The President signed the Consolidated Appropriations Act, 2021 into law on December 27, 2020. The act includes the $900 billion stimulus COVID-19 bill to help provide continued assistance to individuals and businesses that have been impacted by the ongoing pandemic. The bill includes $284 billion to fund first and second draw Paycheck Protection Program (PPP) Loans which initially expired on August 8, 2020.

The U.S. Department of Treasury and the U.S. Small Business Administration released a new interim final rule (IFR) on second draw PPP loans and on the Paycheck Protection Program as amended by Economic Aid Act on January 6, 2021. The new PPP Loan program is similar to the original program in many respects, but expands the eligible expenses and introduces additional requirements to receive a second draw.

Similarities of First and Second Draw PPP Loans

Second draw PPP loans are generally subject to the same terms, conditions, and requirements as first draw PPP loans. This includes:

  • No collateral will be required.
  • No personal guarantees will be required.
  • The guarantee percentage is 100 percent.
  • The interest rate will be one percent, calculated on a non-compounding, nonadjustable basis.
  • 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 the borrower's eligibility and use of loan proceeds.

Who is Eligible for Second Draw PPP Loan

The Second Draw PPP loan is available for businesses, independent contractor, self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw PPP Loan, veteran's organization, Tribal business, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization or an eligible nonprofit news organization. The loan amount is the lesser of 2.5 times average monthly payroll cost (discussed in detail below) or $2 million. Restaurants, hotels, and other businesses with a NAICS Code that starts with 72 can apply for an increased loan of 3.5 times average monthly payroll. The deadline to apply for the loan is March 31, 2021. There are some requirements to be eligible for the second draw PPP loan. An eligible business must:

  • Employ 300 or fewer employees.
  • Have used or will use the full amount of their first PPP loan on or before the expected date for the second PPP loan to be disbursed.
  • The borrower must have spent the full amount of the first PPP loan on eligible expenses.
  • Show a 25% or more in revenue reduction in all or part of 2020 compared with all or part of 2019. This is calculated by comparing gross receipts in any 2020 calendar quarter revenue with the corresponding quarter in 2019. In addition, as stated in the IFR borrowers who were in operation for all quarters of 2019 can compare total annual receipts in 2020 to annual receipts in 2019 rather than doing a quarter-by-quarter comparison and they can submit copies of their annual tax forms that show a reduction in gross receipts of 25% or greater compared with 2019. If the applicant was not in business during 2019, but was in operation on February 15, 2020, the applicant can compare the first quarter gross receipt with second, third or fourth quarter of 2020.

The IFR defines revenue to include all gross receipts in whatever form received or accrued (in accordance with the entity's accounting method) from whatever source including: Sales of products or services, interest, dividends, rents, royalties, fees, commissions, reduced by returns and allowances. If forgiveness amount of First Draw PPP loan is recorded in 2020 revenue it should be excluded from the gross receipts for comparisons.

The IFR also clarifies that an otherwise eligible borrower is not disqualified from receiving a Second Draw PPP Loan because it received forgiveness on a First Draw PPP Loan. The somewhat unclear phrasing of the bill combined with the term "Second Draw" left some practitioners and bankers wondering if receiving forgiveness on the first loan disqualified the borrower from receiving a "second draw" on that loan.

Payroll Cost Calculation

Borrowers can use calendar year 2019, or 2020 to calculate payroll costs, in additions; the Economic Aid Act allows businesses to use the precise one-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020.

Second Draw PPP Loan application and Documentation

The documentation required to verify payroll cost calculations is generally the same as the first draw PPP loans. However, no additional documentation is required if the applicant:

  1. Used calendar year 2019 figures to determine its First Draw PPP Loan amount.
  2. Used calendar year 2019 figures to determine its Second Draw PPP loan amount instead of 2020 and the lender is the same for First and Second Draw PPP Loan.

