The Treasury Department and Small Business Administration (SBA) have released Interim Final Rules (IFR) regarding the permission of “second draw loans” under the Paycheck Protection Program (PPP) recently authorized by the Consolidated Appropriations Act, 2021 (CAA 2021).

BACKGROUND

CARES Act

The CARES Act provided the original legislation authorizing the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the Payroll Protection Program (PPP), which provides up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients for the purpose of maintaining payroll during the coronavirus (COVID-19) pandemic and to cover certain other expenses.

Paycheck Protection Program Flexibility (PPPF) Act

The Paycheck Protection Program Flexibility (PPPF) Act made significant modifications to the PPP, including:

• reducing the percentage of loan proceeds require to be used on payroll costs from 75% to 60%, and in so doing, increasing the percentage that may be used for non-payroll costs such as rent, mortgage interest and utilities from 25% to 40%.

• Additionally, the PPPF Act increased the deferral date that borrowers were required to begin payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020) from the previous deferral period of six months.

The application period for the original PPP closed on 8/8/20, and the SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders beginning 10/2/20.

Consolidated Appropriations Act 2021

On 12/27/20, President Trump signed the Consolidated Appropriations Act 2021 (CAA 2021) into law. Included CAA 2021 is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) which:

• authorizes $806.5 billion towards the PPP, and
• extends the PPP until 3/31/21.

The Act extended the program to other entities, increased additional eligible expenses and clarified terms.

Further, the CAA 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a second draw loan from the PPP of up to $2 million.

See related article, SBA Releases Guidance on PPP Extension and Expansion.

SBA INTERIM FINAL RULE (IFR)
Payroll Protection Plan Second Draw Loans

Because this section provides only a summary of the IFR, the complete guidance is linked here for further reference/clarification:

SBA, Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans, 13 CFR Parts 120 and 121

According to the IFR, Second Draw PPP Loans:

• are 100% guaranteed by the SBA under the same terms, conditions, and processes as First Draw PPP Loans

• are subject to the Consolidated First Draw PPP IFR, inclusive of the FAQs contained within, as well as all PPP loan requirements. 

Terms and Conditions Which are the Same as for First Draw PPP Loans 

• Loan guarantee is 100%.
• Collateral and personal guarantees are not required. 
• 1% interest rate, calculated on a noncompounding, non-adjustable basis.
• Maturity of five years.
• All loans will be processed by all lenders and lenders will rely on borrower certifications to determine eligibility and use of loan proceeds.

Terms and Conditions Specific to Second Draw PPP Loans

Eligibility requirements

First Draw PPP borrowers are eligible for a Second Draw PPP Loan only if the borrower:

• has <=300 employees;

• experiences a 25% revenue reduction in 2020 relative to 2019; and

• has used, or will use, the full amount of the First Draw PPP Loan on eligible expenses under PPP rules, on or before the expected date of disbursement of the Second Draw PPP Loan.

Furthemore, a borrower is prohibited from obtaining a Second Draw PPP Loan if it has not complied with PPP loan program requirements.

Revenue reduction requirement

Eligibility for a Second Draw PPP Loan is contingent on the borrower having experienced a 25% revenue reduction in 2020 relative to 2019. The reduction 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 in 2019.

Examples of revenue reduction measurement:

• the applicant had gross receipts 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;

Example: An applicant that had gross receipts of $50,000 in the second quarter of 2019 and had gross receipts of $30,000 in the second quarter of 2020 experienced a 40% revenue reduction between these two quarters).

• if the applicant was not in business during the first or second quarter of 2019, but was in business during the third and fourth quarters of 2019, the applicant had gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the applicant’s gross receipts during the third or fourth quarter of 2019;

Example: An applicant that had gross receipts of $50,000 in the third quarter of 2019 and had gross receipts of $30,000 in the third quarter of 2020–demonstrating a reduction of 40% from the applicant’s gross receipts during the third quarter in 2019).

