Extension and expansion of PPP loans: What to know about first- and second-draw loans
Updated March 31 to reflect changes made by the American Rescue Plan Act, plus a program extension
The Small Business Administration (SBA) has released applications for the second round of Paycheck Protection Program (PPP) loans, as well as full information and guidance on who is eligible, how to apply, and more. Loans are available both as “second-draw” loans for borrowers who received funding in the first round, and as “first-draw” loans to first-time borrowers. Currently, the last day to apply for and receive a PPP loan of any kind – first- or second-draw – is May 31, 2021 (an extension from March 31).
Many of the guidelines on eligibility, forgiveness, and more changed from the first to the second PPP round, which was created with a pool of over $284 billion by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), enacted Dec. 27, 2020. The American Rescue Plan Act, enacted March 11, 2021, added $7.5 billion in new funding; it also expanded eligibility and adjusted forgiveness rules, effective for PPP loans approved and loan forgiveness applications submitted on or after March 11, 2021. (Find more on the specific changes of the American Rescue Plan Act here.)
Read on for key information regarding the new and updated PPP provisions. Details are subject to change, so please check back for updates as more information becomes available. See the SBA website for the most updated first-draw PPP loan applications and second-draw PPP loan applications. (Looking specifically for updated guidance on PPP loan forgiveness? Read our overview here.)
It’s also worth emphasizing that many of the various rules apply differently to different types of borrowers: first-time borrowers, second-time borrowers, borrowers whose first PPP loans have already been forgiven, certain industries and entity structures, and other groups within the PPP ecosystem. Reach out to our team or another trusted advisor to confirm the details of your particular case.
Click any of the bullets below to skip to a specific section:
“First-draw” refers to a borrower’s first PPP loan, whether taken in the initial, 2020 round of funding or with this new, 2021 wave.
“Second-draw loans” are smaller loans newly available to borrowers who have already taken and spent their first-draw PPP loan.
“First/second wave” and “first/second round” are used here to differentiate between the two main phases of funding, in 2020 and 2021.
Borrowers cannot receive more than one first-draw loan; an entity that received a first-draw loan in 2020 cannot apply for another in 2021, but may be eligible for a second-draw loan.
- If a borrower returned all of a first-draw PPP loan, they may reapply for a new first-draw loan in an amount they are eligible for under the current PPP rules.
- Borrowers that returned or repaid part of a first-draw loan can request an increase in their loan amount equal to the difference between the amount retained and the amount previously approved.
- A borrower that did not accept the full amount of a first-draw loan they were approved for can request an increase up to the amount previously approved.
- Continue to the section “Loan increases and reapplications” for additional information for these borrowers.
A borrower may also only receive one second-draw loan.
If you have already received a first-draw loan, we recommend that you still read the first-draw section, as some first-draw terms have changed and may impact the borrower, such as the opportunity for increases in loan amounts, as well as additions to covered and forgivable expenses.
In addition to adding $7.5 billion in new PPP funding, the American Rescue Plan Act revised a number of PPP provisions related to eligibility, forgiveness, and how PPP interacts with other COVID-19 relief programs. The changes apply to PPP loans approved (and loan forgiveness applications submitted) on or after March 11, 2021. We have updated the sections below to reflect these updates, and full details can be found in this March 22 Interim Final Rule (IFR), but to summarize, most fall under these main topics:
- PPP and SVOG: Under the Economic Aid Act, businesses that received or will receive a grant under the new Shuttered Venue Operator Grant (SVOG) program are ineligible to receive PPP loans, and, conversely, businesses that received a PPP loan after Dec. 27, 2020, were ineligible for a SVOG. The American Rescue Plan Act revised the rules to allow some interaction between these two programs, as outlined below. Updated PPP applications contain new good-faith certifications that reflect these changes.
- If a business receives a first- or second-draw PPP loan after Dec. 27, 2020, but before it is approved for a SVOG, the SVOG amount will be reduced by that PPP loan amount (or, if the business receives both a first- and second-draw loan after that date, by the combined amount of both loans).
