SBA Has Issued Rules for First Draw, Second Draw, and Increased PPP Loans
Note: On January 19, the PPP was opened to all lenders. SBA released guidance regarding how to calculate revenue reduction and loan amounts for a Second Draw PPP loan. The agency also issued forgiveness guidance and new forgiveness applications.
On Monday, December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA), which contains a $900 billion COVID-19 relief package that, among many other initiatives, reauthorizes and modifies the Paycheck Protection Program (PPP). The PPP, implemented by section 1102 of the CARES Act, expanded the Small Business Administration (SBA) 7(a) loan program to provide up to $349 billion (increased by an additional $310 billion on April 24) in 100 percent federally-guaranteed loans to small employers and eligible self-employed individuals impacted by COVID-19. These loans were designed to be forgiven if program requirements are met. Forgiven loan proceeds are excluded from gross income, and the CAA clarified that expenses paid with PPP loan proceeds remain deductible. At the close of the program on August 8, 2020, $525,012,201,124 in loan funds were distributed, and $133,987,798,876 remained on the table.
The CAA’s Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) allocates an additional $284 billion to a reauthorized and revised PPP. SBA guidance states that the total program allocation for guaranteed loans through the PPP is $806,450,000,000 (in 2020 and 2021). The SBA released initial guidance for the reauthorized PPP on January 5, 2021. Interim Final Rule 2021-0001 details the terms of the PPP, as amended. This IFR governs first-time PPP loans made under the Economic Aid Act, as well as applications for loan forgiveness on existing PPP loans where the loan forgiveness payment has not been remitted. Interim Final Rule 2021-0002 details the Second Draw PPP program. In sum, the new law authorizes the following:
First Draw PPP loans
The law reopens the PPP program (through March 31, 2021) to allow First Draw (first-time) loans to businesses that did not receive them in 2020. These loans are provided under the same general terms and with the same limits as the initial PPP loans, with some key enhancements made by the Economic Aid Act.
New Loan Calculation for Self-Employed Farmers
The Economic Aid Act provides a new loan calculation for self-employed farmers based upon gross Schedule F income, rather than net Schedule F income. This new calculation can be used (1) to apply for a First Draw loan, (2) to request an increase to a First Draw loan (as long as forgiveness has not been received), and (3) to request a Second Draw loan, if otherwise eligible.
Increases to First Draw PPP Loans
Increases to First Draw loans, allowed under several narrow circumstances (including a recalculation for some partnerships, seasonal employers, and farmers and ranchers), are available only if forgiveness for the First Draw loan has not been granted and only under the conditions detailed below.
Second Draw PPP Loans
The Economic Aid Act authorizes a second round of PPP loans (called “Second Draw loans”) to borrowers who have already received a PPP loan. The second draw loan program, which closes March 31, 2021, contains stricter eligibility requirements and a lower loan limit, but it retains many of the original terms and conditions of the PPP program.
This post details these changes, as explained by the recent SBA guidance. The SBA has stated that it intends to also issue a consolidated rule governing all aspects of loan forgiveness and the loan review process. In response to the CAA, IRS issued Rev. Rul. 2021-02 on January 6, 2021, to obsolete Notice 2020-32 and Rev. Rul. 2020-27, which had stated that expenses paid with forgiven PPP funds were not deductible. Under the the CAA, forgiven funds are excluded from gross income and expenses remain deductible.
Timeline for 2021 PPP
January 11, 2021: To promote access for smaller lenders and their customers, SBA will initially only accept First Draw loan applications from community financial institutions[i] starting on January 11, 2021. The PPP will open to all participating lenders shortly thereafter. At least $15 billion is being set aside for First Draw loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods.
January 13, 2021: Second Draw Loan Applications will be accepted from community financial institutions for eligible borrowers in low- or moderate-income neighborhoods. At least $25 billion is being set aside for Second Draw PPP Loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. The PPP will open to all participating lenders for Second Draw PPP Loans shortly thereafter.
