Late Wednesday night (January 6), the Department of the Treasury and Small Business Administration (SBA) updated the Interim Final Rule (IFR) to provide the revised guidance for second draws on the Paycheck Protection Program (PPP2). While there may be some remaining “grey areas” as it relates to PPP2, the IFR explicitly states this PPP2 program will either follow the same rules as PPP1 or that such rules have changed and then states the new rule. Below, we have summarized both the changes and important points for purposes of applying for a PPP2 loan.
Eligibility Requirements
Timing
Today (January 8), the SBA announced when its PPP portal will open for the following borrowers:
January 11, 2021 – First-draw (PPP1) applicants processed through “community financial institutions” only (e.g. Community Development Financial Institutions, minority deposit institutions, certified development companies and microloan intermediaries)
January 13, 2021 – Second-draw (PPP2) applicants processed through “community financial institutions” only (e.g. Community Development Financial Institutions, minority deposit institutions, certified development companies and microloan intermediaries)
“Shortly Thereafter” – All other applicants processed through all participating lenders
General Requirements
An eligible borrower must:
Have received a first-draw PPP loan, and
Has used, or will use, the full amount of the PPP1 loan on or before the expected disbursement date of a PPP2 loan.
The borrower must have spent the full amount of its PPP1 loan on eligible forgivable expenses, including any PPP1 loan principal increases resulting from Economic Aid to Hard-Hit Small Businesses, Nonprofits and Ventures Act signed by President Trump on December 27, 2020.
We interpret this to mean that any borrowers who did not receive, or expect to not receive, full forgiveness on their PPP1 loan will be ineligible for a PPP2 loan.
Borrowers that have “permanently” closed are prohibited from obtaining a PPP2 loan. However, a borrower that has “temporarily” closed or suspended business remains eligible for a PPP2 loan.
“Number of Employees” Test
Borrowers must have 300 employees or less to be eligible for a PPP2 loan
The same affiliation rules from PPP1 apply to PPP2
Borrowers with a NAICS code beginning with “72” have the affiliation rules waived and may apply the 300-employee limitation per physical location
Gross Receipts Test
“Gross Receipts” is being defined to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including the sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances
Potentially special inclusions:
Investment income
Subcontractor costs, including reimbursements for purchases at a customer’s request
Employee-based costs such as payroll taxes
Exclusions from gross receipts:
Forgiven PPP1 loan proceeds
Taxes collected for and remitted to a taxing authority if included in gross or total income (e.g. sales taxes)
Proceeds between a borrower and its domestic and/or foreign affiliates
Amounts collected for another business/person by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder, or customs broker
2. A borrower must demonstrate that their gross receipts for a single quarter in 2020 declined by at least 25% as compared to the corresponding quarter in 2019. Though not specifically defined by the SBA, we interpret this to mean calendar quarter (e.g. April 1, 2020 through June 30, 2020)
A borrower that was in operation in all four (4) quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of at least 25% in 2020 compared to 2019 and submits copies of their annual tax forms substantiating this revenue decline. If annual gross receipts have declined by at least 25%, the borrower would have at least one quarter showing such a decline.
If the borrower was not in business during Q1 or Q2 of 2019, but was in business during Q3 and Q4 of 2019,
Then, the borrower may compare any quarter’s gross receipts from 2020 to either Q3 or Q4 of 2019.
If the borrower was not in business during Q1, Q2 or Q3 of 2019, but was in business during Q4 of 2019,
Then, the borrower may compare any quarter’s gross receipts from 2020 to Q4 of 2019.
If the borrower was not in business during 2019, but was in business prior to February 15, 2020,
Then, the borrower may compare Q2, Q3, or Q4 gross receipts from 2020 to Q1 of 2020.
Borrowers with affiliates (and at this time we believe this includes those borrowers with a NAICS code beginning with “72”) must include those affiliates’ gross receipts for purposes of this test
If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts include the receipts of the acquired or acquiring entity(ies)
This aggregation applies for the entire period of measurement, not just the period following the transaction.
The gross receipts of a former affiliate are not included
This exclusion of gross receipts of such former affiliate(s) applies during the entire period of measurement, rather than only for the period following the transaction.
