PPP Second Draw – Program Analysis, Eligibility, and Instructions

Summary: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021) into law. The CAA includes Division N – Additional Coronavirus Response and Relief (ACRR), which has a provision that provides for Paycheck Protection Program (PPP) Second Draw loans.

CAA, 2021 – Paycheck Protection Program Second Draw Loans. ACRR permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts may take a second draw from the PPP of up to $2 million.

Eligible entities. Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans:

  • Employ no more than 300 employees per physical location;
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second,or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan terms. Borrowers may receive a second loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs.

Gross receipts and simplified certification of revenue test. Second draw loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.

Loan forgiveness. Like the first PPP loan, the second draw loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%.

Application of exemption based on employee availability. ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees salaries in excess of 25%.

Clarification of tax treatment of Paycheck Protection Program loans. Sec. 276 clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

Interim Final Rules: Paycheck Protection Program Second Draw Loans under CAA, 2021:

The IFR states that Second Draw PPP Loans are 100% guaranteed by the SBA under the same terms, conditions, and processes as First Draw PPP Loans. Second Draw Loans are subject to the Consolidated First Draw PPP IFR, including the FAQs contained within and all PPP loan requirements.

The IFR notes the following terms and conditions that are the same as First Draw PPP Loans:

  • Loan guarantee is 100%.
  • Collateral and personal guarantees are not required.
  • 1% interest rate, calculated on a noncompounding, non-adjustable basis.
  • Maturity of five years.
  • All loans will be processed by all lenders and lenders will rely on borrower certifications to determine eligibility and use of loan proceeds.

A borrower is prohibited from obtaining a Second Draw PPP Loan if it has not complied with PPP loan program requirements.

Revenue reduction requirement. To be eligible for a Second Draw PPP Loan, the borrower must have experienced a 25% revenue reduction in 2020 relative to 2019. The reduction is calculated by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019.

The appropriate reference quarter depends on how long the Applicant has been in operation:

  • For all entities other than those satisfying the conditions set forth below, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019; Applicants choosing to use annual gross receipts must enter “Annual” in the 2020 Quarter and Reference Quarter fields and, as required documentation, must submit copies of annual tax forms substantiating the annual gross receipts reduction.
  • For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
  • For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
  • For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.

Gross receipts defined. The IFR defines gross receipts consistent with the definition of receipts in 13 CFR 121.104 of SBA’s size regulations. Any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower s gross receipts with some exception.

Excluded entities. The IFR clarifies that borrowers who received a First Draw PPP Loan despite being ineligible to receive the loan are not eligible to receive a Second Draw PPP Loan. Further, the following are excluded entities:

  • a business concern or entity primarily engaged in political activities or lobbying activities (e.g., think tank);
  • borrowers that have already received a Second Draw PPP Loan; or
  • businesses has permanently closed and has no intention of reopening.

Maximum loan amount and payroll cost calculation. Like First Draw PPP Loans, the maximum loan amount is the lesser of 2.5 months of the borrower’s average monthly payroll costs or $2 million. However, the calculation method has been adjusted for Second Draw PPP Loans. The period to calculate payroll costs for a Second Draw PPP Loan is either 2020 or 2019. Borrowers may also use the precise one-year period before the date on which the loan is made to calculate payroll costs if they opt not use 2019 or 2020 to calculate payroll costs.

Business entities assigned an NAICS code beginning with 72 (including hotels and restaurants) may receive a maximum loan amount equal to 3.5 months of payroll costs rather than 2.5 months. Additionally, such businesses that are seasonal or new entities without 12 months of payroll costs may use this method.

Second Draw PPP Loan application. Second Draw PPP Loan applicants must submit documentation substantiating payroll costs calculation like First Draw PPP Loans.

However, these applicants are not required to provide additional documentation if:

  1. the applicant used calendar year 2019 figures to determine its First Draw PPP Loan amount,
  2. the applicant used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020)
  3. the lender for the applicants Second Draw PPP Loan is the same lender that made the applicants First Draw PPP Loan.

The additional documentation is not required because the lender has the relevant documentation to support payroll costs. The lender is required to confirm the borrower’s average monthly payroll costs based on prior documentation.