- If the PPP applicant is approved for a SVOG before receiving a PPP loan number, the applicant will then be ineligible for the PPP loan, and “acceptance of any PPP loan proceeds will be considered an unauthorized use.”
- Also important: A PPP loan received before Dec. 27, 2020, will not reduce the SVOG amount.
- Eligibility for tax-exempt nonprofit organizations. Previously, only certain types of Section 501(c) tax-exempt nonprofits were eligible for PPP loans. The American Rescue Plan Act expanded eligibility to generally include all except Section 501(c)(4) entities, subject to certain other criteria. Size guidelines vary slightly by type; continue reading or see the IFR for more detail.
- Eligibility for “internet publishing organizations.” This applies to an entity that 1) is assigned a NAICS code of 519130; 2) “is engaged in the collection and distribution of local or regional and national news and information”; and 3) has not more than 500 employees per physical location (or a defined alternate size standard). The organization also must make good-faith certifications that it is an internet-only news or periodical publisher and that the loan proceeds “will be used to support expenses at the component of the business concern or organization that supports local or regional news.”
- Eligibility for NAICS Code 72 businesses (Accommodation and Food Services): The IFR implementing the American Rescue Plan Act adds to the previous IFR’s list of entities eligible for first-draw PPP loans, “A business concern that is assigned a NAICS code beginning with 72 that employs no more than 500 employees per physical location.” These businesses previously were eligible, but not specifically listed, which led to confusion; the IFR offers clarification.
Note that the American Rescue Plan Act’s changes to eligibility apply to second-draw loans, such that “internet publishing companies” can now qualify, and nonprofits should consider the same revised guidelines in evaluating their eligibility. Recall that second-draw recipients generally must employ not more than 300 employees (or 300 per physical location, if applicable).
A last key change from the American Rescue Plan Act revised what a PPP recipient can include in their forgiveness-eligible “payroll costs,” defining the interplay between PPP and other COVID-19 relief measures that center on employee pay. See our forgiveness article for details.
Information in this section is drawn from the SBA Interim Final Rule (IFR) Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by the Economic Aid Act; references to “the IFR” generally refer to that document unless otherwise noted (e.g., guidance from the March 22, 2021, IFR implementing the American Rescue Plan Act’s changes). We have summarized key points, but in many cases you will find additional detail in the IFR.
To be eligible for a PPP loan in this round, a prospective borrower (together with any affiliates):
1) Must have been in operation on Feb. 15, 2020;
2) Must have had employees for which they paid salaries or payroll taxes, have paid independent contractors, or be an eligible self-employed individual, independent contractor, or sole proprietorship with no employees; and
3) Must be one of the following types of organizations:
- A “small business concern” under the applicable SBA revenue-based size standard for the applicant’s industry or the SBA alternative size standard (in brief: together with its affiliates, the entity must have a maximum tangible net worth of not more than $15 million; and its average net income after federal income taxes (excluding any carry-over losses) for the two full fiscal years before the application date must be not more than $5 million)
- An independent contractor, eligible self-employed individual, or sole proprietor
- One of the following entities with no more than 500 employees (or a relevant SBA employee-based size standard; see Page 28 of the IFR for details)
- A business concern
- A 501(c)(19) tax-exempt veterans organization
- A tribal business concern as defined in the Small Business Act
- A NAICS code 72 (Accommodation and Food services) business with no more than 500 employees per physical location
- A 501(c)(3) tax-exempt nonprofit organization with no more than 500 employees per physical location
- As of March 11, 2021, a tax-exempt nonprofit organization described in any Section 501(c) paragraph other than (3), (4), (6), or (19) with no more than 300 employees per physical location (and subject to additional criteria, primarily related to lobbying; see Page 11 of the March 22 IFR for details)
- This generally expands eligibility for all 501(c) organizations except for those described in Section 501(c)(4), which generally includes social welfare organizations and local associations of employees
- Electric and telephone cooperatives that are exempt from federal income taxation under Section 501(c)(12) were previously PPP-eligible if they had no more than 500 employees or met the employee-based size standard for their industry (if higher) or SBA’s alternative size standard. Now, for loans made on or after March 11, 2021, they can have no more than 300 employees per physical location, and can no longer use those other size standards.
