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PPP Round 2

Reopening of PPP Loan Program

The SBA and Treasury announced that the new PPP will re-open the week of Jan. 11 with community financial institutions exclusively allowed to make first-draw PPP loans on starting 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 or until funds are exhausted, whichever occurs first.

Congress revived the PPP loan program as part of the $900 billion COVID-19 relief bill or the Economic Aid Act that was signed into law on Dec. 27. The original PPP provided $525 billion in forgivable loans over five months before it stopped accepting applications in August. The new PPP has $284.5 billion available for forgivabe loans, including $35 billion for first-time loans.  The new round of PPP will be smaller than the original and focuses on smaller businesses that can demonstrate need.

Here’s what you need to know:

New PPP and EIDL Guidance

On January 6, 2020 the SBA issued approximately 120 pages of new regulations regarding PPP loans.  View a detailed analysis of changes HERE.

What kinds of PPP loans will be available?

There is funding for three categories of PPP loans:

  • First time PPP loans for businesses who qualified under the CARES Act but did not get a loan (“first draw” PPP loans); SBA application Revised 01-08-2021
  • Second draw PPP loans for businesses that obtained a PPP loan but need additional funding; SBA 2nd Draw PPP Loan Application
  • Additional funding for businesses that returned their first PPP loan or did not get the full amount for which they qualified.

For all types of PPP loans, no collateral or personal guarantee is required. For these new loans, any amount not forgiven becomes a loan at 1% for five years.

Revised Application for First Time Borrowers Released January 8, 2021

The SBA released a revised PPP application form and Top Line Overview for First Draw Borrowers on January 8, 2021 for first time-borrowers.

The guidelines for those seeking a first PPP loan are essentially the same as in previous rounds, aside from some very specific clarifications on issues that were a bit vague in the past. This will assist lenders in developing digital applications, taking applications and ultimately funding loans.

First-draw PPP loans are available to borrowers that were in operation on Feb. 15, 2020, and come from one of the following groups:

  • Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
  • Sole proprietors, independent contractors, and eligible self-employed individuals.
  • Not-for-profits, including churches.
  • Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 500 employees per physical location.
  • Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” that have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15. 2020. Sports leagues are not eligible.
  • News organizations that are majority-owned or controlled by an NAICS code 511110 or 5151 business or not-for-profit public broadcasting entities with a trade or business under NAICS code 511110 or 5151. The size limit for this category is no more than 500 employees per location.

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.

Maximum First Draw Loan Amount

The maximum for a first-draw PPP loan is $10 million, the same as in the original PPP.  In general, first time PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs (with a cap per employee of $100,000 annualized) in 2019, 2020, or the year prior to the loan.  PPP applicants must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records; payroll tax filings; Form 1099-MISC, Miscellaneous Income; Form 1040, Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming; income and expenses from a sole proprietorship; or bank records.

Second Draw PPP Loans – Who is Eligible?

Many small businesses and independent contractors may be eligible for second draw PPP loans if you received a PPP loan previously and qualify.  View SBA Second Draw Borrower Application and Top Line Overview. First, similar to the first rounds of PPP, eligible small businesses may include:

  • Small businesses, nonprofit organizations, veterans organizations, Tribal business concerns, and small agricultural cooperatives that meet the SBA size standards.
  • Sole proprietors, self employed individuals or independent contractors.
  • New: Certain small news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible.

In addition, this round of assistance is meant to target smaller businesses impacted by COVID-19. As a result, applicants must also meet the following criteria:

  1. The business may not have more than 300 employees (“NAICS” Code 72 entities (food service providers) and eligible news organizations with more than one physical location may have up to 500 employees) and
  2. The business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to previous quarters (details below.)

Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.

Businesses must “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.”

Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with certain ties to China. (Note the CARES Act made an exception for certain non-profits and agricultural cooperatives, for example, which are not normally eligible for SBA 7(a) loans.)  Publicly traded companies are not eligible to receive second draw PPP loans.

How is the 25% reduction in revenues calculated?

Business owners will compare gross receipts of the business before expenses are subtracted.  The guidelines are clear that this reduction needs to compare the same time frame in 2020 as 2019. For example, Q1 2020 vs. Q1 2019, or the entire year of 2020 vs. 2019.

What if you weren’t in business all of 2019?

First, a business must have been in operation by Feb. 15, 2020 to be eligible.

  • If you were not in business during the first or second quarter of 2019 but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
  • If you were not in business during the first, second or third quarter of 2019, but you were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
  • A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020 to determine whether gross receipts were reduced by at least 25%.