First Draw PPP Loans
The Economic Aid Act reauthorizes lending under the PPP through March 31, 2021. The eligibility requirements for First Draw PPP loans issued in 2021 are as follows:
Eligible Borrowers - Type and Size Requirements
Specifically, during the covered period, in addition to "small business concerns" meeting revenue-based size standards under current SBA regulations, any of the following types of entities are eligible to receive a First Draw loan if they employ 500 or fewer employees and they meet other eligibility requirements:
- An independent contractor, eligible self-employed individual, or sole proprietor,
- Business concern,
- IRC § 501(c)(3) nonprofit,
- Tax exempt veterans’ organization under IRC § 501(c)(19), or
- Tribal business concern under 31(b)(2)(C) of the Small Business Act
Additionally, the Economic Aid Act makes the following organizations eligible for PPP loans:
- A housing cooperative, an eligible section 501(c)(6) organization, or an eligible destination marketing organization, that employs no more than 300 employees;
- A news organization that is majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151, that employs no more than 500 employees (or, if applicable, the size standard in number of employees established by SBA in 13 C.F.R. 121.201 for the industry) per location; or
- Another type of entity specifically provided for by PPP rules[ii]
Other Eligibility Requirements
To be eligible, the above businesses must also have (a) been in operation on February 15, 2020, and (b) either (1) had employees[iii] for whom salaries and payroll taxes were paid or (2) paid independent contractors, as reported on a Form 1099-MISC, or (3) be eligible self-employed individuals, independent contractors, or sole proprietorships with no employees. Applicants must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include payroll records, payroll tax filings, Form 1099-MISC, Schedule C or Schedule F, or bank records.
Self-employed individuals[iv] are eligible for a PPP loan if they:
- were in operation on February 15, 2020
- have self-employment income (such as an independent contractor or sole proprietor)
- have a principal place of residence in the United States, and
- filed or will file a Schedule C or Schedule F for 2019 or meet additional requirements (detailed below)
Partners in partnerships may not submit a separate PPP loan application as a self-employed individual. Partnerships are eligible for PPP loans, but the partnership and its partners are eligible for only one loan. The SBA reasons that allowing partners to apply as self-employed individuals would create unnecessary confusion regarding which entity applied and would generate coordination and allocation issues.
Under the Economic Aid Act, a seasonal business is a borrower that does not operate for more than seven months in any calendar year and had gross receipts for any six months of a year that were not more than 33.33 percent of the other six months of that year. Seasonal businesses will be considered to have been in operation as of February 15, 2020, if the business was in operation for any 12-week period between February 15, 2019, and February 15, 2020.
Who is Ineligible?
The following potential borrowers are ineligible for PPP loans (the specific requirements in italics were added by the Economic Aid Act):
- Engaged in any activity that is illegal under federal, state, or local law
- Household employer (individuals who employ household employees such as nannies or housekeepers)
- 20 percent or more owner of employer is incarcerated, on parole, subject to criminal indictment or convicted of a felony within the last five years (one-year for non-financial felonies)
- Any business owned or controlled by them has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government
- Not in operation on February 15, 2020
- Received or will receive a grant under the new Shuttered Venue Operator Grant Program
- A direct or indirect controlling interest in the business is held by the President, Vice President, head of an Executive Department, Member of Congress or the spouse of any of these
- Publicly held company
- Business has permanently closed
Additionally, 13 CFR §120.110 exclusions generally apply to prevent passive landlords, financial businesses, and life insurance companies from receiving PPP loans. The restrictions on legal gaming businesses, nonprofits, and religious organization, however, do not apply. Businesses that are debtors in a bankruptcy proceeding at the time the application is submitted or at any time before proceeds are disbursed are not eligible to apply for a PPP loan.
Maximum Loan Amount
The maximum loan amount for First Draw PPP loans remains the lesser of:
- $10,000,000[v] or
- 2.5 times the average monthly payroll costs (generally prior 12 months or 2020 / 2019 calendar year[vi]), plus any refinanced Economic Injury Disaster loans received after January 31, 2020, through April 3, 2020 (not including an Advance).
Under section 336 of the Economic Aid Act, a seasonal employer determines its maximum loan amount by using the employer’s average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.