- Certain news organizations: “A business concern, or any station which broadcasts pursuant to a license granted by the Federal Communications Commission under Title III of the Communications Act of 1934 (47 U.S.C. 301 et seq.), with more than one physical location that employs not more than 500 employees (or the size standard established by the Administrator for the NAICS code applicable to the business concern) per physical location, is eligible for a PPP loan if it: (1) is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 or 5151 or, with respect to a public broadcasting entity (as defined in section 397(11) of the Communications Act of 1934 (47 U.S.C. 397(11))), has a trade or business that falls under such a code.” This group must also make “a good-faith certification that proceeds of the loan will be used to support expenses at the component of the organization that produces or distributes locally focused or emergency information.”
- The American Rescue Plan Act added eligibility for “internet publishing organizations,” described as an entity that 1) is assigned a NAICS code of 519130; 2) “is engaged in the collection and distribution of local or regional and national news and information”; and 3) has not more than 500 employees per physical location (or a defined alternate size standard). Such an organization also must make good-faith certifications that it is an internet-only news or periodical publisher and that the loan proceeds “will be used to support expenses at the component of the business concern or organization that supports local or regional news.”
In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility. Affiliates are determined based on factors including (but not limited to) stock ownership, overlapping management, and identity of interest. Additional affiliate considerations for these PPP loans include:
- SBA affiliation rules are waived for NAICS code 72 (Accommodation and Food services) businesses with no more than 500 employees (300 for second-draw loans); franchises that are approved on SBA’s Franchise Directory; small businesses that receive financing through the Small Business Investment Company (SBIC) program; and select news and nonprofit organizations and internet-only publishers. See Page 15 of the March 22 IFR for details.
- The number of employees in determining eligibility includes employees of any foreign affiliates; however, “under no circumstances may PPP funds be used to support non-U.S. workers or operations,” the IFR notes.
- Otherwise eligible faith-based organizations are exempt from SBA’s affiliation rules where they would “substantially burden those organizations’ religious exercise.”
- Portfolio companies of private equity funds are subject to affiliation rules; however, the IFR also reminds them that “all borrowers should carefully review the required certification on [the borrower application form] stating that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.’ ”
- Participation in an employee stock ownership program (ESOP) does not trigger application of affiliation rules.
In calculating employee counts, also consider:
- Independent contractors do not count as employees for the purpose of PPP loan calculations
- Student workers generally count as employees in PPP calculations; however, applicant institutions of higher education cannot include work-study students or payroll costs related to them in their calculations for eligibility and loan amounts.
Partnerships are eligible for PPP loans, but individual partners may not submit separate PPP loan applications for themselves as a self-employed individual. “Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred on a PPP loan application filed by or on behalf of the partnership,” the IFR says. A partnership and its partners, and LLCs filing taxes as a partnership, are limited to one PPP loan.
Seasonal employers were newly defined by the Economic Aid Act as an eligible recipient that:
1. “Does not operate for more than seven months in any calendar year;” OR
2. “During the preceding calendar year, had gross receipts for any six months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other six months of that year.”
The IFR says that seasonal businesses will be considered as meeting the “in operation as of Feb. 15, 2020” requirement if they were in operation for any 12-week period between Feb. 15 of 2019 and 2020.
The following entities are eligible provided that they meet the other eligibility requirements:
- Hospitals owned by state or local government (both businesses and tax-exempt nonprofits), provided they receive less than 50% of their funding from state or local government sources (exclusive of Medicaid)
- Businesses that receive legal gaming revenue
The following are ineligible even if they meet the other requirements:
- Any prospective borrower that engaged in any activity that is illegal under federal, state, or local law
- Household employers (i.e., individuals employing nannies or housekeepers)
- Applicants with an owner of 20% or more of equity who 1) is presently incarcerated, 2) is presently subject to criminal charges for any felony, or 3) has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years.
