PPP Second Draw: Ten Key Updates and Changes

Key Summary Highlights:

PPP Second Draw opens up this week, starting with community financial institutions on January 11th and opens to the rest of lenders on January 13th.
Employee headcount requirements have been adjusted down from 500 to 300 employees.
Businesses must demonstrate a reduction of at least 25% of gross receipts in the first, second, or third quarter of 2020 when compared to 2019. This is a new requirement.
The SBA also determined borrowers can use 2019 and 2020 full year tax returns to determine a 25% gross receipt reduction over the previous year instead of the quarterly method.
Hospitality and Restaurant businesses are now eligible for 3.5x average monthly payroll, allowing for larger loan amounts for companies most impacted by COVID
New non-payroll expenses are eligible for forgiveness. Including operating expenses, property damage, supplier disruptions, and COVID related expenses for protective equipment.
SBA will release a simplified, one-page forgiveness application for loans under $150k.
PPP funds were determined to be non-taxable income for business owners. Expenses in which PPP funds were used for are also tax-deductible
An additional $20 billion was allocated to EIDLs
The food, entertainment, and networking tax deduction increases from 50% deductible to 100%

On December 27, 2020, after months of discussion, President Trump signed the 2021 Consolidated Appropriations Act which included $900 billion in additional funding for COVID relief. In this bill, $284 billion is earmarked for the second round of the Paycheck Protection Program (PPP) for small businesses. The initial two tranches (or “first draw”) of the PPP injected $525 billion into 5,212,128 small businesses and saved many companies from bankruptcy, but the program obviously had major flaws. With the new legislation, adjustments have been made to company eligibility, forgiveness, tax implications, and approved uses of the funds from the previous PPP. We’ll help answer the major questions and summarize the changes to the Paycheck Protection Program below and what to expect when applying for “second draw” funds.

The SBA and Treasury announced Friday that the new PPP will re-open the week of Jan. 11 with community financial institutions exclusively allowed to make first-draw PPP loans starting on Jan. 11 and second-draw PPP loans starting Jan. 13. The PPP will open to all participating lenders at an unspecified date shortly thereafter and remain open through March 31.

How much money is available in the PPP Second Draw? What is the deadline?

An additional $284 billion has been allocated to the Second Draw of the PPP funds. This includes $138 billion that went unspent in the first allocation. The program has been extended to March 31st, 2021. Also, $35 billion is set aside for first time loans for those that didn’t take advantage of PPP the first time around.

What companies are eligible to apply for the PPP Second Draw?

Businesses with less than 300 full-time, part-time or seasonal employees are eligible. This is a reduction of headcount from the 500 employees in the original guidance as this round looks to target smaller businesses. The other major eligibility criteria is that borrowers will need to demonstrate a reduction of at least 25% of “gross receipts” in the first, second, or third quarter of 2020 when compared to 2019. This was not a requirement in the first round of PPP. Since the legislation did not define gross receipts, borrowers will use existing SBA criteria to calculate receipts.

Under SBA rules, “receipts” means all revenue in whatever form received or accrued from whatever source, including the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. The SBA notes that if you received a First Draw PPP loan that was fully forgiven, it does not count in the gross receipts reduction requirement when showing a loss.

The SBA also provides an alternative method to comparing year over year losses due to COVID. Since quarterly statements might not be readily available, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019 to qualify.

Lastly, if you borrowed money during the first round of PPP, you will need to have used or will use the entirety of the original loan in order to apply for this round. As with the original guidance, the company has to be operational before February 15th, 2020 and remains operational.

During the original rollout it was a bit rocky on setting guidelines on who could apply. This time around we have more concrete details on who is eligible:

Businesses eligible for first- and second-draw PPP loans include:

Sole proprietors
Independent contractors
Self-employed individuals
Certain non-profits (the new bill has expanded eligible businesses to include certain 501(c)(6) non-profit organizations)
Seasonal employers; the new bill has clarified the definition of these to be businesses that operate no more than seven months within a year or earn no more than a third of gross receipts within a six-month period
Faith-based organizations that have less than 150 employees
Housing cooperatives that employ less than 300 people

The following businesses remain ineligible for PPP loans:

Lobbying organizations
Organizations involved in political activities or public policy
Lenders or financial services businesses
Cannabis businesses (or any other businesses that deal with products that are illegal at the federal level)
Household employers (such as those who employ housekeepers or nannies)
Businesses that have defaulted on SBA or federal loans
Any business that is at least 20% owned by someone who is currently incarcerated, on probation, on parole, or subject to an indictment
Any business that is at least 20% owned by someone who has been convicted of a felony within the last five years
Entities affiliated with the People’s Republic of China or Hong Kong or that have a member on their board of directors that is a resident of the People’s Republic of China
Registrants under the Foreign Agents Registration Act
Entities that have received or will receive a grant under the Shuttered Venue Operator Grant program

In a change from the original PPP, publicly traded companies and businesses controlled, either directly or indirectly, by the President, Vice President, Head of Executive Departments, and members of Congress (or their spouses as defined by applicable common law) are not eligible for PPP loans.