Calculating the Loan Amount – Consolidated Instructions
Note: On January 17, SBA updated its loan calculation guidance to incorporate changes from the CAA.
Businesses calculate their loan amounts using the following steps:
- Step 1: Calculate payroll costs by adding the following:
- For self-employed (non-farmers and ranchers): 2019 or 2020 Form 1040 Schedule C line 31 net profit amount, up to $100,000 annualized (not eligible for a loan if this amount is zero or less).[vii]
- For self-employed (farmers and ranchers): 2019 or 2020 Form 1040 Schedule F line 9 gross income, up to $100,000 annualized (not eligible for a loan if this amount is zero or less).[viii]
- For partnerships: 2019 or 2020 Schedule K-1 net earnings from self-employment of U.S. based general partners subject to self-employment tax, computed from box 14a (reduced by Section 179 expenses, unreimbursed partnership expenses, and oil and gas depletion) multiplied by .9235, in an amount up to $100,000 per partner.
- Aggregate payroll costs from 2019 or 2020 for employees whose principal place of residence is in the United States (subtract compensation paid to an employee in excess of $100,000 each, annualized) (if self-employed or a partnership and have no employees, there will be no additional payroll costs to aggregate)[ix]
- Step 2: Divide the total amount from Step 1 by 12.
- Step 3: Multiply the amount from Step 2 by 2.5.
- Step 4: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
“Payroll costs” include compensation with respect to compensation to employees (whose principal place of residence is the United States) that includes:
- Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation
- Cash tips or equivalent
- Payment for vacation, parental, family, medical, or sick-leave
- Allowance for dismissal or separation
- Payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement
- Payment of state or local tax assessed on employee compensation
- For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation
Excluded from Payroll Costs
Payroll costs do NOT include:
- Any compensation of an employee whose principal place of residence is outside of the United States
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period during which payments are made or the obligation to make the payments is incurred
- Payments to independent contractors
- Federal employment taxes imposed or withheld during the applicable period, including the employee’s and employer’s share of FICA and Railroad Retirement Act Taxes, and income taxes required to be withheld from employees
- Compensation to an employee whose principal residence is outside of the U.S (i.e. many H-2A workers)
- Qualified sick and family leave for which a credit is allowed under section 7001 and 7003 of the Families First Coronavirus Response Act
Borrowers may use the proceeds of a PPP loan for the following purposes:
- Owner Compensation Replacement (for the self-employed)
- Payroll Costs
- Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums
- Mortgage interest payments (but not prepayments or principal payments) on business mortgage on real or personal property[x]
- Business rent payments
- Business utility payments
- Interest payments on other debts incurred before 2/15/20 (not forgivable)
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
- Covered operations expenditures
- Defined as a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
- Covered property damage costs
- Defined as a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered supplier costs
- Defined as an expenditure made by an entity to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time at which the expenditure is made and (2) is made or pursuant to a contract, order or purchase order (a) in effect at the time before the covered period with respect to the applicable covered loan or (b) with respect to perishable goods in effect before or at any time during the covered period with respect to the applicable covered loan.
- Covered worker protection expenditures
- Defined as an operating or a capital expenditure to facilitate the adaptation of the business activity to comply with specific COVID-19 guidelines issued by federal, state, and local health agencies. The definition includes specific examples and exclusions.
Italicized uses were first authorized by the Economic Aid Act.
Percent Used for Payroll
At least 60 percent of the loan proceeds must be used for payroll expenses. For purposes of determining the percentage of the use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included in payroll costs. If 60 percent of the proceeds are not used for payroll, a proportionate amount of the loan can still be forgiven.
Misuse of Funds
If PPP funds are used for unauthorized purposes, SBA will require the borrower to repay the loan, and a borrower who knowingly used the funds for unauthorized purposes may be subject to additional liability, such as charges for fraud.
Loan Terms for the Unforgiven Portion
In the event that the loan is not forgiven, PPP loans are subject to the following terms:
- 100 basis points or one percent interest (section 339 of the Economic Aid Act)
- Five-year term[xi]
- One loan per borrower (with the exception of a possible Second Draw loan detailed below)
- E-signatures allowed
- If loan application is submitted within 10 months after the end of the loan forgiveness period, the borrower will not be required to make any payments of principal or interest before the date on which SBA remits some loan forgiveness amount to the lender or notifies the lender that no forgiveness is allowed.