- UPDATE: Previously, the above restricting circumstance #3 also applied to those in such circumstance related to any felony within the past year. SBA announced in early March 2021 that “the one-year lookback restriction related to non-financial fraud felonies should be removed and only the five-year lookback restriction for those felonies involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance will limit an applicant’s eligibility for the PPP.”
- Applicants that themselves, or any business owned or controlled by them or any of their owners, “have ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government”
- UPDATE: SBA announced in early March 2021 that this restriction will not apply in cases where the loan was a federal student loan. This change applies to both new PPP applicants and those that have already received a PPP loan, and to both first- and second-draw loans.
- Businesses that were not in operation on Feb. 15, 2020
- Businesses that are permanently closed
- Businesses that have received or will receive a grant under the new Shuttered Venue Operator Grant (SVOG) program included in the Economic Aid Act
- UPDATE: The American Rescue Plan Act revised the rules to allow some interaction between these two programs. If a business receives a first- or second-draw PPP loan after Dec. 27, 2020, but before it is approved for a SVOG, the SVOG amount will be reduced by that PPP loan amount (or, if the business receives both a first- and second-draw loan after that date, the SVOG will be reduced by the combined amount of both loans). But if the PPP applicant is approved for a SVOG before receiving an PPP loan number, the applicant will then be ineligible for the PPP loan, and “acceptance of any PPP loan proceeds will be considered an unauthorized use.”
- Businesses for which a controlling interest is held by the president, vice president, the head of an executive department, a member of Congress, or a spouse of such person (Businesses in this category that received loans made before Dec. 27, 2020, must disclose that information to SBA, in some cases no later than Jan. 26, 2021; see Page 25 of the IFR for details)
- Issuers with securities listed on registered national securities exchanges
- The applicant or its owner is the debtor in a bankruptcy proceeding
- Hedge funds and private equity firms
See Page 26 of the IFR for details on whether businesses that are generally ineligible for 7(a) loans under 13 CFR 120.110 are eligible for PPP loans.
FIRST-DRAW LOAN MAXIMUM LOAN SIZE
Businesses can apply for the lesser of:
- Maximum loan size of $10 million or
- A calculated amount based on 2.5 times the average total monthly payroll costs during either calendar year 2019; the calendar year 2020; or the one-year period before the date the loan is made. In general, this calculation is as follows:
- Aggregate eligible payroll costs from the chosen period for employees whose principal place of residence is in the U.S.
- “Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.”
- Divide this amount by 12 to get average monthly payroll costs
- Multiply by 2.5
- “Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020, that you seek to refinance”; do not include the amount of any EIDL COVID-19 loan advance.
- Additional special calculation methods and documentation requirements are outlined for individuals with self-employment income (with and without employees); seasonal employers; farmers and ranchers (with and without employees); and partnerships.
- UPDATE: In early March 2021, SBA released additional guidance for filers of Form 1040, Schedule C – sole proprietors, independent contractors, and self-employed individuals. Read our full article for details.
Reference period: The CARES Act stated that borrowers should calculate their maximum loan amount using “payroll costs incurred during the one-year period before the date on which the loan is made,” so most 2020 borrowers used 2019. The IFR allows new borrowers who obtain first-draw loans in 2021 to use either 2019 or 2020 to calculate their maximum loan amount, at their election, so that they can “obtain funding on terms commensurate with existing PPP borrowers” and “do not see their permissible loan amounts reduced due to financial distress experienced in 2020.” (Farmers and ranchers are included in this flexibility, which does not otherwise impact loan terms, processes, and procedures.)
Businesses that are part of a single corporate group – defined for this purpose as businesses that “are majority owned, directly or indirectly, by a common parent” – in no event can receive more than $20 million in the aggregate. Applicants that have applied for or received more than that amount must notify their lender and withdraw or request cancellation of any noncompliant pending PPP loan application or approved PPP loan. “Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness,” the IFR states.
- Note that this limitation applies even if the business is eligible for a CARES Act waiver of SBA’s affiliation rules or otherwise not considered an affiliate under those rules.
DOCUMENTATION AND CERTIFICATIONS
Applicants will be required to provide payroll records, evidence of retirement and health insurance contributions, and other documentation from each quarter in the chosen period, as well as documentation from the pay period that included Feb. 15, 2020, to establish that they were in operation at that time.
