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PPP Second Draw Loans - Does Your Business Qualify?

Included in the Consolidated Appropriations Act that includes $900 billion for COVID-19 relief is a new round of PPP funding. 
Below is a general overview of the requirements to obtain a second draw of PPP funding:
  • Deadline to file is March 31, 2021 to fall under SBA guarantee program. 
  • Business faced a significant decline in gross receipts (at least 25%) in any 2020 quarter compared to the same quarter in 2019. The business only has to meet the test for one quarter. Other provisions regarding gross receipts include: 
    • A borrower in operation in all four quarters of 2019 can meet the requirement if its annual gross receipts for 2020 are reduced 25% or more than its annual gross receipts for 2019. A business not in operation in all four quarters of 2019 is subject to alternative testing. 
    • Gross receipts are defined in subsection (c)(2) of the IFR (Interim Final Review). A few notes regarding this:
      • Gross receipts do not include any first draw PPP loan that is forgiven.
      • Gross receipts do not include net capital gains or losses.
      • Sole proprietors (yes, independent contractors qualify) generally look to gross income on Form 1040 Schedule C.
    • For loans greater than $150,000, adequate documentation will be required at the time of application to support the gross receipts reduction test and could include tax returns, quarterly financial statements and/or bank statements. For loans of $150,000 or less, such documentation will be required when seeking loan forgiveness vs. application.   
  • Business has 300 or fewer employees. 
    • A business entity with an NAICS code beginning with 72 (e.g., restaurants and hotels) determines the 300 employee test by location.
    • The affiliation rules that applied to first draw PPP loans generally apply to second draw PPP loans. 
  • Business has used the entire amount of its first PPP loan for authorized uses.
  • Business calculates its loan amount based on its average monthly payroll in either calendar year 2019 or payroll for the one year period prior to applying, times 2.5. 
    • A borrower using 2019 payroll data could expect to receive a similar loan as with the first draw, subject to the $2 million limitation noted below. 
    • The one year period prior to applying allows an option to use calendar year 2020 as a means for simplifying the calculation. 
    • Businesses in NAICS Code 72 can use a multiple of 3.5.
    • Seasonal businesses, entities who did not exist for a full twelve months prior to the loan draw, self-employed individuals and partnerships all have alternative calculations.   
    • A borrower using 2019 payroll data and the same lender will not be required to provide additional documentation. 
    • Payroll costs are defined as they were with the first draw loans. 
  • Business qualifies for full forgiveness if, during the 8- to 24-week period following loan disbursement:
    • Employee and compensation levels are maintained in the same manner as required under the original PPP program.
    • Loan proceeds are spent on eligible costs, as defined below.
    • At least 60% of the loan proceeds are spent on payroll costs. 
  • Business can request a maximum of $2 million. Borrowers who are part of a single corporate group are limited to $4 million in the aggregate. 
  • A borrower that has temporarily closed or suspended its business is eligible.
  • A borrower with a first draw PPP loan that has yet to be forgiven is eligible to apply for a second draw PPP loan but will not receive second draw approval without resolution of the first draw loan. 
  • In addition to meeting the gross receipts reduction and employee count tests, a second draw borrower must make the same certifications as made with the first draw so, for example, the necessity test (i.e., current economic uncertainty makes this loan request necessary to support ongoing operations) still exists!
    • Recall that loans of less than $2 million were deemed to meet the required certification concerning the necessity of the loan request in good faith. Query: if the first and second draws combined are $2M or more, does the safe harbor still apply? 
  • SBA Form 2483-SD is used to apply for the second draw loan. 
  • Second draw loans that are forgiven are not taxable income but the expenses used by the second draw loan are tax deductible. 
Some other changes related to the PPP loan program are as follows:
  • First time PPP borrowers should generally follow the original PPP rules and are not subject to the more restrictive criteria adopted for second draw borrowers. 
  • Certain businesses termed “shuttered venue operators” are eligible to receive a grant and are thus not eligible for a second draw PPP loan. 
  • Eligible expenses for existing (if not already forgiven) and new loans are expanded to include:
    • Employer paid group life, disability, vision and dental insurance. Previously, only health insurance qualified. 
    • Payments for business software or cloud computing service.
    • Costs related to property damaged and vandalism or looting from public disturbances not covered by insurance.
    • Certain supplier/perishable goods costs pursuant to a contract in effect before the covered period. 
    • Worker protection expenditures, e.g., PPE, physical barriers. 
  • The expansion of eligible costs could give rise to resubmitting an application for an increased first draw loan amount to the extent that the loan has not been forgiven and that action is taken by March 31, 2021.
  • 501(c)(6) organizations, such as chambers of commerce, now qualify.
The summary above does not attempt to cover every last provision but we stand ready to assist you in any way that we can.