The legislation and subsequent guidance do not define “quarter” and some business owners that operated on a fiscal basis have asked about using non-calendar quarters. This is not addressed in the current guidance.

Note that according to the legislation, for loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss. The details of what the SBA will require will be included in future guidance.

Also note that for nonprofits and veteran’s organizations, the term gross receipts has the same definition as gross receipts under section 6033 of the Internal Revenue Code of 1986.

What are Gross Receipts?

The guidance from the SBA defines gross receipts 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.”

NOTE: It also specifies that 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.

Also note that for nonprofits and veteran’s organizations, the term gross receipts has the same definition as gross receipts under section 6033 of the Internal Revenue Code of 1986.

How much can I get with a second draw PPP loan? 

In general, the Economic Aid Act provides that the maximum loan amount a borrower may receive for a Second Draw PPP Loan is the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million.  Businesses that are part of a single corporate group can’t receive more than $4,000,000 of Second Draw PPP Loans total. An eligible entity may receive only one second draw loan.

The Act also provided that the time period that is used for calculating a borrower’s average payroll costs for a Second Draw PPP Loan is either “the 1-year period before the date on which the loan is made” or “calendar year 2019.”

The Interim Final Rules provide that the borrower is permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs. The Act itself was interpreted to mean that a borrower’s average monthly payroll costs had to be calculated based upon 12 consecutive calendar months. This can now be any consecutive 365 day period and can start as soon as Jan 1, 2019, but can be, for example, March 12, 2019 to March 11, 2020.

Hard Hit Businesses Can Apply for More

Businesses that fall under NAICS code 72 industries (hotels, restaurants, caterers, bars, etc.) will be eligible to receive 3.5 times their average payroll. Additionally, these business owners can apply for a loan for each location, provided that those locations are separate legal entities.

Owners Should Contact their Lender and Start Gathering Documentation

The Second Draw PPP Loan application is now available.  Contact your lender and review the application and documentation requirements.  If you qualify, we encourage you to apply as soon as possible as this is a first-come, first-served program.  Once the funds are exhausted, no more loans may be made unless Congress Acts to replenish available resources.  Here is  a complete list of SBA PPP lenders by state.

Documentation includes:

“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.”

The Interim Final Rules provide that in such cases described above, “additional documentation is not required because the lender already has the relevant documentation supporting the borrower’s payroll costs.”

For loans with a principal amount greater than $150,000, the Interim Final Rules state that borrowers must submit documentation “adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019.” This documentation may include:

  • Relevant tax forms, including annual tax forms, or
  • Quarterly financial statements or bank statements if relevant tax forms are not available.

Self-employed business owners will be applying based on net income from a Schedule C, plus any employees’ wages if applicable.

Farmers and ranchers will be able to use Schedule F gross income, plus employee wages if applicable.

For partnerships, the requirements remain the same as during the last rounds. They will need to apply at a partnership level and cannot apply individually.

Are These Loans Forgivable?

PPP borrowers can have their first- and second-draw loans forgiven if the funds are used on eligible costs. As with the first round of the PPP, the costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities. In addition, the following costs are now eligible:

  • Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
  • Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
  • Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
  • Covered operating expenditures, which refer to 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.

To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period between eight or 24 weeks.

Simplified forgiveness

Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA has yet to create the simplified application form but must do so by Jan. 20. The form may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.

Minority, underserved, veteran, and women-owned businesses

The Economic Aid Act provided set-asides for new and smaller borrowers, for borrowers in low- and moderate-income communities, and for community and smaller lenders. The set-asides include:

  • $15 billion across first- and second-draw PPP loans for lending by community financial institutions;
  • $15 billion across first- and second-draw PPP loans for lending by insured depository institutions, credit unions, and Farm Credit System institutions with consolidated assets of less than $10 billion;
  • $35 billion for new first-draw PPP borrowers; and
  • $15 billion and $25 billion for first-draw and second-draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans of less than $250,000 to borrowers in low- or moderate-income neighborhoods. The SBA has determined that at least 25% of each of those set-asides will go to each one of the groups: loans to borrowers with a maximum of 10 employees and loans of less than $250,000 to borrowers in low- or moderate-income neighborhoods.

Conclusion

This information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. 

For the most part, the changes included in this legislation apply to all PPP loans except those already forgiven. In addition, the way the legislation is written, most provisions take effect immediately after the legislation is enacted, as if they were in the CARES Act that was passed March 27, 2020.

Questions? 

Contact your Warady & Davis advisor or our PPP team at 847-267-9600; info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated regularly.

SOURCE: SBA, U.S. Treasury, IRS and AICPA
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