- The “Loan Forgiveness Covered Period” is the period beginning on the date the lender disburses the loan proceeds and ends on any date selected by the borrower that occurs from 8-24 weeks after the date of disbursement.
In addition to these terms, PPP loans have the following terms and conditions:
- The guarantee is 100 percent
- No collateral is required
- No personal guarantee is required
- Lenders will be permitted to rely on the certification of the borrower to determine eligibility and use of the proceeds
On January 8, 2021, the SBA released Form 2483, the Application for First Draw Loans. The application form includes detailed instructions.
Good Faith Certification
Those applying for a PPP loan are required to make a good faith certification that:
- The Applicant was in operation on February 15, 2020, has not permanently closed, and was either an eligible self-employed individual, independent contractor, or sole proprietorship with no employees, or had employees for whom it paid salaries and payroll taxes or paid independent contracts, as reported on Form 1099-MISC..
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.
- That the funds will be used to retain workers and maintain payroll or pay eligible expenses.
- That the applicant has not and will not receive another PPP loan (excluding a second draw loan).
- That the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person as determined under applicable common law, does not directly or indirectly hold a controlling interest in the Applicant.
- That the Applicant is not an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f). That the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects and that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 U.S.C.1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 U.S.C. 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 U.S.C.1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
- That the Lender will confirm the eligible loan amount using required documents submitted and that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
Limited Safe Harbor
On May 13, 2020, Treasury and SBA issued guidance stating that borrowers receiving PPP loans with a principal amount of less than $2 million will be deemed to have made the required certification in good faith. Borrowers with loans greater than $2 million that do not satisfy this safe harbor "may still have an adequate basis for making the required good-faith certification,” but loans greater than $2 million (and others "as appropriate") will be reviewed by SBA.
PPP loan forgiveness can be up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained or, if not, an applicable safe harbor or exemption applies.
Payroll costs that are used as qualified wages under the employee retention credit are not eligible for loan forgiveness. The CAA allows PPP borrowers to also receive the Employee Retention Credit.
The loan forgiveness covered period is the period beginning on the date the loan proceeds are disbursed and ending on any date selected by the borrower that occurs during the period (1) beginning on the date that is eight weeks after the date of disbursement and (2) ending on the date that is 24 weeks after the date of disbursement.
To receive full forgiveness, a borrower must use at least 60 percent of the PPP loan for payroll costs.
Example: $100,000 PPP loan
$54,000 (54 percent) on payroll costs
Maximum forgiveness = $90,000 (54,000/.60)
Because the Economic Aid Act allows borrows to select their own loan forgiveness period (between 8 – 24 weeks), the rules eliminate the alternative covered period originally provided for payroll costs.
Forgiveness for Loans of $150,000 or Less
When applying for forgiveness, borrowers that received a loan of $150,000 or less will not be required to submit an application or documentation in addition to the certifications and information required by the Small Business Act. These borrowers must, however, retain records that prove compliance with PPP requirements for four years (employment records) or for three years (other records). SBA may audit or review these loans and access any records the borrower is required to retain.
All other borrowers must follow already established requirements for loan forgiveness and records retention. On January 19, 2021, SBA issued a new forgiveness application (Form 3508S) for borrowers of loans of $150,000 or less.
EIDL Advance Deduction
The Economic Aid Act repealed the CARES Act provision requiring SBA to deduct EIDL Advance amounts from the forgiveness pay amounts remitted by the SBA to the lender. Any EIDL Advance received by the borrower will not be deducted from this payment. Any EIDL Advance amounts previously deducted will be remitted to the lender, together with interest to the remittance date. SBA has released a procedural memorandum detailing its response to this change.