If a borrower acquired a segregable division of another business during 2020, gross receipts do not include the receipts of the acquired division prior to the acquisition
Similarly, borrowers disposing of a segregable division during 2020, will include the receipts of the division sold
Calculation of Loan Amount
Calculation and Maximums
The loan principal amount is calculated using the monthly average of “payroll costs” from one of the following periods:
Calendar year 2019
Calendar year 2020
Precisely 12-months prior to the application being filed (for non-self-employed borrowers)
Similar to PPP1, most borrowers will multiply this monthly average by 2.5 months to arrive at their pre-limited loan principal. However, new for PPP2, those borrowers with a NAICS code beginning with “72” will use a 3.5-month multiplier.
The maximum PPP2 loan amount is $2,000,000 (down from $10,000,000 for PPP1), with a corporate group maximum of $4,000,000 (down from $20,000,000 for PPP1). A corporate group is defined as businesses that are majority owned, directly or indirectly, by a common parent. It is the responsibility of the borrower to inform the lender about their corporate group and to request the lender withdraw or cancel a pending loan application or approved loan not in compliance within this limitation.
While the above calculation applies to most borrowers in general, there are specific provisions depending on the business type of the borrower (i.e. Corporation, Partnership, Schedule C filer, etc.), similar to PPP1. We are happy to discuss these provisions with you individually.
“Payroll Costs”
The PPP2 loan application will follow the same expanded definition of “payroll costs” from the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Ventures Act to include:
Cash compensation (salaries, wages, overtime, bonuses, etc.)
Employer’s share of insurance benefits
Health Insurance
Dental Insurance
Eye Insurance
Life Insurance
Disability Insurance
3. Employer’s share of retirement benefits
4. Employer’s share of non-income state and local taxes (e.g. state unemployment insurance, state workers compensation, etc.)
Application Process
While the SBA has yet to release the PPP2 application form (Form 2483-SD), we will notify you when this application becomes available. Similar to PPP1, we expect many of the larger banks to provide a secure portal to allow borrowers to provide the necessary information. We encourage those who are interested in obtaining a PPP2 loan to reach out to their bank representative to understand their timing for accepting application or launching their respective portal.
Gross Receipts Support
For those borrowers requesting a PPP2 loan in excess of $150,000, borrowers must provide the lender, at the time of application, either relevant annual tax forms for 2019 and 2020, or if such information is not available, a copy of the borrower’s quarterly income statements or bank statements for 2019 and 2020.
For those borrowers requesting a PPP2 loan of $150,000 or less, such borrowers must provide the same information above, but only at the time of requesting loan forgiveness. Such information does not need to be provided at the time of applying for the loan. However, the SBA has the right to request such information at any time during the PPP2 process.
Loan Principal Calculation Support
If a borrower:
Used calendar year 2019 figures to determine its PPP1 loan amount,
Uses calendar year 2019 figures to determine its PPP2 loan amount, and
The lenders for the borrowers PPP2 loan is the same as the lender that made the PPP1 loan
Then, the borrower is not required to provide additional documentation as the lender already has the relevant documentation supporting the borrower’s payroll costs. However, as the insurance benefit definition has expanded since PPP1, borrowers should be prepared to provide such documentation to the extent any of the new allowable costs have been included in the PPP2 loan application.
If the borrower is self-employed and has employees, the borrower must provide:
2019 or 2020 Form 1040 Schedule C (following whichever period is used to determine the loan amount)
Form 941 filings for 2019 or 2020, or equivalent payroll records
Insurance, retirement, and state and local tax expense support, as applicable
A payroll statement or similar documentation that covers February 15, 2020 to establish the borrower was in operation on February 15, 2020.
If the borrower is self-employed with no employees, the borrower must provide:
2019 or 2020 Form 1040 Schedule C (following whichever period is used to determine the loan amount)
One of the following to establish the borrower was in operation on or around February 15, 2020
2019 Form 1099-MISC or 2020 Form 1099-NEC detailing non-employee compensation
2019 or 2020 invoice
2019 or 2020 bank statement
2019 or 2020 book of record
We realize there is a lot to digest with this new Interim Final Rule. At Cassady Schiller, we are prepared to help you understand how to apply this guidance to your specific situation. Accordingly, please reach out to us to see how we can help you take full advantage of the PPP2 program.
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