• if the applicant was not in business during the first, second, or third quarter of 2019, but was in business during the fourth quarter of 2019, the applicant had gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the fourth quarter of 2019; or

Example: An applicant that had gross receipts of $50,000 in the fourth quarter of 2019 and had gross receipts of $30,000 in the fourth quarter of 2020-demonstrating a reduction of 40% from the applicant’s gross receipts during the fourth quarter in 2019).

• if the applicant was not in business during 2019, but was in operation on 2/15/20, the applicant had gross receipts during the second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the gross receipts of the entity during the first quarter of 2020

Example: An applicant that had gross receipts of $50,000 in the first quarter of 2020 and had gross receipts of $30,000 in the fourth quarter of 2020 – demonstrating a reduction of 40% from the applicant’s gross receipts during the first quarter in 2020).

Note: Borrowers in operation for all four quarters of 2019 are required to submit copies of annual tax forms substantiating the revenue decline. 

Gross receipts defined

The IFR gross receipts definition is consistent with that of the definition of receipts in 13 CFR 121.104 of SBA’s size regulations. Any portion of a First Draw PPP Loan (received in calendar 2020) that was forgiven is excluded from a borrower’s gross receipts with certain exceptions.

Businesses having more than one physical location

Business entities assigned a NAICS code beginning with 72 (including hotels and restaurants) may receive a Second Draw PPP loan if they:

• have <=300 employees per physical location (rather than 500 employees for First Draw PPP Loans), and

• meet the revenue reduction requirements

Note: The 300 employees also applies to certain news organizations (NAICS code beginning with 511110 or 5151 or majority-owned or controlled by a business concern with those NAICS codes).

Affiliation rules

The IFR notes that affiliation rules and its waivers under First Draw PPP loans also apply to Second Draw PPP Loans with certain exceptions:

• a waiver is added for certain eligible news organizations and reflects the reduced size requirement noted above

• a religious exemption to affiliation rules is adopted for Second Draw PPP Loans

Excluded entities

The IFR clarifies that borrowers who received a First Draw PPP Loan despite being ineligible to receive the loan are not eligible to receive a Second Draw PPP Loan.

Furthermore, the following entities are also excluded:

• a business concern or entity primarily engaged in political activities or lobbying activities;

• certain entities organized under the laws of (or with other specified ties to) the People’s Republic of China or the Special Administrative Region of 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 §324 of the Economic Aid Act;

• entities in which the President, the 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% equity;

• a publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934;

• borrowers that have already received a Second Draw PPP Loan; or

• businesses that have permanently closed and have no intention of reopening.

Maximum loan amount and payroll cost calculation

Similar to First Draw PPP Loans, the maximum loan amount is the lesser of:

• 2.5 months of the borrower’s average monthly payroll costs, or
• $2 million.

The calculation method has, however, been adjusted for Second Draw PPP Loans. The period to calculate payroll costs for a Second Draw PPP Loan is either 2020 or 2019. Borrowers may also use the actual one-year period before the date on which the loan is made to calculate payroll costs if they opt to not use calendar 2019 or 2020 to calculate payroll costs.

Other items of note

• Seasonal employers and entities that did not exist for the full 12-month period preceding the Second Draw PPP Loan are provided a calculation method.

• Business entities assigned an NAICS code beginning with 72 (including hotels and restaurants) may receive a maximum loan amount equal to 3.5 months of payroll costs rather than 2.5 months.  In addition, businesses that are seasonal or new entities without 12 months of payroll costs may use this method.

• Payroll cost calculation for farmers and ranchers will be the same as under First Draw PPP Loans, but eliminates the reference to EIDL refinancing since it does not apply and applies the choice of time period consistent with other Second Draw PPP Loans. Such borrowers must subtract any employee payroll costs from gross income in the calculation of the maximum loan amount to avoid double-counting amounts.

• Calculation methods for self-employed individuals and partnerships are provided.

• Businesses that are part of a single corporate group are limited to a maximum aggregate loan amount of $4 million. 