In case of SBA review or audit, borrowers of all sizes should pay close attention to the IFR’s guidance for retaining records related to their spending and other compliance with PPP requirements.
Prospective borrowers will be required to make the following good-faith certifications on their applications indicating that they have met or will meet various program requirements.
- “The applicant was in operation on Feb. 15, 2020, has not permanently closed, and was either an eligible self-employed individual, independent contractor, or sole proprietorship with no employees, or had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”
- “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” (However, note that the safe harbor introduced in May 2020 will also still apply: “Any PPP borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”)
- “The funds will be used to retain workers and maintain payroll; or make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures as specified under the Paycheck Protection Program Rules; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. (As explained above, not more than 40 percent of loan proceeds may be used for nonpayroll costs.)”
- “I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs. If required, the Applicant will provide to the Lender and/or SBA documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of eligible expenses for the covered period following this loan.”
- The Applicant has not and will not receive another loan under the Paycheck Protection Program, or a Shuttered Venue Operator grant from SBA.
- “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, does not directly or indirectly hold a controlling interest in the Applicant, with such terms having the meanings provided in Section 322 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.”
- “The Applicant is not 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 (15 U.S.C. 78f).”
- “I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects.” (The applicant also certifies in this item to understanding of penalties for false statements.)
- “I acknowledge that the lender will confirm the eligible loan amount using required documents submitted. I understand, acknowledge, and agree that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.”
Payroll costs are defined as including:
- Compensation to employees (whose principal place of residence is the U.S.) in the form of salary, wages, commissions, or similar compensation. Independent contractors do not count as employees for purposes of PPP loan calculations.
- Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, “a reasonable, good-faith employer estimate of such tips”)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for separation or dismissal
- Payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement
- Payment of state and local taxes assessed on compensation of employees
- For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation
Expressly excluded under the act are:
- Compensation to employees whose principal place of residence is outside the U.S.
- “The compensation of an individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred”
- Federal employment taxes imposed or withheld during the selected period, including both the employee’s and the employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
- Qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the March 2020 Families First Coronavirus Response Act (FFCRA)
LOAN INCREASES AND REAPPLICATIONS
The IFR and subsequently released SBA guidance establish that the following borrowers can work with their “Lender of Record” – the lender reflected in SBA’s system as the current owner of the first-draw loan – to request loan increases. These increases can be made even if their loan has already been disbursed, but not if SBA has remitted a forgiveness payment. (Lenders are permitted to make additional disbursements for the increased amount.) Requests must be submitted on or before March 31, 2021, and will be subject to availability of funds. For more details and instructions, see Pages 74-76 of the IFR and SBA’s Jan. 13 Procedural Notice. (Lenders, see the Procedural Notice for guidance on submitting, reporting, and disbursing these requests and amounts.)
- Partnerships that received PPP loans that did not include any compensation for their partners can request an increase to include “appropriate partner compensation.”
- Seasonal employers that received loans before Dec. 27, 2020, and are now eligible for a higher maximum loan amount under the Economic Aid Act’s new calculation can request an increase to that higher amount.
- Farmers and ranchers whose maximum loan amount calculation changed under the new legislation can request an increase if the new formula makes them eligible for a higher amount.
Note that these increased amounts cannot exceed the maximum loan amount the borrower is entitled to, and cannot exceed $10 million for individual borrowers or $20 million for a corporate group.
Also, as noted earlier, borrowers that repaid or did not accept all or part of their first-draw loan may be eligible to reapply for new first-draw loans or request an increase. In such cases, the lender must have reported the repayment or rejection to SBA before Dec. 27, 2020, and SBA must have not yet remitted a forgiveness payment.
- If a borrower fully repaid their loan, the borrower may reapply for a new first-draw loan in an amount they are eligible for under the current PPP rules. The reapplication process depends on whether the lender reported the first-draw loan as “canceled” or “paid in full”; see Pages 4-5 of the Procedural Notice for details.
