Economic Aid Act: 10 Things to Know about Second Draw PPP Loans - Update

Schwabe, Williamson & Wyatt PC

Late on January 6, 2021, the Small Business Administration (the “SBA”) and the Department of Treasury released an Interim Final Rule called “Business Loan Program Temporary Changes; Paycheck Protection Second Draw Loans” (“Second Draw Rules”). These rules announced the implementation of section 311 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The SBA also released an Interim Final Rule called “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act” (“Consolidated First Draw PPP IFR”). That rule restates existing regulatory provisions into a single regulation on borrower eligibility, lender eligibility, and loan application or origination requirement issues for new First Draw PPP Loans, as well as general rules relating to First Draw PPP Loan increases and loan forgiveness. Both rules take effect immediately. For more information on the Consolidated First Draw PPP IFR, see our article What to Know about the Paycheck Protection Program, Round Two.

For purposes of this article and the Second Draw Rules, first round Paycheck Protection Program (“PPP”) Loans are “First Draw PPP Loans” and second round loans are “Second Draw PPP Loans.” Since the issuance of the Second Draw Rules, the SBA in consultation with the Department of the Treasury has released further guidance and forms. This article summarizes 10 key items relating to the Second Draw PPP Loans:

  1. Deadline and Fund Availability
  2. In General
  3. Eligibility Requirements
  4. Affiliation
  5. Excluded Entities
  6. Maximum Loan Amount; Payroll Cost Calculations, Use of Funds
  7. Second Draw PPP Loan Application, Documentation Requirements, and Certifications
  8. Loans to Borrowers with Unresolved First Draw PPP Loans
  9. Loan Forgiveness
  10. Frequently Asked Questions and Other Guidance

1. Deadline and Fund Availability and Some Lender Requirements:

The last day to apply for and receive a Second Draw PPP Loan is March 31, 2021. Borrowers should contact their lenders to learn when those lenders will begin accepting applications for Second Draw PPP Loans. Eligible lenders are SBA 7(a) lenders and any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in the Paycheck Protection Program. On January 8, 2021, the SBA announced that to promote access for smaller lenders and their customers, the SBA will initially only accept Second Draw PPP Loan applications from community financial institutions starting on January 13, 2021. On January 13, 2021, the SBA announced that it would open its portal to PPP-eligible lenders with $1 billion or less in assets for Second Draw PPP Loan applications on Friday, January 15, 2021 and the portal will fully open on January 19, 2021 to all participating PPP lenders to submit Second Draw PPP Loan applications.  At least $25 billion is 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- to moderate-income neighborhoods. Given these priorities, some borrowers may have to wait. After borrowers who are given priority access Second Draw Loans, we expect availability will be on a first-come, first-served basis, and the funds may go faster now that forgiveness and tax rules are clearer.

It appears that some lenders are requiring PPP borrowers to apply for forgiveness on their First Draw PPP Loan before they file to seek a Second Draw PPP loan. This is not a requirement of the SBA and the Department of Treasury. So, borrowers should discuss this requirement with their lender and if appropriate, consider other lenders that will process the Second Draw PPP Loan application without having to file for forgiveness on their first PPP loan. Please note that the SBA does require that the First Draw PPP Loan forgiveness application be submitted before or simultaneously with the loan forgiveness application for a Second Draw PPP Loan that is more than $150,000.

2. In General:

Second Draw PPP Loans are generally subject to the same terms, conditions, and requirements as First Draw PPP Loans. These include the following:

  • The SBA will guarantee 100% of the Second Draw Loan.
  • No collateral will be required.
  • No personal guarantees will be required.
  • The interest rate will be 100 basis points (1%), calculated on a non-compounding, non-adjustable basis.
  • The maturity is five years.
  • All loans will be processed by 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.

3. Eligibility Requirements:

  • General eligibility requirements: The eligibility requirements for Second Draw PPP Loans are narrower than the eligibility requirements for First Draw PPP Loans. The Economic Aid Act provides that a borrower is eligible for a Second Draw PPP Loan only if the borrower meets all of the following eligibility requirements:
    • It is a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw PPP 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;

Please note that the Economic Aid Act added housing cooperatives, eligible 501(c)(6) organizations or destination marketing organizations, and eligible nonprofit news organizations to the businesses that are eligible for First Draw PPP Loans. Additionally, under the Consolidated First Draw PPP IFR and prior guidance, the following industry-specific entities are also eligible for First Draw and Second Draw PPP Loans: certain hospitals owned by governmental entities, certain legal gaming businesses, certain electric cooperatives, and certain telephone cooperatives.

