Paycheck Protection Program Round Two – What Our Clients Need to Know
Updated: Jan 31, 2021
As the PPP 2 Loan applications for limited business, it is my belief the SBA will soon start for all businesses, possibly as early as 1/15/21. The following will help you prepare for the application process. We have omitted rules that generally don't impact our clients or those that we assisted with PPP Round One.
PPP 2 Loan Eligibility Requirements
In general, a borrower is eligible for a PPP 2 Loan if it has 300 or fewer employees and experienced a revenue reduction of 25 percent or greater in 2020 relative to 2019, 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. The PPP 2 interim final rule (IFR) made additional clarifications around the eligibility requirements, including:
The borrower must have received a First Draw PPP loan and have used or will use the full amount of the First Draw PPP loan on authorized uses to be eligible for a PPP 2 Loan. The guidance doesn't specifically state that First Draw funds must be spent within the PPP 1 loan covered period, only that they be spent on eligible expenditures before the receipt of the PPP 2 Loan proceeds. The borrower must make this certification on the PPP 2 Loan application.
If a borrower received a First Draw PPP loan but was later determined not to receive a loan, the borrower isn't eligible for a PPP 2 Loan.
As an alternative to the quarterly comparison rule, if a PPP 2 Loan borrower was in business for all four quarters in 2019 and experienced a 25 percent or greater reduction in annual receipts in 2020 compared to 2019, the borrower may submit copies of income tax returns for both years to support the 25 percent or more decline.
Gross receipts include all revenue in whatever form received or accrued according to the borrower's accounting method. Gross revenue isn't reduced by the cost of sales but is reduced by returns and allowances. The term also excludes capital gains and losses, receipts from affiliates, and items generally construed as deposits held for others. Importantly, any First Draw PPP loan that's forgiven in 2020 is not included in 2020 gross receipts. However, the CAA and current SBA guidance doesn't include other Coronavirus Aid, Relief, and Economic Security Act relief funds in this exclusion, e.g., Provider Relief Funds.
Maximum PPP 2 Loan Amount
In general, the maximum PPP 2 Loan amount is the lesser of 1) 2.5 times the borrower's average monthly payroll costs or 2) $2 million. Payroll costs are defined the same as for First Draw PPP loans. However, the PPP 2 allows a PPP 2 Loan borrower to use either its calendar 2020 or 2019 payroll for purposes of the average monthly payroll calculation.
Regardless of the period used, the same $100,000 annual compensation limit applies. Other notable items include:
Borrowers that fall under NAICS code 72 (generally hotels and restaurants) can calculate their PPP 2 Loan based on 3.5 times the average monthly payroll (subject to the same $2 million cap).
Application & Required Documentation
Borrowers can apply for a PPP 2 Loan until March 31, 2021, using Form 2843-SD.
Suppose a PPP 2 Loan borrower uses the same lender as its First Draw PPP loan and is using the 2019 payroll information for both loans. In that case, the borrower isn't required to submit any payroll information with the application, as the lender already has this information.
Suppose the PPP 2 Loan borrower uses a different lender or won't be using the same payroll for calculating its PPP 2 Loan. In that case, the borrower is required to submit similar payroll documentation that was provided for its First Draw PPP loan. A detailed list of the required documentation is on page 33 of the PPP 2 IFR.
If the PPP 2 Loan is greater than $150,000, the borrower must submit documentation of the 25 percent or greater decline in gross receipts at the time of application.
If the PPP 2 Loan is $150,000 or less, the gross receipts documentation isn't due until the forgiveness application is filed (or upon SBA request). However, the borrower must still certify it meets the gross receipts decline test at the time of the loan disbursement.
Similar to First Draw PPP loans, borrowers of PPP 2 Loans also must make a good faith certification of need on the loan application, i.e., current economic uncertainty makes this loan request necessary to support the ongoing operations of the borrower.
The PPP 2 IFR indicates the forgiveness and loan review process for PPP 2 Loans generally will be done under similar terms and conditions as First Draw PPP loans. However, we expect the SBA will issue further guidance on the PPP 2 Loan forgiveness and SBA loan review process in the form of additional interim final rules and frequently asked questions.
While individual businesses' ability to obtain a second round of PPP funding is positive, businesses should be aware of the other stimulus funding available. For example, the CAA included an expansion of the Employee Retention Credit (ERC) to allow PPP borrowers to take advantage of the ERC in 2020 and extended the ERC to apply through June 30, 2021 several favorable taxpayer changes. However, the ERC can only be claimed on qualified wages that weren't used to receive PPP loan forgiveness, so it will be important for borrowers to take this into account when filing for forgiveness of the First Draw PPP loan and when evaluating whether to apply for a PPP 2 Loan.
I will send a ERC post soon to help you navigate through this credit.