The Small Business Administration has issued two interim final rules (IFRs) that consolidate rules for existing and new “first draw” Paycheck Protection Program borrowers (PPP1) as well as “second draw” borrowers who took a loan earlier this year and are now applying for additional forgivable loans a second time (PPP2).
Our team has put together a summary of the latest guidance from the SBA and Treasury. Please contact your Lurie advisor with questions or if we can assist you with PPP loan applications or forgiveness support.
What Are the Qualifications for PPP1 & PPP2?
An additional round of funding under the Paycheck Protection Program is available as part of the $900B stimulus and economic relief package (December 2020) and includes: privately held businesses, nonprofits, eligible self-employed individuals, sole proprietors, independent contractors (and others).
PPP1 loans are available for first-time borrowers:
- Businesses with 500 or fewer employees (or revenue-based size standard if applicable) that are eligible for other SBA 7(a) loans.
- If your business has more than 500 employees, you may still qualify under the Alternative Size Standard.
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 500 employees per physical location.
PPP2 loans may be eligible for “second draw” borrowers:
- Businesses with 300 or fewer employees.
- Businesses that have used the full amount of PPP1 Loan on or before the expected date of PPP2 disbursement. If you still have PPP1 funds, you can still apply but must use all of PPP funds before PPP2 is distributed.
- If you received a PPP1 loan increase in 2021, you likely will need to use that amount first before PPP2 is distributed.
- Pass a Gross Receipts reduction test, one of two ways:
- You would compare 2020 Q1, Q2, Q3, or Q4 gross receipts to the same 2019 quarter and if there is at least a 25% reduction in 2020 then you are eligible. OR
- There is an annual receipts test option, whereby if there is a reduction in annual receipts of at least 25% in 2020 compared to 2019 as shown on your annual tax forms.
- There is no requirement to have applied for forgiveness on your first PPP loan (PPP1) prior to applying for a second draw loan (PPP2).
What is the Maximum Loan Amount for PPP2 & How Is It Calculated?
- Your loan amount is calculated by using the average monthly payroll costs x 2.5, up to a maximum loan amount for PPP2 of $2,000,000.
- Schedule C borrowers can use either 2019 or 2020 net profit, capped at $100,000.
- A borrower cannot receive more than one PPP2 loan.
Which Time Period Do Borrowers Use to Calculate Average Monthly Payroll for Determining Their Loan Amount?
- All borrowers (PPP1 and PPP2) can use calendar year 2019 or 2020 to determine their average monthly payroll to calculate their maximum PPP loan amount, OR
- Borrowers who apply for PPP loans in 2021 and are not self-employed can also use the 12-month period ending on the date of the loan application to determine their average monthly payroll.
How Does the SBA Define “Gross Receipts” for the Gross Receipts Reduction Test?
- Generally defined to 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 as these terms are defined and reported on IRS tax return forms.
- Gross receipts do not include the following: 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.
- 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.
- Gross receipts of a borrower with affiliates is calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.
- If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern. This aggregation applies for the entire period of measurement, not just the period after the affiliation arose.
- However, if a concern acquired a segregable division of another business concern during 2020, gross receipts do not include the receipts of the acquired division prior to acquisition.
- The gross receipts of a former affiliate are not included. This exclusion applies for the entire period of measurement, not just the period after which affiliation ceased.
- However, if a borrower sold a segregable division during 2020, gross receipts will continue to include the receipts of the division that was sold.
- Uses the definition from Internal Revenue Code § 6033
Under the New Guidance, Who Is Not Eligible?
- Businesses receiving (or will receive) a grant under the Shuttered Venue Operator Grant program cannot receive a PPP2 loan (you cannot get both).
- Businesses cannot receive a PPP loan if the business or the owner is the debtor in a bankruptcy proceeding, at the time the application is submitted or at any time before the loan is disbursed.
- Publicly traded companies are ineligible for PPP2.
- Businesses that have permanently closed are ineligible for PPP2.
Loans to Borrowers with Unresolved PPP1 loans
If your PPP1 loan is under review by the SBA, you may see a delay in the funding of your PPP2 loan until any issues related to your PPP1 loan are resolved.
New Guidance on Simplified Loan Forgiveness
- Streamlined Forgiveness for PPP Loans under $150k
For borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that is (1) not more than one page in length, (2) includes a description of the number of employees the borrower was able to retain because of the loan, (3) the estimated total amount of the loan spent on payroll costs, and (4) the total loan amount.
Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud. The form may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Please consult you CPA for the latest guidance on this streamlined forgiveness and latest changes.
- “Alternative covered period” is eliminated.
The introduction of the 24-week covered period under the PPP Flexibility Act rendered the alternative covered period moot and is no longer needed.
What Are the Loan Application & Documentation Requirements for PPP2?
- Generally, the application process for PPP2 is the same as PPP1 “First Draw Loans”
- Documenting payroll costs for determining loan amount:
- If you apply for PPP2 with the same lender that you used for PPP1 AND you used your calendar year 2019 to determine your monthly average payroll costs, you can use the same 2019 payroll costs to determine your PPP2 loan amount without submitting additional payroll documentation to the lender.
- Substantiating the gross receipts reduction of at least 25%
- Examples given are relevant tax forms, including annual tax form, or if those are not available, quarterly financial statements or bank statements.
- For loans greater than $150,000, applicant must provide documentation substantiating the gross receipts reduction with the loan application.
- For loans of $150,000 or less, applicants will provide their gross receipts reduction documentation later when they submit their PPP2 loan forgiveness application
For More Information
Lurie’s Economic Relief Team is reviewing 120+ pages of IFR language and will be providing additional PPP updates to our SBA Loans & Resources Hub. The Small Business Administration’s website, SBA.gov, will have additional news and information, here.
For more information, please contact your Lurie advisor for questions, or contact us for assistance with both new application and PPP loan forgiveness guidance. We’re here to help.