Increases to First Draw Loans
Partnerships, Seasonal Employers, and Those Who Returned a Loan or Did Not Receive the Full Amount
Section 312 of the Economic Aid Act allows borrowers who have not yet received forgiveness to request an increase in their loan amount if they returned all or part of a PPP loan or did not take the full amount of a PPP loan to which they were entitled. The law also states that a borrower who is eligible for an increased covered loan amount as a result of any interim final rule that allowed for loan increases could submit a request for an increase in the included covered loan amount even if— (1) the initial covered loan amount has been fully disbursed; or (2) the lender of the initial covered loan has submitted to the Administration a Form 1502 report related to the covered loan.
The IFR details two specific situations for which increases are allowed under this section because of a change in guidance:
- Partnership received a PPP loan that did not include compensation for its partners
- Before rules were clear last April, some partnerships applied for PPP loans, but did not request loan amounts including compensation for their partners. The Economic Aid Act allows these partnerships to request an increase.
- The IFR states that the lender may electronically submit a request through SBA’s E-tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been full disbursed and even if the lander’s first Form 1502 report to SBA has already been submitted. The increase cannot increase the overall loan to exceed the maximum loan amount under the PPP, which is $10 million for an individual borrower (or $20 million for a corporate group). The borrower must provide the lender with documentation to support calculation of the increase. Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is submit to availability of funds.
- Seasonal Employer may be eligible for a larger loan under section 336 of the Economic Aid Act
- Section 336 of the Economic Aid Act allows a seasonal employer to determine its maximum loan amount by using the employer’s average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.
Additionally, the IFR states that a borrower may be eligible for PPP funds under the following circumstances:
- If a borrower returned all of a PPP loan, the borrower may reapply for a PPP loan in an amount the borrower is eligible for under current rules
- If a borrower returned part of the First Draw loan, they may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
- If a borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in an amount of the PPP loan, up to the amount previously approved.
Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to availability of funds. The IFR states that SBA will issue additional guidance on the process to reapply or request a loan increase under these provisions.
Farmers and Ranchers - New Loan Calculation Rule
Section 313 of the Economic Aid Act Economic Aid Act changes the way that a PPP loan is calculated for a farmer or rancher. Rather than calculating the loan amount using net farm income, the new law directs farmers to use gross farm income, as shown on line 9 of Schedule F. Farmers can use this new calculation to (1) request a First Draw loan if they did not receive one in 2020, (2) request an increase to a First Draw loan that they received in 2020 if forgiveness for that loan has not been granted, or (3) request a Second Draw loan if they received a First Draw loan and otherwise qualify.
This new rule applies:
to a farmer or rancher who (1) operates as a sole proprietorship, an independent contractor, or is an eligible self-employed individual; (2) reports farm income or expenses on a Schedule F (or any equivalent successor schedule); and (3) was in business as of February 15, 2020. This provision is effective as if included in the CARES Act and applies to any loan made before, on, or after December 27, 2020, unless SBA has remitted a loan forgiveness payment to the lender on the PPP loan.
Although the Economic Aid Act states that farmers and ranchers are to calculate their maximum loan amount using 2019 as their base period, the IFR allows them to elect either 2019 or 2020 as their base period, in order to ensure that they can obtain funding on terms commensurate with those available to other new PPP borrowers.
As noted above in the loan calculation section, the IFR instructs eligible farmers or ranchers to calculate the owner compensation portion of their payroll costs in the following way:
- 2019 or 2020 Form 1040 Schedule F line 9 gross income, up to $100,000 annualized (not eligible for a loan if this amount is zero or less).
- If the farmer or rancher has employees, employee payroll costs should be subtracted from the farmer’s or rancher’s gross income to avoid double-counting amounts that represent pay to the employees of the farmer or rancher.
For the self-employed with no employees, this amount is divided by 12 and multiplied by 2.5 to obtain an eligible loan amount, up to $20,833.
For those farmers with employees, the instructions for the new application describes “payroll costs” as follows:
For farmers and ranchers that operate as a sole proprietorship or as an independent contractor, or who are eligible self-employed individuals and report farm income or expenses on a Schedule F (or any equivalent successor IRS form), payroll costs are computed using eligible payroll costs for employees, if any, plus the lesser of $100,000 and the difference between gross income and any eligible payroll costs for employees, as reported on a Schedule F.