  • It employs not more than 300 employees, unless it satisfies the alternative criteria for businesses with a North American Industry Classification System (“NAICS”) code beginning with 72 and eligible news organizations with more than one physical location as described in the Economic Aid Act (see below);
  • It experienced a revenue reduction in 2020 relative to 2019 (described further below);
  • It received a First Draw PPP Loan; and
  • It has used, or will use, the full amount of the First Draw PPP Loan (including the amount of any increase on such First Draw PPP Loan) on eligible expenses under the PPP rules on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower.
  • Revenue reduction requirement: To be eligible for a Second Draw PPP Loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019, which is calculated as follows.
    • Calculation: To determine the reduction, the borrower must compare the borrower’s quarterly “gross receipts” for one quarter in 2020 with the borrower’s “gross receipts” for the corresponding quarter of 2019. Alternatively, the borrower may compare annual gross receipts in 2020 with annual gross receipts in 2019 (see below). For all loans, the appropriate reference quarter depends on how long the borrower was in operation. The Second Draw Rules, the application, and the guidance provide that a borrower has experienced a reduction in calendar year 2020, measured as follows, if the borrower:
      • had gross receipts during the first, second, third, or fourth quarter in 2020 that demonstrate at least a 25% reduction from the borrower’s gross receipts during the same quarter in 2019 (for example, a borrower that had gross receipts of $50,000 in the second quarter of 2019 and had gross receipts of $30,000 in the second quarter of 2020 experienced a 40% revenue reduction between these two quarters);
      • was not in business during the first or second quarter of 2019, but was in business during the third and fourth quarters of 2019, the borrower had gross receipts in any quarter of 2020 that demonstrate at least a 25% reduction from the borrower’s gross receipts during the third or fourth quarter of 2019 (for example, a borrower that had gross receipts of $50,000 in the third quarter of 2019 and had gross receipts of $30,000 in the third quarter of 2020—demonstrating a reduction of 40% from the borrower’s gross receipts during the third quarter in 2019);
      • was not in business during the first, second, or third quarter of 2019, but was in business during the fourth quarter of 2019, the borrower had gross receipts in any quarter of 2020 that demonstrate at least a 25% reduction from the fourth quarter of 2019 (for example, a borrower that had gross receipts of $50,000 in the fourth quarter of 2019 and had gross receipts of $30,000 in the fourth quarter of 2020—demonstrating a reduction of 40% from the borrower’s gross receipts during the fourth quarter in 2019);
      • was not in business during 2019, but was in operation on February 15, 2020, the borrower had gross receipts during the second, third, or fourth quarter of 2020 that demonstrate at least a 25% reduction from the gross receipts of the entity during the first quarter of 2020 (for example, a borrower that had gross receipts of $50,000 in the first quarter of 2020 and had gross receipts of $30,000 in the fourth quarter of 2020—demonstrating a reduction of 40% from the borrower’s gross receipts during the first quarter in 2020); or
      • alternatively, was in operation in all four quarters of 2019 and experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline. The amounts required to compute such receipts vary by the entity tax return type:
        • For self-employed individuals other than farmers and ranchers (IRS Form 1040 Schedule C): sum of line 4 and line 7 (if the borrower files multiple Schedule C forms on the same Form 1040, the borrower must include and sum across all of them)
        • For self-employed farmers and ranchers (IRS Form 1040 Schedule F): sum of lines 1b and 9
        • For partnerships (IRS Form 1065): sum of lines 2 and 8, minus line 6
        • For S corporations (IRS Form 1120-S): sum of lines 2 and 6, minus line 4
        • For C corporations (IRS Form 1120): sum of lines 2 and 11, minus the sum of lines 8 and 9
        • For nonprofit organizations (IRS Form 990): the sum of lines 6b(i), 6b(ii), 7b(i), 7b(ii), 8b, 9b, 10b, and 12 (column (A)) of Part VIII
        • For nonprofit organizations (IRS Form 990-EZ): sum of lines 5b, 6c, 7b, and 9 of Part I
        • LLCs should follow the instructions that apply to their tax filing status in the reference periods.