For loans greater than $150,000, the applicant is required to submit documentation on revenue reduction of 25% or more in 2020 compared to 2019. The documentation may include relevant tax forms, including annual tax forms, or if relevant tax forms are not available, quarterly financial statement or bank statements.

For loans of $150,000 or less, documentation is not required to be submitted at the time of loan application but will be required when the borrower seeks loan forgiveness. If the borrower is not asking for loan forgiveness such documentation should be provided upon SBA's request.

The borrower will need to submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form: SBA Form 2483-SD

First Draw PPP Loans

The Economic Aid Act allows the first draw PPP loan to remain available to borrowers that were in operation on February 15, 2020. The terms and condition of the first draw PPP loan is same as the original PPP loan with some modifications. As with the original PPP loan the maximum loan amount is $10 million, and applicants must provide form 941, Employer's Quarterly Federal Tax Return, payroll records, Form 1099-Misc, Schedule C or F, income and expenses from a sole proprietorship, or bank records. The following groups are eligible for first-draw PPP loans:

  • Businesses with 500 or fewer employees.
  • Sole proprietors, independent contractors, and eligible self-employed individuals.
  • Businesses that average less than 500 employees per physical location that have NAICS code starting with 72 (accommodation and food services).
  • Tax-exempt organizations Section 501 (c)(3), tax-exempt veterans' organizations, a Tribal business, nonprofits, including churches.
  • Section 501(c)(6) organizations such as chamber of commerce, visitors' bureaus etc. a housing cooperative, or an eligible destination marketing organization, that employs no more than 300 employees.
  • Certain news organizations with limitations.
  • SBA Form 2483 (Updated January 8, 2021)

PPP Loan Forgiveness and Eligible Costs

Borrowers can have their first and second draw loans forgiven if the funds are used on eligible costs. Under the previous law eligible costs were, payroll (plus group life, disability, vision or dental), rent, mortgage interest and utilities. The new bill keeps all of those while adding the following:

  • Covered operations expenditures such as business software and cloud computing.
  • Property damage - resulting from vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance.
  • Covered supplier costs - expenditures to a supplier that are essential to the recipient's current operations.
  • Covered worker protection - may include drive through window facility, indoor/outdoor or combined air or air pressure ventilation or filtration system, physical barriers such as sneeze guards, expansion of indoor, outdoor, or combined space, onsite or offsite health screening, personal protective equipment.

These additional expenses also apply to the original PPP loans unless forgiveness has already been processed. To be eligible for the full loan forgiveness, PPP loan borrowers will have to spend no less than 60% of the funds on payroll during the covered period. The new legislation adds additional flexibility, and allows the borrower to choose a covered period that is anywhere between 8 and 24 weeks. Original PPP rules only allowed a choice between 8 or 24, nothing in-between.

Simplified Forgiveness

The legislation added direction for a simplified application for PPP loans of $150,000 or less. The eligible borrowers are not required to submit any documentation but must signs and submit to the lender a certification not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. Borrowers who have taken second-draw PP loan will be required to provide documentation to substantiate loss of revenue when applying for forgiveness. The SBA has not released the simplified application form yet but is expected to do so before January 20, 2021. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as this may be reviewed and audited by SBA to check for fraud. We will provide updates as the SBA issues the simplified application form and instructions.

Minority, Under-served, Veteran and Women-Owned Businesses

The Economic Aid Act set aside funds for new and smaller borrowers, for borrowers in low-and moderate-income communities, and for community and smaller lenders. The set-asides include $15 and $25 billion for first and second-draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans less than $250,000 to borrowers in low- or moderate-income communities.

The SBA announced that it would take several steps to ensure increased access to the PPP for minority, under-served, veteran, and women-owned business concerns. Most notably, the SBA said it will accept PPP loan applications only from community financial institutions for at least the first two days when the PPP loan portal reopens.

To discuss these provisions or any others law changes in the Consolidated Appropriation Act and how they may benefit you, please contact your HLB Gross Collins, P.C. adviser. or the author, Beza Asrat.