This amount, divided by 12 and multiplied by 2.5 is the loan amount.[xii]
The IFR also restates a directive from the Economic Aid Act:
A farmer or rancher who received a PPP loan before December 27, 2020, may request a recalculation of the maximum loan amount based on the formula described above regarding gross income, if doing so would result in a larger covered loan amount and may receive an increase in its PPP loan based on the recalculation.
This provision applies “unless SBA has remitted a loan forgiveness payment to the lender on the PPP loan.” The IFR does not provide additional guidance specific to this farm and ranch increase. The IFR does state in general:
Any request for an increase must be submitted electronically in E-Tran on or before March 31, 2021, and is subject to the availability of funds. SBA will issue additional guidance on the process to reapply or request a loan increase.
Second Draw Loans
Section 311 of the Economic Aid Act added a new temporary section 7(a)(37) to the Small Business Act (15 U.S.C. 636(a)(37)). This new section authorizes the SBA to guarantee Second Draw Loans under generally the same terms and conditions as First Draw loans. Under section 311, SBA may guarantee loans under the Second Draw Program through March 31, 2021, to borrowers that previously received a First Draw Loans and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.
Second Draw PPP Loans are subject to the same general rules and conditions as First Draw loans, with some exceptions. IFR-202-0002 details these rules, summarized below. The IFR affirms that the following rules apply to Second Draw Loans:
- The guarantee percentage is 100 percent.
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable 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.
Additionally, other guidance applying to PPP loans applies to Second Draw loans, except as described within the IFR. In general, the following borrowers may be eligible for a Second Draw loan:
a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw Loan, veterans’ organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization.
A business is eligible for a Second Draw PPP Loan only if:
- it has 300 or fewer employees[xiii] and
- it experienced a revenue reduction of 25 percent or more in 2020 relative to 2019 (detailed below).
Additionally, a borrower is eligible for a Second Draw loan only if the borrower:
- received a First Draw Loan, and
- has used or will use the full amount of the First Draw loan (including the amount of any increase on such First Draw PPP Loan) on or before the date the Second Draw Loan is expected to be disbursed to the borrower.
In addition, the IFR clarifies that the borrower must have spent the full amount of its First Draw PPP Loan on eligible expenses to be eligible for a Second Draw PPP Loan.
To qualify for a Second Draw Loan, the borrower must have experienced a revenue reduction of 25 percent or greater in 2020 relative to 2019. A borrower calculates this revenue reduction 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.
Example: A borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters, and is therefore eligible for a Second Draw loan (assuming other eligibility criteria are met).
Additionally, a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019. This can be shown by submitting copies of annual tax forms, without worrying about substantiating income by quarter.
The IFR provides businesses that were not in operation for all of 2019 with special rules for calculating revenue reduction for purposes of determining Second Draw eligibility.
In the IFR, the SBA defines “gross receipts” consistent with the definition of “gross receipts” in 13 C.F.R. 121.104 of SBA’s size regulations. The SBA explains that this definition is one the agency is used to applying and it applies well to small businesses. This definition is as follows:
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.
The amount of any forgiven First Draw PPP Loan is not included in the calculation of any borrower’s gross receipts.
The IFR details particular entities excluded from Second Draw loans, including publicly traded companies, businesses engaged primarily in political or lobbying activities, certain businesses connected with China or Hong Kong, and businesses that receive a new Shuttered Venue Operator Grant authorized by the CAA.
Amount of the Second Draw Loan
In general, the maximum loan amount for a Second Draw Loan is equal to the lesser of:
- (1) two and half months of the borrower’s average monthly payroll costs or (2) $2 million.
A borrower’s average monthly payroll costs may be based on calendar year 2020 or calendar year 2019. Second Draw PPP Loan borrowers who are not self-employed, sole proprietorships, or independent contractors are permitted 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.
“Payroll costs” has the same definition for Second Draw loans as it does for First Draw loans (detailed above). Special calculation rules are provided for seasonal employees and new entities[xiv] Businesses in the accommodation or food service industry are eligible for a Second Draw loan in the amount of 3.5 times their average monthly payroll costs.