For loans of greater than $150,000, the applicant is required to provide documentation that substantiates at least a 25% revenue reduction in 2020 relative to 2019. Acceptable documentation may include relevant tax forms, quarterly financial statements, or bank statements.

Loans to borrowers with unresolved First Draw PPP Loans. The IFR contains procedures on how to handle a Second Draw PPP Loan application when the borrower’s First Draw PPP Loan is under review (“unresolved borrower”).

Loan forgiveness. Generally, Second Draw PPP Loans are subject to the Consolidated First Draw PPP IFR with some exception. Second Draw PPP Loan borrowers of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

Application process. Applicants must submit SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form in addition to required certifications and documentation.

Required documentation. Unless the applicant used calendar year 2019 figures to determine both its First Draw PPP Loan amount and its Second Draw PPP Loan amount (as noted above), and the lender for the applicant s Second Draw PPP Loan is the same as the lender that made the applicant s First Draw PPP Loan), the applicant must provide the following:

  • Form 941 (Employer’s Quarterly Federal Tax Return) or other tax forms with similar information;
  • State quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, as applicable or equivalent payroll processor records;
  • Evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions;
  • For partnerships, Form 1065, Schedule K-1s (Partner’s Share of Income, Deductions, Credits, etc.);
  • For self-employed applicants who have employees, the 2019 or 2020 (the applicable year used to determine the loan amount) Form 1040, Schedule C and items listed above in a, b, and c. Additionally, a payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
  • For self-employed applicants with no employees, the 2019 or 2020 (the applicable year used to determine the loan amount) Form 1040 Schedule C, a 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020. The IFR refers to Form 1099-MISC box 7 nonemployee compensation. Note that beginning with the 2020 tax year, nonemployee compensation is reported on Form 1099-NEC.
  • For loans of greater than $150,000, documentation must be provided to establish the applicant experienced a reduction in revenue at the time of application that may include annual tax forms or quarterly income statements or bank statements.
  • For loans of $150,000 or less, documentation must be provided to establish the applicant established a reduction in revenue at the time of application, on or before the date the borrower submits an application for loan forgiveness, or, if the borrower does not apply for loan forgiveness, at SBA s request. Documentation may include annual tax forms or quarterly income statements or bank statements.

Certifications. Applicants must certify that they:

  1. have not and will not receive another Second Draw PPP Loan;
  2. experienced a 25% revenue reduction with the necessary substantiating documentation;
  3. have used the full First Draw PPP Loan amount (including any increase) only for eligible expenses; and
  4. are not an ineligible business concern (listed under “Excluded entities”).

Average Monthly Payroll. This section differs to reflect that for Second Draw PPP Loans, applicants with NAICS Code of 72 (Accommodations and Food Services) may multiply the average monthly payroll costs by 3.5 rather than 2.5 for other industries. The maximum loan request is $2 million as opposed to $10 million for a First Draw PPP Loan. The number of employees may not exceed 300 for a Second Draw PPP Loan.

PPP First Draw SBA Loan Number. The applicant must supply their First Draw PPP Loan number.

Reduction in Gross Receipts of at Least 25%. The applicant must supply the quarters in 2020 and 2019 used to determine the reduction and provide the gross receipts in those quarters. Additionally, the form notes that applicants requesting $150,000 or less are not required to complete section, but may be asked for this information when seeking loan forgiveness.
Certifications. In addition to similar certifications on the First Draw PPP Loan applications, applicants must also certify they experienced a 25% reduction in gross receipts and that the applicant has used the full loan amount of the First Draw PPP Loan (including any increase) for only eligible expenses. Also, the applicant does not fall under certain listed prohibited entities.

Instructions. The Instructions clarify how to determine whether an applicant has experienced a 25% reduction in gross receipts. The appropriate reference quarter depends on how long the Applicant has been in operation:

  1. For all entities other than those satisfying the conditions set forth below, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019; Applicants choosing to use annual gross receipts must enter “Annual” in the 2020 Quarter and Reference Quarter fields and, as required documentation, must submit copies of annual tax forms substantiating the annual gross receipts reduction.
  2. For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
  3. For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
  4. For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.

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