Note: Any of the following included in the specific tax form lines must be excluded from the computation and annotated on the return: 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. In particular, for tax returns that include sales tax as income and then as a deduction, annotate next to the “taxes and license” line of the return the amount of such taxes that were included in income.

    • Gross receipts”: The Economic Aid Act does not include a general definition of “gross receipts” for purposes of determining a borrower’s revenue reduction. The Second Draw Rules and subsequent guidance provide more clarifications, as follows:
      • Definition: The Second Draw Rules and the application define “gross receipts” as follows:
        • “Gross receipts includes 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.”
        • For for-profit businesses, the SBA clarified net capital gains and losses are excluded and that the terms carry the definitions used and reported on IRS tax forms.
      • Gross receipts of affiliates: Gross receipts of a borrower with affiliates is calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate. If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern. This aggregation applies for the entire period of measurement, not just the period after the affiliation arose. However, the Second Draw Rules also provide that if a concern acquired a segregable division of another business concern during 2020, gross receipts do not include the receipts of the acquired division prior to the acquisition. The gross receipts of a former affiliate are not included. This exclusion of gross receipts of such former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased. However, if a borrower sold a segregable division during 2020, the gross receipts will continue to include the receipts of the division that was sold that were received prior to the sale. Per the Second Draw Rules, all terms in this subsection have the meaning attributed to them by the Internal Revenue Service. The same SBA rules for determining affiliation that applied to First Draw PPP Loans, including exemptions applicable to tribal, Alaska Native, and Native Hawaiian organizations, apply to determining if the gross receipts of an affiliate need to be accounted for by a borrower when calculating their eligibility for a Second Draw PPP Loan.
      • Gross receipts of nonprofits, etc.: For an eligible nonprofit 501(c)(3) organization, a 501(c)(19) veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or an eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986. The SBA clarified that “gross receipts” are the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. “Gross receipts” include, but are not limited to: (i) the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts, (ii) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, (iii) gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T), (iv) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and (v) the gross amount received as investment income, such as interest, dividends, rents, and royalties.
      • Forgiveness amount or EIDL Advance of the First Draw PPP Loan: The amount of any forgiven First Draw PPP Loan or any EIDL Advance, which was not subject to federal income tax, is not included in the calculation of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.
      • Documents: The SBA stated that the following are the primary sets of documentation a borrower can provide to substantiate their certification of a 25% gross receipts reduction (only one set is required):
        • Quarterly financial statements for the entity. If the financial statements are not audited, the borrower must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the borrower must annotate which line item(s) constitute gross
        • Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The borrower must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
        • Annual IRS income tax filings of the entity (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the borrower must fill out the return forms, compute the relevant gross receipts value, and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax Entities that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns only if their fiscal year contains all of the second, third, and fourth quarters of the calendar year (i.e., have a fiscal year start date of February 1, March 1, or April 1).
      • Guidance: See Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide (as of January 19, 2021).
    • Certain businesses with more than one physical location: A business concern that has more than one physical location and employs not more than 300 employees per physical location is eligible to receive a Second Draw PPP Loan if it otherwise meets the eligibility criteria and either (a) it is assigned a NAICS code beginning with 72 (Accommodation and Food Services) (including hotels and restaurants) at the time of loan disbursement; or (b) it is a certain type of news organizations that make a good faith certification relating to the proceeds of the loans. The Second Draw Rules confirmed that FAQ 24 is still good guidance other than the substitution of 300 employees for 500 employees. As such, if each hotel or restaurant location owned by a parent business is a separate legal business entity and employs not more than 300 employees, each hotel or restaurant location is permitted to apply for a separate PPP loan provided it uses its unique EIN.

4. Affiliation:

With certain exceptions, eligibility for Second Draw PPP Loans is governed by the same affiliations rules (and waivers) as First Draw PPP Loans (see Question 7 of our article What to Know about the Paycheck Protection Program, Round Two). The following entities are exempt from the affiliations rules:

  • any business concern with not more than 300 employees that, as of the date on which the covered loan is disbursed, is assigned a NAICS code beginning with 72 (Accommodation and Food Services);
  • any business concern (including any station that broadcasts pursuant to a license granted by the Federal Communications Commission under title III of the Communications Act of 1934 (47 U.S.C. 301 et seq.) without regard for whether such a station is a concern as defined in 13 C.F.R. § 121.105, or any successor thereto) that employs not more than 300 employees per physical location of such business concern and is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 (Newspaper Publishers) or 5151 (Radio and Television Broadcasting); and
  • any nonprofit organization that is assigned a NAICS code beginning with 5151 (Radio and Television Broadcasting).