Second Draw PPP Loan application

General rule

Second Draw PPP Loan applicants must submit documentation substantiating payroll costs calculation like First Draw PPP Loans. 

Exceptions

Second Draw PPP loan applicants are not required to provide additional documentation if:

• the applicant used calendar year 2019 figures to determine its First Draw PPP Loan amount,

• the applicant used calendar year 2019 figures to determine its Second Draw PPP Loan amount (rather than calendar year 2020),

• 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.

Note: The reason the additional document is not required is because the lender has the relevant documentation to support payroll costs as the lender is required to confirm the borrower’s average monthly payroll costs based on prior documentation.

>$150,000 Loans

For loans in excess of $150,000, applicant is required to provide documentation that substantiates at least a 25% revenue reduction in 2020 relative to 2019. Acceptable documentation may include:

• relevant tax forms,
• quarterly financial statements, or
• bank statements.

Loans to borrowers having unresolved First Draw PPP Loans

Procedures are provided on how to process a Second Draw PPP Loan application in the event the borrower’s First Draw PPP Loan is under review (“unresolved borrower”). 

Loan forgiveness

In general, Second Draw PPP Loans are subject to the Consolidated First Draw PPP IFR with certain exceptions. Second Draw PPP Loan borrowers of <=$150,000 are required to provide documentation of revenue reduction in the event such documentation was not provided at the time of the loan application.

Application process

Applicants must submit SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form in addition to required certifications and documentation (outlined below).

Required documentation

Other than the situation in which:

• the applicant used calendar year 2019 figures to determine both its First Draw and Second Draw PPP Loan amounts (as discussed above), and

• the lender for the applicant’s Second Draw and First Draw PPP Loan is the same,

the applicant must provide the following:

• Form 941 (Employer’s Quarterly Federal Tax Return);

• State quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, as applicable, or equivalent records from the payroll processor;

• Retirement plan and health/life/disability/vision/dental insurance: Evidence of contribution;

• For partnerships, Form 1065, Schedule K-1s (Partner’s Share of Income, Deductions, Credits, etc.);

• For self-employed applicants with employees:

• • the 2019 or 2020 (as applicable for determining the loan amount) Form 1040 Schedule C,
  • items listed above in the first three bullets,
  • Additionally, to establish the applicant was in operation on 2/15/20,  a payroll statement or similar documentation from the pay period that covered 2/15/20 must be provided.

• For self-employed applicants without employees:

• • the 2019 or 2020 (as applicable for determining the loan amount) Form 1040 Schedule C,
  • a 2019 or 2020 (as applicable for calculating the loan amount) IRS Form 1099-MISC (or 1099-NEC) detailing nonemployee compensation received,
  • invoice, bank statement, or book of record establishing that the applicant is self-employed,
  • Additionally, to establish that applicant was in operation on 2/15/20, a 2020 invoice, bank statement, or book of record
•  
• >$150,000 loans: documentation establishing the applicant experienced a reduction in revenue at the time of application which may include:

• • annual tax forms,
  • quarterly income statements,or
  • bank statements

• <=$150,000 loans: documentation establishing the applicant established a reduction in revenue at the time of application:

• on or before the date the borrower submits an application for loan forgiveness, or
• if the borrower does not apply for loan forgiveness, at SBA’s request.

Documentation may include:

• annual tax forms,
• quarterly income statements, or bank statements

Required certifications

Certifications are required of applicants stating that they:

• have not received, and will not receive, another Second Draw PPP Loan;
• experienced a revenue reduction of 25%, inclusive of the necessary substantiating documentation;
• have utilized the full First Draw PPP Loan amount (including any subsequent increase) for only eligible expenditures; and
• are not an ineligible business concern (as outlined in the section entitled “Excluded entities”). 

Applicability date

This IFR is applicable to to:

• loan applications, and
• applications for loan forgiveness

submitted for Paycheck Protection Program Second Draw Loans.

(This is Blog Post #955)