New “Second Draw” PPP Loans Under the Economic Aid Act for the Self-Employed/Sole Proprietors

Burr & Forman

Burr & Forman

The new Economic Aid Act passed by Congress authorizes new PPP loans for first-time borrowers, but also additional PPP loans for those that already received a loan last year. This addresses the requirements and issues for the self-employed and sole proprietors, who have no employees, and who wish to apply for a second PPP loan under the new law (“Second Draw PPP Loan”).


If you are self-employed/or a sole proprietor, with no W-2 employees, and you report income from your business on your personal tax return, Form 1040/Schedule C, if you qualified for a First Draw PPP Loan and would continue to qualify, here are the other requirements for a Second Draw PPP Loan:

  • You must have already used/spent the money you received through your prior PPP loan last year (“First Draw PPP Loan”); and
  • You must have experienced a revenue reduction of 25% or more in 2020 compared to 2019. For this purpose, you must compare your quarterly gross receipts/sales for any quarter in 2020 with the gross receipts for the same quarter in 2019.  You can also qualify if your total 2020 gross receipts are less than your total 2019 gross receipts. For example, if you had gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020, you would have experienced a revenue reduction of 40% between the quarters, and are therefore eligible for a Second Draw PPP Loan (assuming all other eligibility criteria are met).  Also, and as another example, if your gross receipts were $250,000 for 2019 but only $150,000 for 2020, you experienced a 40% declined here as well and may qualify.  The term “gross receipts” includes all your business income, including sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total receipts” or “total sales” (or in the case of a sole proprietorship or self-employed individual “gross income”). If your First Draw PPP Loan was or will be forgiven, this is not included in your “gross receipts.”
    • For most new PPP loans, which will be less than $150,000, you will not need to submit documentation to show a 25% revenue reduction in 2020 relative to 2019 –  at least when you apply for a loan. However, if you apply for forgiveness of your new loan, you must provide information showing a 25% revenue reduction on or before the date you apply for forgiveness.

Amount of Second Draw PPP Loan:

The amount of your new PPP loan is generally calculated in the same manner as your First Draw PPP Loan, with a few important differences.

For your new and Second Draw PPP Loan, you should calculate the amount of the new loan as follows:

Step 1: Find your 2019 or 2020 IRS Form 1040 Schedule C line 31 net profit amount. If you are using 2020 and have not yet filed a 2020 return, fill out a draft of a 2020 Form Schedule C using your business income and expense records and compute the net profit. If you began a new business that operated on February 20, 2020, but where you were not in business for 12 months in 2020 (e.g. if you began your business on February 1, 2020), you should use the net profit from the business during the period of operations in 2020. You can get a draft of the 2020 Form Schedule C on the IRS website – If the net profit amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a Second Draw PPP Loan.

Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12, or the number of months you were in operation in 2020 if not in operation the entire year – see above).

Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

Step 4:  If you have an Economic Injury Disaster Loan (EIDL) and wish to refinance this EIDL through a Second Draw PPP Loan, add the outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, that you seek to refinance. Do not include the amount of any advance under an “EIDL COVID-19 loan” (because it does not have to be repaid).

Documents and Information to be provided with Second Draw PPP Loan application:

Second Draw PPP Loans for $150,000 or more require specific documentation with the loan application.  If you seek a Second Draw PPP Loan of less than $150,000, and particularly through the same bank, your bank may not require you to submit documents and information supporting your application, but you must make “certifications” concerning your business and your loan in the Second Draw PPP loan application (new SBA Form 2483-SD).  However, you may need to provide a copy of your 2019 or 2020 Form 1040 Schedule C (whichever you used to calculate the loan amount above), and another document showing you were in business on February 15, 2020, (e.g. a customer/client invoice or bank statement).

Uses of your new Second Draw PPP Loan:

The SBA has expanded the uses for a Second Draw PPP Loan, and beyond the simple payment of your monthly “owner profit”;  however, at least 60% of the new Second Draw PPP Loan must be used to pay your owner profit each month, which cannot be more than $8,333/month  – $100,000/12. You can now use your new PPP loan to pay for the following:

  • Monthly owners profit (again, no more than $8,333/month);
  • Business property mortgage interest payments (but not mortgage prepayments or principal payments);
  • Business rent payments;
  • Business utility payments;
  • Interest payments on other business loans that were incurred before February 15, 2020;
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020;
  • Property damage costs (costs 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);
  • Supplier costs (expenditures made by you to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period for the loan; or (ii) for perishable goods, in effect before or at any time during the covered period for the loan); and
  • Worker protection expenditures (generally, expenditures to purchase things used to protect you in your business from COVID-19).

For expenses other than the payment of your monthly “owner’s profit”, these other expenses cannot exceed in total 40% of your new PPP loan amount.

Loan Forgiveness

New Second Draw PPP Loans can be forgiven just like First Draw PPP Loans. Provided you use the new loan for the purposes above, you can apply for and receive forgiveness of the new loan.

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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.

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