5. Excluded Entities:

The following entities are not eligible for a Second Draw PPP Loan:

  • those entities excluded from eligibility under the CARES Act or Consolidated First Draw PPP IFR—see Question 6 of our article "What to Know about the Paycheck Protection Program, Round Two" and PPP Ineligibility Update: Businesses Ineligible for First Draw and Second Draw PPP Loans;
  • a business concern or entity primarily engaged in political activities or lobbying activities, as defined in section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602), including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public documents;
  • any business concern or entity: (i) for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20% of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or (ii) that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China;
  • any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612);
  • any person or entity that receives a grant for shuttered venue operators under section 324 of the Economic Aid Act;
  • any entity in which 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, directly or indirectly holds a controlling interest (the terms “Executive department,” “Member of Congress,” and “controlling interest” are all defined in the Second Draw Rules);
  • any publicly traded company that is 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), where the terms “exchange,” “issuer,” and “security” have the meanings given those terms in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) (with some exception for news organizations);
  • an entity that has previously received a Second Draw PPP Loan; or
  • an entity that has permanently closed.

6. Maximum Loan Amount; Payroll Cost Calculations; Use of Funds:

  • Maximum loan amount:
    • In general: The maximum loan amount is 2.5 times the average total monthly payment for payroll costs incurred or paid by the borrower during 2019 or 2020 (at the election of the borrower); or $2 million, with some exceptions.
    • Borrowers with NAICS code beginning with 72: For borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the maximum loan amount is 3.5 times the average total monthly payment for payroll costs incurred or paid by the borrower during either 2019 or 2020 (at the borrower’s election); or $2 million. For purposes of calculating a borrower’s maximum payroll costs, a borrower may multiply its average monthly payroll costs by 3.5 only if the borrower is in the Accommodation and Food Services sector and has reported a NAICS code beginning with 72 as its business activity code on its most recent IRS income tax return.
    • Seasonal employers: For seasonal employers (meaning an employer that does not operate for more than 7 months in any calendar year, or that during the preceding calendar year has gross receipts for any 6 months of that year that were not more than 33.33% of the gross receipts of the employer for the other 6 months of that year), the maximum loan amount is 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the average total monthly payments for payroll costs incurred or paid by the borrower for any 12-week period between February 15, 2019 and February 15, 2020 (at the election of the borrower); or $2 million.
    • “New entity”: For a “new entity” (meaning a borrower that did not exist during the 1-year period preceding February 15, 2020, but was in operation on February 15, 2020), the maximum loan amount is 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the sum of the total monthly payments by the borrower for payroll costs paid or incurred by the borrower as of the date on which the borrower applies for the Second Draw PPP Loan divided by the number of months in which those payroll costs were paid or incurred; or $2 million.
    • Farmers and ranchers: For a farmer or rancher that (a) operates as a sole proprietorship or as an independent contractor, or is an eligible self-employed individual; (b) reports farm income or expenses on a Schedule F (IRS Form 1040); and (c) was in business as of February 15, 2020, the maximum loan amount depends on whether the borrower has employees. If the borrower does not have employees, the maximum loan amount is 2.5 times the gross income of the borrower in 2019 or 2020, as reported on a Schedule F (IRS Form 1040), that is not more than $100,000, divided by 12. If the borrower does have employees, the maximum loan amount is 2.5 times the sum of (i) the difference between gross income and employee payroll costs of the borrower in 2019 or 2020 (at the election of the borrower), as reported on a Schedule F (IRS Form 1040), that is not more than $100,000, divided by 12, and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or $2 million.