- Borrowers that returned or repaid part of their first-draw loan can request an amount equal to the difference between the amount retained and the amount previously approved.
- Borrowers that did not accept the full loan amount they were approved for can request an increase in their loan amount up to the amount previously approved.
PPP loans will generally be guaranteed under the same terms, conditions, and processes as other 7(a) loans, though there are changes including (but not limited to):
- Guarantee percentage: 100%
- No collateral or personal guarantees will be required
- Interest rate: 100 basis points or 1%, calculated on a non-adjustable, non-compounding basis
- Maturity: Five years
- Lenders will not be required to apply the “credit elsewhere test”
- Borrowers that submit a forgiveness application within 10 months of the end of their forgiveness covered period (see below) do not have to make any payments of principal or interest before the date on which SBA remits the forgiveness amount to their lender (or notifies the lender that no forgiveness has been allowed). Lenders must inform borrowers of those events and the date their first payment is due.
- The covered period is now defined as “the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is eight weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.”
- If a borrower has not submitted a forgiveness application within that time frame (covered period plus 10 months), they must begin making payments on or after the last date of that time frame.
- Note that interest continues to accrue during while payment is deferred.
Additionally, “All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan proceeds,” the IFR states.
Borrowers may not take multiple loan draws to delay the start of their covered period. The IFR states, “The lender must make a one-time, full disbursement of the PPP loan within 10 calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA.”
Update: Click here to read our full overview of new and updated PPP forgiveness rules.
Like in the first round, new first-draw PPP loans are again forgivable up to the full principal amount of the loan and any accrued interest. “An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained or, if not, an applicable safe harbor or exemption applies,” the IFR states.
The covered period is now defined as “the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is eight weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.”
With this new guidance, permissible expenses have been expanded – from the defined payroll costs and qualified rent, utilities, mortgage interest, and other interest payments – to also include:
- Certain employer-provided group insurance payments: “Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums”
- Refinancing of SBA EIDL loans made between Jan. 31 and April 3 of 2020
- Covered operations expenditures: “Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
- Covered property damage costs: Costs related to “property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation”
- Covered supplier costs: Payments made to suppliers of goods pursuant to contracts, orders, or purchase orders in effect before the covered period (or, for perishable goods, in effect before or during the covered period), for the supply of goods that “are essential to the operations of the borrower at the time at which the expenditure is made”
- Covered worker protection expenditures: Expenditures made to help the business comply with federal, state, or local requirements or guidelines related to worker and customer safety amid COVID-19, such as the purchase of PPE or facility modifications such as ventilation and filtration systems, physical barriers, and screening capabilities; see Page 50 of the IFR for additional details and examples
- Note that borrowers that received PPP loans before, on, or after the date the Economic Aid Act was enacted – Dec. 27, 2020 – are allowed to use the expanded permissible expenses, unless their loans were already forgiven.
The IFR states:
“At least 60% of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed. This percentage is consistent with the limitation on the forgiveness amount set forth in the Flexibility Act. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.”
Additional considerations regarding forgivable costs and forgiveness amounts include:
- Individuals with self-employment income are subject to additional provided guidance on how loan proceeds can be used; see Page 52 of the IFR for information.
- Loan proceeds cannot be used for lobbying activities or expenditures.
- Payroll costs that are qualified wages taken into account in determining the CARES Act’s Employee Retention Credit are not eligible for forgiveness.
- The American Rescue Plan Act expanded these payroll cost exclusions; see our article on forgiveness for details.
- Borrowers that also received SBA Economic Injury Disaster Loan Advances no longer need to subtract such advances from their PPP forgiveness, and SBA will no longer deduct those amounts from the forgiveness payment remitted to the PPP lender. “Any EIDL Advance Amounts previously deducted from a borrower’s forgiveness amount will be remitted to the lender, together with interest to the remittance date,” the IFR states.
Borrowers that are found to have used PPP funds for unauthorized purposes not only will have to repay those amounts, but may also be subject to additional liability such as charges for fraud. Shareholders, members, and partners can face SBA recourse for any unauthorized use they commit.