Farmers and Ranchers calculate their Second Draw loan using the new loan calculation rule detailed above, which uses Schedule F gross income instead of Schedule F net income. The preamble to the IFR states:
The Economic Aid Act included a new payroll cost calculation for farmers and ranchers receiving First Draw PPP Loans. However, it did not specify how payroll costs should be calculated for Second Draw PPP Loans to farmers and ranchers. This IFR clarifies that the same general calculation for farmers and ranchers applicable to First Draw PPP Loans applies to Second Draw PPP Loans.
On January 8, SBA published SBA Form 2484-SD, the application for Second Draw loans. Instructions are included within the form. In many cases, the same documentation will be used for the Second Draw loan as was used for the First Draw loan.
In addition to the certifications required for a First Draw loan, an applicant for a Second Draw loan must certify to the following:
- The Applicant has realized a reduction in gross receipts in excess of 25 percent relative to the relevant comparison time period. For loans greater than $150,000, Applicant has provided documentation to the lender substantiating the decline in gross receipts. For loans of $150,000 or less, Applicant will provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness for the Second Draw Paycheck Protection Program Loan or upon SBA request.
- The Applicant received a First Draw Paycheck Protection Program Loan and, before the Second Draw Paycheck Protection Program Loan is disbursed, will have used the full loan amount (including any increase) of the First Draw Paycheck Protection Program Loan only for eligible expenses.
Additionally, borrowers must certify that they are not: publicly traded companies, businesses engaged primarily in political or lobbying activities, certain businesses connected with China or Hong Kong, or businesses that receive a Shuttered Venue Operator Grant.
Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans, except that Second Draw PPP Loan borrowers with a principal amount 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. SBA has stated that additional forgiveness guidance will be provided. On January 19, 2021, SBA issued forgiveness guidance in the form of a new IFR. This IFR specifically provides that "the covered periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap." The borrower must use all proceeds of the First Draw PPP Loan for eligible expenses before disbursement of the Second Draw PPP Loan. The covered period is the period beginning on the date the lender disburses the PPP loan and ending on a date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement, and (ii) ending on the date that is 24 weeks after the date of disbursement.
[i] These include Treasury-certified Community Development Financial Institutions, FDIC-designated Minority Depository Institutions, Certified Development Corporations, and certain non-profit or governmental microloan intermediaries.
[ii] The rules clarify a number of eligibility requirements for groups such as news organizations, hospitals, electric cooperatives, and legal gaming businesses. These rules are not detailed in this post.
[iii] The term “employee” for purposes of determining how many employees a business employs includes individuals employed on a full-time, part-time, or other basis. Additionally, lodging and restaurant businesses are eligible to receive a loan if their multi-location business did not employ more than 500 employees per physical location. Businesses meeting the definition of an SBA “small business concern” are eligible for a loan, even if they had more than 500 employees. Size standards are generally based upon the number of employees of a business and its affiliates. This post does not document the complex affiliate rules.
[iv] SBA notes that participation in the PPP may affect eligibility for unemployment compensation.
[v] Corporate groups may be eligible for a loan up to $20,000,000.
[vi] Slightly different rules apply to self-employed, farmers, and other businesses. These differences are explained below.
[vii] If the 2020 return has not been filed, borrowers are instructed to fill it out and compute the value.
[viii] If the 2020 return has not been filed, borrowers are instructed to fill it out and compute the value.
[ix] Payroll costs are detailed below.
[x] For the self-employed to use loan proceeds for mortgage interest, rent, and utilities, they must have claimed or been entitled to claim a deduction for these expenses on their 2019 or 2020 Form 1040, Schedule C
[xi] Loans made before June 5 had a two-year term.
[xii] Farmers were not generally eligible for EIDL loans before April 3, but if they received one, they would include the EIDL loan to refinance in the loan calculation formula.
[xiii] Unless it satisfies the alternative criteria forbusinesses with a North American Industry Classification System (“NAICS”) code beginning with 72 and eligible news organizations with more than one physical location described in subsection (c)(3) or (c)(4) of this section.
[xiv] New entities are still required to have been in existence as of February 15, 2020.
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