What else has changed since the last round of PPP?

Previously, companies could borrow up to $10 million in a PPP loan, this time around the maximum loan amount is $2 million. If a company did not participate in the First Draw of the PPP, however, the old rules still apply (500 or less employees with a $10m maximum cap).

Calculating your loan amounts loan amounts haven’t changed either, companies are still eligible to borrow 2.5x their average monthly payroll costs. One exception, however, is for businesses in the hospitality and restaurant industries. Their loan size is now determined by 3.5x average monthly payroll costs, giving additional funding for those hit hardest by the pandemic. One additional change and clarification is that the new legislation allows the borrower to elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks after origination to receive full forgiveness.

What about eligible expenses? Any additional opportunities to utilize PPP funds for forgiveness?

As we remember from the initial PPP program, expenses eligible for forgiveness are payroll costs, mortgage, rent and utility payments. Borrowers also had to spend at least 60% of PPP money on payroll costs to be eligible for forgiveness and this is still the case. This legislation also clarifies that other employer-provided group insurance benefits are included in payroll costs. This includes group life, disability, vision, or dental insurance.

The good news, for non-payroll costs, the legislation expands eligibility for forgivable expenses.

The 60% payroll cost stipulation still applies, but the new PPP legislation allows for more flexibility on covered non-payroll costs. This now includes:

Operating expenditures. Payments 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.
Property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
Supplier costs. Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
Worker protection expenditure. Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration.

These expanded forgiveness changes also apply to PPP loans made during the first tranches if those loans have not yet been forgiven.

What are the major changes to the application and forgiveness process?

The PPP will continue to be managed by the Small Business Administration (SBA) through a network of SBA lenders (including banks, FinTech companies, and community lenders like CDFIs and MDIs) to distribute PPP loans. The new legislation will simplify the forgiveness application process for smaller loans of $150k or under. Borrowers will only have to submit a one page application for forgiveness certifying that the borrower is able to describe the number of employees they were able to retain because of the loan, estimated total amount spent on payroll costs, and the total loan amount. The borrower will then just need to attest they are in compliance with the PPP requirements. Additionally, borrowers are required to retain relevant records related to employment for four years and other records for three years. The Administrator may review and audit these loans to ensure against fraud.

This form will be released by the SBA by January 20th.

How about tax implications? Are expenses covered by PPP funds deductible?

In some good news for previous PPP borrowers and new ones, the new legislation deemed PPP loans as non-taxable income. Also, small businesses can have tax deductible expenses for payments that were covered by PPP funds. This reverses previous guidance that didn’t allow business to deduct expenses covered by PPP.

The other major change in regard to taxes is expanding networking, food, and entertainment as full 100% deductions versus previously a 50% deduction.

Is the EIDL program still alive? What about the EIDL advance grants?

The new legislation allocates an additional $20 billion to the EIDL program and advance grants are still available. These grants provide long-term, low-interest loans at a fixed 3.75% for borrowers. If you receive a PPP loan, you are also eligible to apply for an EIDL and the advance grants are no longer deductible from the PPP loan amount.

Anything else?

A major issue from the previous PPP loan program was that those with access to banking relationships typically were first in line when it came to receiving loans. Only 12% of black and latino owned companies were approved for PPP loan. The good news is that the SBA announced that minority and women led companies will get the first chance at applying for PPP funds for at least two days before other applicants are considered.

This time around, funds are set aside for specific use cases.

$15 billion for PPP loans (initial and second draw) issued by community financial institutions, including community development financial institutions (CDFIs) and minority depository institutions (MDIs);
$15 billion for PPP loans (initial and second draw) issued by certain small depository institutions.
$35 billion for first-time borrowers, $15 billion of which for smaller, first-time borrowers with 10 or fewer employees, or loans less than $250,000 in low income areas;
$25 billion for second draw PPP loans for smaller borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas.
$25 million for the Minority Business Development Centers program under the Minority Business Development Agency (MBDA);
$50 million for PPP auditing and fraud mitigation purposes;
$20 billion for the Targeted EIDL Advance program
$57 million for the Microloan program
$15 billion for grants for live venues

Bottom Line

The bottom line for the Paycheck Protection Program this time around is that it should (hopefully) run more smoothly than before. As the program rules become clearer and lessons were learned in the expedited rollout in 2020, it should be better understood this time around. Eligible companies should absolutely take advantage of the program, even if you received funds during the First Draw. Also, new tax clarifications should significantly benefit small businesses. PPP is absolutely something you should apply for if you qualify.