SBA issued a simplified forgiveness application in October for borrowers with loans of $50,000 or less. The new legislation and guidance simplifies the forgiveness application process for loans up to $150,000; we will provide more information as application materials become available.
The second-draw loans created by the Economic Aid Act are smaller PPP loans available to certain borrowers that received previous, first-draw PPP loans. Many of the same terms, conditions, and processes of first-draw PPP loans apply for second-draw PPP loans; still, there are a number of key differences and exceptions, which are specified in a second IFR, Paycheck Protection Program (PPP) Second-Draw Loans. Read on for an overview of key ones to know, and see the IFR for complete information.
A second-draw borrower can be a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a first-draw PPP Loan, veterans organization, tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization, with all terms defined as they are in the first-draw IFR. As of March 11, 2021, the list also includes the additional covered nonprofit entities described above, and eligible internet publishing companies.
They must have used or have plans to use their first-draw loan’s full amount on or before the date of disbursement of the second-draw loan.
- “Full amount” includes any loan increase as described above.
- The full amount must have been spent on authorized PPP uses.
Eligibility requirements are narrower; in addition to meeting the first-draw requirements, second-draw borrowers must:
- Have no more than 300 employees (or, 300 or fewer per physical location for NAICS code 72 businesses (Accommodation and Food Services), 501(c)(3) nonprofit organizations, additional covered nonprofit entities, eligible 501(c)(6) organizations, or eligible destination marketing, news, or internet publishing organizations
- Demonstrate at least a 25% reduction in gross receipts (further defined below) in 2020, calculated by comparing quarterly gross receipts for one quarter in 2020 with those for the corresponding 2019 quarter
- Alternatively, so that borrowers can substantiate this revenue reduction with their annual tax return forms, a borrower that was in operation in all four quarters of 2019 can also be deemed to have experienced this reduction if 1) it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and 2) it submits copies of those annual tax forms.
- Specific guidance is provided for applicants that were not in operation all four 2019 quarters, based on when they were in operation – see Page 21 of the IFR for information.
- Applicants that were not in operation in 2019 but were on Feb. 15, 2020, can demonstrate this reduction between 1) Q1 of 2020 and 2) Q2, Q3, or Q4 of 2020.
Certain entities are also specifically excluded from second-draw loans:
- Entities that have permanently closed; those temporarily closed or suspended remain eligible
- “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 otherwise describes itself as a think tank in any public documents;
- “Certain entities organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, 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 (22 U.S.C. 612);
- “A person or entity that receives a grant for shuttered venue operators under Section 324 of the Economic Aid Act;”
- (However, as with first-draw loans, borrowers can now receive a SVOG after receiving a PPP loan. The SVOG will be reduced by the amount of any second-draw PPP loan received after Dec. 27, 2020; PPP loans received before that date will not reduce the SVOG amount.)
- Entities in which the president, the vice president, the head of an executive department, or a member of congress, or the spouse of such a person, directly or indirectly owns, controls, or holds a controlling interest in the entity (at least 20% of any class of equity interest, by vote or value); or
- “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 (15 U.S.C. 78f).”
The second-draw IFR includes specific definitions and rules for what constitutes “gross receipts.”
- Gross receipts do 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.”
- Gross receipts excludes:
- “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);
- “Proceeds from transactions between a concern and its domestic or foreign affiliates; and
- “Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.”
- The amount of any first-draw loan
- Net capital gains or losses as these terms are defined and reported on IRS tax return forms
- “All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts,” the IFR states.
- Affiliates: Specific guidance is provided for borrowers with affiliates and borrowers that acquired or were acquired by affiliate during 2020; gross receipts of former affiliates are not included.
- Eligible nonprofit, veterans, nonprofit news, 501(c)(6), and destination marketing organizations should use the gross receipts definition in IRC Section 6033.