    • Self-employment: For a borrower that has income from self-employment and files a Form 1040, Schedule C, the maximum loan amount depends on whether or not the borrower has employees. If the borrower does not have employees, the maximum loan amount is 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the net profit of the borrower in 2019 or 2020, as reported on IRS Form 1040 Schedule C, that is not more than $100,000, divided by 12. If the borrower does have employees, the maximum loan amount is 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the sum of (i) the net profit of the borrower in 2019 or 2020 (at the election of the borrower), as reported on an IRS Form 1040, Schedule C, that is not more than $100,000, divided by 12, and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or $2 million.
    • Partnership: For a borrower that files taxes as a partnership, the maximum loan amount is 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the sum of (i) net earnings from self-employment of individual general partners in 2019 or 2020 (at the election of the borrower), as reported on IRS Form 1065 K-1, reduced by section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.9235, that is not more than $100,000, divided by 12; and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or $2 million.
    • Single corporate group: Businesses that are part of a single corporate group cannot receive more than $4 million of Second Draw PPP Loans in the aggregate. “Corporate group” has the same meaning as in subsection (B)(4)(f) of the Consolidated First Draw PPP IFR. See Question 10 of our article What to Know about the Paycheck Protection Program, Round Two.
  • Payroll cost calculations:
    • Payroll costs: Payroll costs consist of 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 the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave (except those paid leave amounts for which a credit is allowed under FFCRA[1] Sections 7001 and 7003); allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage (including insurance premiums), group life, disability, vision, or dental insurance, and retirement benefits; payment of state and local taxes assessed on compensation of employees; and, for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation. “Payroll costs” has the same meaning as for First Draw PPP Loans and is calculated in the same manner. In calculating a borrower’s payroll costs, the borrower must subtract any compensation paid to any employee in excess of $100,000 on an annualized basis, as prorated for the time period during which the payments are made or the obligation to make the payments is incurred. See Question 11 of our article What to Know about the Paycheck Protection Program, Round Two.
    • Average monthly payroll: Most borrowers will use the average monthly payroll for 2019 or 2020, excluding costs over $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred, for each employee. For seasonal businesses, new businesses, farmers and ranchers, self-employed individuals, and partnerships, see above.
    • Calculation: A borrower’s average monthly payroll costs may be based on calendar year 2020, calendar year 2019, or as otherwise specified above for seasonal employers, new entities, NAICS code 72 borrowers, self-employed individuals, partnerships, farmers, or ranchers. Please note that the Economic Aid Act only included “the twelve-month period prior to when the loan is made or calendar year 2019,” but in the Second Draw Rules, the SBA and Department of Treasury determined that calculating payroll costs based on “calendar year 2020” is more appropriate and substituted “calendar year 2020” for the “twelve-month period” in most instances.
  • Use of funds: In general, funds can be used to pay payroll costs (including some benefits), mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations. See Question 13 of our article What to Know about the Paycheck Protection Program, Round Two.

