On January 6, 2021, the Small Business Administration issued a set of Interim Final Rules (IFR) – here we go again – pertaining to the Paycheck Protection Program (PPP). These two new IFR’s provide some additional clarity on the legislation passed last week as it pertains to First Draw PPP loans and the newly established PPP Second Draw loans. Without further ado, let’s discuss the key changes to PPP.
PPP First Draw Loans
For the most part, the rules for PPP First Draw Loans have not changed. The requirements around applying for loans, maximum loan amount, use of the funds (minimum 60% payroll and maximum 40% other eligible costs), covered periods and the forgiveness factors remain relatively unchanged. However, there are a few key adjustments that the Economic Aid Act incorporate into the program that further assist those business that either a.) Have not applied for a loan and would like to; b.) Are applying for forgiveness of the PPP First Draw Loan; or c.) Would like to apply for a PPP Second Draw loan (to be discussed shortly).
Key Changes for PPP First Draw Loans
- Period to apply for a PPP First Draw Loan is extended to March 31, 2021
- New borrowers may calculate maximum loan amount using 2019 or 2020 payroll data
- Eligibility has been extended to:
- Section 501(c)(6) and destination marketing organizations.
- Not more than 300 employees
- Lobbying activities do not comprise more than 15% of activities
- Cost of lobbying did not exceed $1 million in most recent tax year that ended prior to February 15, 2020
- News organizations that are majority owned and controlled by a NAICS code of 511110 or 5151 business/non-profit and employ no more than 500 employees per location
- Section 501(c)(6) and destination marketing organizations.
- Acceptable use of funds now includes:
- Operations expenditures – Cloud computing services, human resources, payroll functions and accounting related functions for sales, billing, tracking supplies, inventory, records and expenses.
- Property damage costs due to vandalism or looting from public disturbances in 2020 not covered by insurance.
- Supplier costs for essential operations, pursuant to a contract in effect at any time before the covered period of the loan or with respect to perishable goods.
- Worker protection expenditures incurred beginning March 1, 2020, to the end date of the current National Emergency.
- Expanded guidance for Seasonal employers
- Expands definition of eligible seasonal business that was dormant or not fully operating on February 15, 2020, to allow for PPP First Draw Loan eligibility to calculate their maximum loan amount on any 12-week period between February 15, 2019, and February 15, 2020.
- Defines a seasonal employer as a business that does not operate for more than 7 months in a calendar year and had gross receipts for any 6 months of that year that were not more than 33.33 percent of the gross receipts for the other 6 months of that same year.
- Use of “Alternative Covered Period” has been eliminated
- Loan requests for less than $150,000 will not require submissions of documentation at time of application
- Economic Injury Disaster Loan (EIDL) advances will no longer be deducted from the borrower’s forgiveness amount
- Loans received before December 27, 2020 can be revised to receive increased amounts due to changes from the Economic Aid Act. Requirements would be:
- If the 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 PPP rules.
- If a borrower returned part of a PPP loan, the borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
- If the borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.
- All increase requests must be submitted on or before March 31, 2021.
PPP Second Draw Loans
PPP Second Draw Loans are clearly one of the hot items within the Economic Aid Act. PPP2 as many are calling it, gives businesses that took a PPP First Draw Loan a second bite at the apple if you will. For the most part, the terms, conditions, and requirements of a PPP2 loan are the same as those outlined for a PPP First Draw Loan. The PPP2 loans also include all of the new legislative changes, as outlined above, from the PPP First Draw loans. While many of the requirements around the use of the funds, covered periods and forgiveness matters are the same, there are a few nuisances to PPP2. So, let’s get started with what is different:
Key Changes and Requirements of PPP2
- Eligible business with 300 or fewer employees
- Experienced a revenue reduction of 25% in 2020 relative to 2019
- PPP2 loans may only be made to an eligible borrower that
- Has received a First Draw PPP Loan
- Has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date which the Second Draw PPP Loan is disbursed to the borrower
- Full amount is defined as the PPP First Draw Loan and any increases to such loan
- Loan amount is equal to the lesser of two-and-a-half months of the borrowers average monthly payroll costs or $2 million
- For borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the Economic Aid Act provides that the maximum loan amount is equal to three-and-a-half (3.5) months of payroll costs
- PPP2 Loan is calculated using either the twelve-month period (calendar year 2020) prior to when the loan is made or calendar year 2019
Revenue Reduction Requirement
One of the key features to qualification for this loan is that an eligible business must prove a revenue reduction of 25% or greater in 2020 relative to 2019. The borrowers must calculate 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. There are other general requirements for businesses that were not in business for all quarters in 2020 or 2019. For more clarity on that please feel free to reach out to us.
The IFR provides a little caveat for simplicity that states that 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 and the borrower submits copies of its annual tax forms substantiating the revenue decline. This provision will allow a borrower to provide annual tax return forms to substantiate its revenue reduction.
So this sounds great, all I have to do is show that my revenues were down at least 25% in one quarter in 2020 versus the same quarter in 2019. But wait, what’s this language of gross receipts. What if I am an accrual-based business, do I use cash or accrued revenue, what about reimbursable expenses? Fear not, we have the definition of gross receipts.
SBA’s Definition of Gross Receipts
The IFR generally defines gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from:
- Sales of products or services
- Interest, dividends and investment income
- Rents, royalties, fees, or commissions, reduced by returns and allowances
Other items such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, and employee-based costs such as payroll taxes are included in gross receipts.
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:
- 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
- Amounts collected for another by:
- Travel agent
- Real estate agent
- Advertising agent
- Conference management service provider
- Freight forwarder or customs broker
- First Draw PPP Loans
Loan Documentation Requirements
The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans. However, no additional documentation to substantiate payroll costs will be required if the applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and (iii) 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.
For loans with a principal amount greater than $150,000:
- The applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019
- Documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.
For loans with a principal amount of $150,000 or less:
- Documentation is not required at the time the borrower submits its application for a loan
- Documentation must be submitted on or before the date the borrower applies for loan forgiveness.
What to Do Now
Some banks have already opened up portals for submissions of information for continued First Round PPP loans or PPP2 loans. The easiest option would be to do a PPP2 loan with the same bank or lender that you worked with in the first round based upon the documentation and qualification requirements. For those that are now considering a first round loan, be prepared with the needed documentation as outlined above for calculating the loan.
As always, we are here to help. Contact our COVID-19 team at firstname.lastname@example.org with any questions you may have.
Questions on submitting your PPP loan application or the forgiveness process?
Our team stands ready to assist you through the PPP loan application and forgiveness process. Do not go at it alone. Ensure you are submitting the right information and receiving the highest forgiveness amount possible. Visit our PPP Loan Consulting webpage by clicking here to request assistance or support.