Affiliation rules for second-draw loans are the same as for first-draw loans, but waived for:
- NAICS code 72 business concerns with not more than 300 employees
- NAICS code 5151 nonprofit organizations
- “Any business concern (including any station which broadcasts pursuant to a license granted by the Federal Communications Commission under title III of the Communications Act of 1934 (47 U.S.C. 301 et seq.) without regard for whether such a station is a concern as defined in 13 C.F.R. Section 121.105, or any successor thereto) 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"
- Added following the American Rescue Plan Act: “Any business concern or other organization that was not eligible to receive a covered loan before March 11, 2021, is assigned a NAICS code of 519130, certifies in good faith as an internet-only news publisher or internet-only periodical publisher, and is engaged in the collection and distribution of local or regional and national news and information, if the business concern or organization: A) employs not more than 300 employees, per physical location of the business concern or organization; and B) is majority owned or controlled by a business concern or organization that is assigned a NAICS code of 519130.”
SECOND PPP DRAW – MAXIMUM LOAN AMOUNT
The maximum loan amount is smaller for second-draw loans. In general, borrowers can apply for the lesser of:
- Maximum loan size of $2 million (down from $10 million for first-draw loans), or
- 2.5 times the average total monthly payroll costs during either calendar year 2019; calendar year 2020; or the one-year period before the date the loan is made.
- Tailored calculations and considerations are provided for certain borrower groups (see pages 28-32 of the IFR):
- NAICS code 72 entities may receive up to 3.5 times their average monthly payroll figure
- Borrowers that did not exist during the one-year period preceding Feb. 15, 2020
- Filers of Form 1040, Schedule C – sole proprietors, independent contractors, and self-employed individuals (Guidance updated in early March 2021; read our full article for details)
- Seasonal employers
- Farmers and ranchers
- Businesses that are part of a single corporate group – defined for this purpose as businesses that “are majority owned, directly or indirectly, by a common parent” – in no event can receive more than $4 million in the aggregate.
DOCUMENTATION AND CERTIFICATIONS
While second-draw loan applications generally will require the same documentation as first-draw loans, no additional documentation to substantiate payroll costs will be required if the applicant used calendar year 2019 figures to determine both their first- and second-draw loan amounts, and is going through the same lender for both loans. (However, lenders can request additional documentation.)
Second-draw applicants are also subject to additional documentation requirements to establish that they experienced the required revenue reduction; see Page 15 of the IFR for details and examples. Submission for that documentation varies:
- Loan principal amounts greater than $150,000: Due with the loan application
- $150,000 or less: Due on or before the date the borrower applies for forgiveness
- If the borrower does not apply for loan forgiveness, this documentation must be provided upon SBA’s request.
There are also several additional certifications for second-draw borrowers related to their various additional requirements.
- “… The applicant must certify that the applicant has not and will not receive another Second Draw Paycheck Protection Program Loan; and
- “The applicant has realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period. For loans greater than $150,000, applicant has provided documentation to the lender substantiating the decline in gross receipts. For loans of $150,000 or less, applicant will provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness for the Second-Draw Paycheck Protection Program Loan or upon SBA request.”
- “The applicant received a First-Draw Paycheck Protection Program Loan and, before the Second-Draw Paycheck Protection Program Loan is disbursed, will have used the full loan amount (including any increase) of the First-Draw Paycheck Protection Program Loan only for eligible expenses.”
- “The Applicant is not a business concern or entity (a) 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, or that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20% of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or (b) that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China.”
- “The applicant is not required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612).”
- “The applicant is not a business concern or entity primarily engaged in political 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 otherwise describes itself as a think tank in any public documents.”
UNRESOLVED ISSUES WITH FIRST-DRAW LOANS
If a borrower’s first-draw loan is under review, and/or the SBA has information indicating that they may have been ineligible for that loan or loan amount, the SBA will notify the lender when the lender submits the second-draw guaranty application. In such a case, the lender will not receive an SBA loan number until (and if) the SBA resolves the issue.
Update: Click here to read our full overview of new and updated PPP forgiveness rules.
Forgiveness terms and conditions are the same for second-draw loans as for first-draw loans, with the only additional requirement (at this time) being that, as mentioned above, borrowers with a principal amount of $150,000 or less must provide the required revenue reduction documentation with their forgiveness application if they did not do so with their loan application.
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