PPP Second Draw Loan Overview

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The COVID-19 pandemic’s persistence, combined with restrictive government orders, created ongoing financial challenges for many Los Angeles and Dallas businesses. The combination of employee safety guidelines, occupancy limit changes, and indoor service elimination has resulted in sharp revenue declines. The Consolidated Appropriations Act, 2021, passed into law in December, provides businesses with several components of relief. A key part of this relief is the Paycheck Protection Program, which was again funded, permitting second draw loans for prior borrowers. This was welcome news for many in need of additional working capital to survive the second wave of COVID-19. The Small Business Administration (SBA) recently released a new Interim Final Rule, providing detailed guidance, including eligibility, payroll calculations, loan forgiveness, and more. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Eligibility Criteria

Many changes have been made to the eligibility rules to ensure those with the greatest need have access to additional funds. To qualify, a business must have 300 or fewer employees, experienced a revenue reduction in 2020, and has used, or will use the full amount of the first loan before the second loan disbursement. In addition, a borrower must have spent the first loan on eligible expenses to qualify.

Gross Receipts Test

The CAA also requires a business to have experienced a reduction in gross receipts of 25% or greater in 2020 when compared against 2019. The IFR defines this as all revenue, in whatever form received or accrued, including from the sales of products, services, interest, dividends, rents, royalties, fees or commissions. To make the calculation a borrower must compare gross receipts for any quarter in 2020 with the corresponding quarter in 2019. For those not in business in 2019, but were in operation on February 15, 2020, they demonstrate the reduction by comparing the 2nd, 3rd, or 4th quarter against the 1st quarter of 2020. It is important to note that any forgiven amount from the first loan should not be included in the calculation.

Excluded Entities

There are several businesses that are not eligible to participate, including:

  • Organizations primarily engaged in political or lobbying activities, including research and advocacy in public policy, political strategy, or self-described think tanks.
  • Certain businesses organized in China or Hong Kong.
  • Shuttered Venue Operators Grant recipients.
  • Any business or organization in which the President, Vice President, Head of an Executive Department, Member of Congress, or spouse, that owns, controls, or holds at least 20% of any class of stock or equity.
  • Most publicly traded companies.

Payroll Cost Calculations

The maximum loan amount is equal to the lesser of two and a half months of average monthly payroll or $2M. An important exception is for hotels, restaurants, and other businesses with a NAICS code starting with 72, as they are permitted to use three and a half months. There were also minor changes made to the calculation process for ranchers, farmers, and partnerships. When making the calculation, the relevant period is either the 12-months prior to a loan application or 2019.

Loan Application & Documentation

Applicants need to submit the recently updated  PPP Borrower Application Form and the following supplemental documentation, which is outlined below by applicant type.

  • Not Self-Employed – For these applicants, a copy of IRS Form 941, state quarterly wage unemployment insurance tax forms from each quarter in 2019 or 2020, whichever period is used to calculate payroll, evidence of any group health, dental, vision, and disability insurance contributions must be provided. Partnerships should also include a copy of its IRS Form 1065 K-1.
  • Self Employed with Employees – Applicants must provide a copy of 2019 or 2020 (whichever was used to calculate the loan amount) IRS Form 1040 Schedule C, form 941 for each quarter and evidence of any group health, dental, vision, and disability insurance contributions.
  • Self Employed with No Employees – Applicants must provide a copy of 2019 or 2020 (whichever was used to calculate the loan amount) IRS Form 1040 Schedule C, IRS Form 1099-MISC detailing non-employee compensation, invoices, bank statements or other evidence that established self-employment, and copies of invoices, bank statements or other evidence to establish the applicant was in operation on February 15, 2020.

Loan Forgiveness

Second draw loans are eligible to receive full or partial forgiveness up to the full principal loan amount and accrued interest. Borrowers will not be responsible for any loan payments if proceeds are used for forgivable purposes and employee and compensation levels are maintained. In addition, if a borrower qualifies for the safe harbor or exemption rules apply, then repayment will not be required.

The amount of forgiveness will depend on the total amount of payroll costs, payments of covered mortgage interest, rent and utilities entered into before February 15, 2020. In addition, covered payments for property damage costs, supplier and covered employee protections are also forgivable. Full forgiveness is only possible when a borrower uses at least 60% of loan proceeds for payroll costs and not more than 40% for other expenses.

Special forgiveness application rules apply to borrowers with a loan value of $150,000 or less. These borrowers are not required to submit any additional documentation at the time of forgiveness application. These borrowers are only required to retain relevant records that demonstrate compliance with PPP requirements. It is recommended to retain employment records for 4 years and all others for 3. For loans above $150,000, the existing record and document retention guidance must be followed. It is important to note, any EIDL advance received will not reduce the amount of loan forgiveness.

Contact Us

The SBA announced late last week that applications will be accepted from community lenders on January 11th and from all others on January 13th. This means Los Angeles and Dallas businesses should act quickly to determine eligibility and compile the necessary information. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.