7. Second Draw PPP Loan Application, Documentation Requirements, and Certifications:

  • Application: A borrower must submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form (“Form 2483-SD”). That form was posted on the SBA website on January 8, 2021.
  • Questions: Form 2483-SD sets forth eight questions of which a yes answer to (1), (2), (4), or (5) will result in the loan not being approved:
    • (1) Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?
    • (2) Has the Applicant, any owner of the Applicant, or any business owned or controlled by any of them, ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is (a) currently delinquent, or (b) has defaulted in the last 7 years and caused a loss to the government?
    • (3) Is the Applicant or any owner of the Applicant an owner of any other business, or have common management (including a management agreement) with any other business? If yes, list all such businesses (including their TINs if available) and describe the relationship on a separate sheet identified as addendum A.
    • (4) Is the Applicant (if an individual) or any individual owning 20% or more of the equity of the Applicant presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction?
    • (5) Within the last 5 years, for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, or within the last year, for any other felony, has the Applicant (if an individual) or any owner of the Applicant 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) commenced any form of parole or probation (including probation before judgment)?
    • (6) Is the United States the principal place of residence for all employees included in the Applicant’s payroll calculation above?
    • (7) Is the Applicant a franchise?
    • (8). Is the franchise listed in SBA’s Franchise Directory? If yes, enter the SBA Franchise Identifier Code.
  • Documentation: At the time of submission of a loan application, the borrower must submit the following documentation:
  • If the lender for the First Draw PPP Loan and Second Draw PPP Loan are the same and 2019 payroll information is used: If the borrower does not submit new payroll documentation with its Second Draw PPP Loan application because it previously submitted 2019 payroll information to the same lender when it applied for its First Draw PPP Loan, then the lender must confirm the borrower’s average monthly payroll costs based on that prior documentation.
  • Other situations:
    • Borrower is not self-employed: The borrower’s Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions.
    • Partnership: Same as above and a partnership must also include its IRS Form 1065 K-1s.
    • Self-employed:
      • With employees: If the borrower is self-employed and has employees, the borrower’s 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the borrower was in operation on February 15, 2020.
      • Without employees: If the borrower is self-employed and does not have employees, the borrower must provide (a) its 2019 or 2020 (whichever was used to calculate loan amount) Form 1040 Schedule C; (b) 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 borrower is self-employed; and (c) a 2020 invoice, bank statement, or book of record to establish that the borrower was in operation on or around February 15, 2020.
      • Loans greater than $150,000: For loans with a principal amount greater than $150,000, the borrower must identify the 2020 quarter meeting this requirement, identify the reference quarter, and state the gross receipts amounts for both quarters, as well as provide supporting documentation sufficient to establish that the borrower experienced a reduction in revenue, at the time of application, which may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the borrower’s quarterly income statements or bank statements.
      • Loans up to $150,000: For loans with a principal amount of $150,000 or below, the borrower only must certify that the borrower has met the 25% gross receipts reduction at the time of the application; however, upon or before seeking loan forgiveness (or upon the SBA request), the borrower must provide documents that identify the 2020 quarter meeting this requirement, identify the reference quarter, state the gross receipts amount for both quarters, and documentation that supports the amount provided. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the borrower’s quarterly income statements or bank statements.
    • Certification: An authorized representative of the borrower must make the same certifications as for a First Draw PPP Loan (see Question 17 of our article What to Know about the Paycheck Protection Program, Round Two), except the borrower must certify:
      • instead of the certification in subsection (B)(12)(v) of the Consolidated First Draw PPP IFR, that the borrower has not and will not receive another Second Draw PPP Loan;
      • that the borrower has realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period;
      • for loans greater than $150,000, that the borrower has provided documentation to the lender substantiating the decline in gross receipts, and for loans up to $150,000, that the borrower will provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness for the Second Draw PPP Loan or upon SBA request.
      • that the borrower received a First Draw PPP Loan and, before the Second Draw PPP Loan is disbursed, will have used the full loan amount (including any increase) of the First Draw PPP Loan only for eligible expenses.
      • that the borrower is not an “excluded entity”—see Section 5 above.

8. Loans to Borrowers with Unresolved First Draw PPP Loans:

If a First Draw PPP Loan is under review pursuant to PPP rules and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount received by the borrower, the lender will receive notification from SBA when the lender submits an application for guaranty of a Second Draw PPP Loan (“unresolved borrower”). If the lender receives notification that the borrower for a Second Draw PPP Loan is an unresolved borrower, the lender will not receive an SBA loan number. The SBA will resolve the issue related to the unresolved borrower expeditiously and will notify the lender of the process to obtain an SBA loan number for the Second Draw PPP Loan, if appropriate.

9. Loan Forgiveness:

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 with their application for loan forgiveness of revenue reduction if such documentation was not provided at the time of the loan application. As with First Draw PPP Loans, Second Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement: (a) employee and compensation levels are maintained in the same manner as required for the First Draw PPP Loan; (b) the loan proceeds are spent on payroll costs and other eligible expenses; and (c) at least 60% of the proceeds are spent on payroll costs. In the Second Draw Rules, the SBA indicated that it intends to issue a consolidated rule governing all aspects of loan forgiveness and the loan review process.

10. Frequently Asked Questions and Other Guidance:

The FAQs and other guidance issued by the SBA or by the SBA in consultation with the Department of Treasury with respect to First Draw PPP Loans apply to Second Draw PPP Loans, except as otherwise provided in the Second Draw Rules. The SBA may provide further guidance, if needed, through SBA notices and a programs guide, which are to be posted on the SBA and the Department of Treasury’s websites.

[1] Families First Coronavirus Response Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Schwabe, Williamson & Wyatt PC | Attorney Advertising

Written by:

Schwabe, Williamson & Wyatt PC
Contact
more
less

Schwabe, Williamson & Wyatt PC on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.