. For example, 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% between the quarters and, therefore, satisfies the requirement—assuming all other eligibility criteria are met. Also, a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the requisite 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 returns to substantiate its revenue reduction.

In general, gross receipts include 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. Gross receipts do not include 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, and proceeds from transactions from a concern and its domestic or foreign affiliates. Subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs (e.g., payroll taxes) may not be excluded from gross receipts. Special rules are provided for gross receipts of affiliates.

For an eligible nonprofit organization, gross receipts mean the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses.

Any forgiveness amount of a First Draw PPP loan received by a borrower in calendar year 2020 is excluded from a borrower’s gross receipts.

Business Concerns with More Than One Physical Location

The interim final rule specifically addresses business entities assigned an NAICS code beginning with 72—including hotels and restaurants. Any single business entity that is assigned an NAICS code beginning with 72 that employs not more than 300 employees per physical location is eligible to receive a Second Draw PPP loan. Taking into account special affiliation rules applicable to NAICS code 72 businesses (noted below), if each hotel or restaurant location owned by a parent business is a separate legal business entity and employs not more than 300 employees per physical location, each hotel or restaurant location is permitted to apply for a separate Second Draw PPP loan—provided it uses its unique employer identification number—if it meets the revenue reduction requirements and otherwise satisfies the eligibility criteria.

Affiliation Rules

As with First Draw PPP loans, in most cases, a borrower is considered together with its affiliates to determine eligibility for a Second Draw PPP loan. However, the affiliation rules are waived for certain categories of borrowers, including, for example, business concerns with an NAICS code beginning with 72 if they employ 300 or fewer employees. Also, a faith-based organization/religious exemption to the affiliation rules applies to Second Draw PPP loans.

Excluded Entities

Borrowers ineligible to receive Second Draw PPP loans include:

  • An entity ineligible to receive a First Draw PPP loan.
  • A borrower that received a First Draw loan despite being ineligible to receive the loan.
  • An entity that previously received a Second Draw PPP loan.
  • An entity that has permanently closed.
  • A business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank.
  • Certain entities organized under the laws of the People’s Republic of China or Hong Kong, or with specified ties to either the People’s Republic of China or Hong Kong.
  • Any person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938.
  • A person or entity that receives a grant for “shuttered venue operators” under the Act.
  • Entities in which the president, vice president, the head of an executive department, or a member of Congress, or the spouse of such person owns, controls or holds at least 20% of any class of equity.
  • A publicly traded company, the securities of which are listed on a national securities exchange.

Payroll Cost Calculation

Generally, the maximum loan amount for a Second Draw loan amount is equal to the lesser of two-and-a-half months of the borrower’s average monthly payroll costs or $2 million. The relevant time period for calculating a borrower’s payroll costs may be based on calendar year 2020 or calendar year 2019, or for certain borrowers the precise one-year period before the date on which the loan is made. Tailored methodologies are provided for certain categories of borrowers (e.g., seasonal businesses, self-employed individuals and partnerships, new entities that did not exist for the full 12-month period preceding the Second Draw PPP loan, farmers and ranchers, and borrowers assigned an NAICS 72 code at the time of disbursement).

As in the case of First Draw PPP loans, in calculating a borrower’s payroll costs, the borrower must subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the time period during which the payments are made or the obligation to make the payment is incurred.

Also, business that are part of a single corporate group in no event can receive more than $4 million of Second Draw PPP loans in the aggregate.

Application and Documentation Requirements

The applicant must submit to the lender SBA Form 2483-SD or the lender’s equivalent form. The documentation required to substantiate an applicant’s payroll cost calculations for Second Draw PPP loans is generally the same as for First Draw PPP loans. Specifically, the following must be submitted unless the documentation was previously provided to the lender in connection with a First Draw PPP loan (i.e., the applicant (i) used calendar year 2019 figures to determine its First Draw PPP loan amount; (ii) is using calendar year 2019 figures to determine its Second Draw PPP loan amount, instead of calendar year 2020; and (iii) the lender for the applicant’s Second Draw PPP loan is the same as the lender that made the applicant’s First PPP loan):

  • Applicant is not self-employed – The applicant’s Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, whichever was used to calculate payroll, as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions. A partnership must also include its Form 1065 K-1s.
  • Applicant is self-employed and has employees – The applicant’s 2019 or 2020 whichever was used to calculate loan amount, IRS Form 1040 Schedule C, Form 941 or other tax forms or equivalent payroll processor records containing similar information, and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, whichever was used to calculate loan amount as applicable, or equivalent payroll processor records, plus any evidence of any retirement and employee group health, life, disability, vision and dental contributions, if applicable. A payroll statement or similar documentation form the pay period that covered February 15, 2020, must be provided to establish the applicant was in operation on February 15, 2020.
  • Applicant is self-employed and does not have employees – The applicant’s (i) 2019 or 2020 whichever was used to calculate loan amount, Form 1040 Schedule C; (ii) a 2019 or 2020 whichever was used to calculate loan amount, Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; and (iii) a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or about February 15, 2020.

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. That 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 it must be submitted on or before the date the borrower applies for forgiveness. If a borrower does not submit an application for loan forgiveness, that documentation must be provided upon the SBA’s request.

Loans to Borrowers with Unresolved First Draw PPP Loans

The interim final rule establishes procedures with respect to the handling of a Second Draw PPP loan application by a borrower whose First PPP loan is under review by the SBA. If a borrower’s First Draw PPP loan is under review by the SBA and/or the SBA has information indicating that the borrower may have been ineligible for the First Draw PPP loan it received or for the loan amount received, the lender will receive notification from the SBA when the lender submits an application for a guaranty of a Second Draw PPP loan and will not receive an SBA loan number until the issue is resolved. The SBA is required to resolve issues related to unresolved borrowers “expeditiously.”

About Richard J. Shapiro

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has more than 40 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.