Here’s What You Need to Know about the Updated PPP Program

Two distinct Paycheck Protection Programs (PPP) opened on January 19, 2021. First-time borrowers (including newly eligible borrowers) can once again apply under the first-round program. These applications can be for a completely “new” first draw loan or to “right size” (discussed below) their original loan.

First-round borrowers who have already exhausted their initial loan can also now submit a new application, this time under the second draw program, assuming they are eligible.

Alongside the PPP re-opening, the government released several important pieces of guidance affecting first and second-round applicants. We have summarized this guidance below.

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How to Calculate Revenue Reduction for PPP Second Round
Among other eligibility requirements, a second-round borrower must demonstrate at least a 25% reduction in gross receipts (by generally choosing a 2020 calendar quarter and comparing to the same 2019 calendar quarter). Gross receipts are expansively defined and the government has now provided the following specific information to help borrowers determine gross receipts, depending on the type of entity tax returns. Note the below references to line items and forms are to specific areas of the relevant tax returns.

• For self-employed individuals other than farmers and ranchers (IRS Form 1040 Schedule C): sum of line 4 and line 7.
• 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.

Calculating the maximum first and second round PPP loan amount
Due to the rapid enactment of the PPP, early first-round applicants submitted applications without the benefit of complete guidance from the government. Consequently, some borrowers, despite best efforts, did not receive the full amount of the loan they were entitled too. For example, it was originally unclear whether a partner’s earnings from self-employment (whether distributed as net earnings or paid as a guaranteed payment) qualified as payroll for the partnership. Subsequent governmental guidance clarified that self-employment earnings are payroll of the partnership for PPP purposes.

To clear up any lingering confusion, the government has now released guidance, with examples, to assist borrowers “in calculating their payroll costs … for purposes of determining the maximum amount” of a first-round loan. Examples in this guidance confirm, for instance, that “partners’ self-employment income should be included on the partnership’s PPP loan application; individual partners may not apply for separate PPP loans.” Additionally, now that recently enacted legislation states that certain farmers and ranchers can use gross income to apply for first and second-round loans, the guidance states “[t]he calculation for self-employed farmers and ranchers without employees is the same as for Schedule C filers that have no employees, except that Schedule F line 9 (gross income) should be used to determine the loan amount rather than Schedule C line 31 (net profit).”

The government has also released guidance, closely mirroring the guidance above, for calculating the “maximum second draw PPP loan amount.”

First-round borrowers (especially those who applied when the program first opened in April of 2020) may want to review this guidance to insure they received the full amount of the loan they were entitled to.

Increased to First Draw PPP Loans
Those first-round borrowers discovering they are entitled to additional proceeds may have recourse under additional new guidance (found here and here).

First, if the borrower has applied for forgiveness, and the government has “remitted forgiveness payment to the Lender on that loan,” then the borrower is not eligible for any additional proceeds.

For other borrowers, please note:

• Partnerships. “If a partnership received a First Draw PPP Loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, and SBA has not remitted a forgiveness payment to the Lender on that loan, the Lender of Record may electronically submit a request through SBA’s E-Tran Servicing site (E-Tran) to increase the First Draw PPP Loan amount to include appropriate partner compensation, even if the loan has been fully disbursed and even if the Lender’s first 1502 report to SBA on the First Draw PPP Loan has already been submitted.”
• Seasonal Employers. Seasonal employers “can now use the average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019 and ending February 15, 2020” to determine the maximum first round loan amount. The government states: “If a seasonal employer received a First Draw PPP Loan and SBA has not remitted a forgiveness payment to the Lender on that loan, the seasonal employer would be eligible for an increase if application of the methodology in Section 336 of the Economic Aid Act results in the calculation of a higher loan amount.”
• Farmers and Ranchers. Certain farmers and ranchers can now use gross revenue to determine their first-round loan amount. “If an eligible farmer or rancher received a First Draw PPP Loan and SBA has not remitted a forgiveness payment to the Lender on that loan, and such farmer or rancher would be eligible for a higher maximum loan amount based” on the new rules, “the Lender of Record may electronically submit a request through E-Tran to increase the First Draw PPP Loan amount, even if the loan has been fully disbursed and even if the Lender’s first 1502 report to SBA on the PPP loan has already been submitted.”
• Eligible borrower that fully repaid a First Draw PPP Loan Before December 27, 2020. “If an eligible borrower received a First Draw PPP Loan, the Lender reported to SBA before December 27, 2020 that the borrower fully repaid the loan, and SBA has not remitted a forgiveness payment to the Lender on that loan, the borrower may reapply for a new First Draw PPP Loan in an amount for which the borrower is eligible under current PPP rules.”
• Borrowers that returned part of a First Draw PPP Loan before December 27, 2020. “If a borrower returned (or repaid) part of a First Draw PPP Loan, the Lender reported to SBA before December 27, 2020 that the borrower repaid the loan in part, and SBA has not remitted a forgiveness payment to the Lender on that loan, the Lender of Record may approve a borrower’s request for a loan increase and re-disburse funds equal to the difference between the amount retained by the borrower and the amount previously approved.”
• Borrowers that did not accept the full amount of a First Draw PPP Loan for which they were approved. “If a borrower did not accept before December 27, 2020 the full amount of a First Draw PPP Loan for which it was approved in SBA’s E-Tran Origination site and SBA has not remitted a forgiveness payment to the Lender on that loan, the borrower may request an increase and the Lender of Record may approve and disburse a loan increase in the amount of the First Draw PPP Loan up to the amount previously approved.”

There are additional procedural rules both borrowers and lenders must follow to increase a first-draw loan amount. Also note that borrowers are not eligible for the PPP second round until they apply for a first-round PPP loan and spend the proceeds, meaning any newly eligible business must look to the first PPP round. And under no circumstances can the total first round loan exceed “$10 million for an individual borrower or $20 million for a corporate group.”

Paycheck Protection Program Excess Loan Amount Errors
While some borrowers may discover they could have borrowed more under the first round, other borrowers may find they borrowed more than they were entitled to, due to an unintentional error on the part of the borrower or lender. In guidance, the government calls this “[a]n  excess loan amount error” made “in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount.” The government cautions that a borrower “may not receive loan forgiveness for any amount that exceeds the correct maximum loan amount permitted by statute for that borrower” whether the error was caused by the borrower or lender. Further, “[i]f an excess loan amount error is due in whole or in part to the lender’s failure to satisfy its obligations under PPP rules…the SBA guarantee will not apply to the excess loan amount.”

Form 3508S and Lender Notice Responsibilities to PPP Borrowers
In October of 2020, the government released a simplified forgiveness application form (Form 3508S) for loans up $50,000. Recent legislation provides that eligible loans up to $150,000 are now eligible for simplified forgiveness procedures. In response, the government expanded Form 3508S to include eligible loans up to $150,000. And the government states that “a borrower that is eligible to use SBA Form 3508S, but applied for loan forgiveness using PPP Loan Forgiveness Application Form 3508EZ or 3508, may resubmit its loan forgiveness application to its lender using SBA Form 3508S at any time until SBA notifies the lender of a final SBA loan review decision or remits to the lender the PPP loan forgiveness payment.”

Recent guidance also instructs lenders to keep borrowers informed about certain actions.

“Specifically, lenders must notify borrowers in writing within five business days of any of the following:

• A decision by the lender to deny forgiveness in full.
• A decision by SBA declining a request for review by a borrower of a lender’s decision to deny forgiveness in full.
• A final SBA loan review decision, including an SBA loan review decision on forgiveness (whether approving or denying forgiveness in full or part).
• Remittance by SBA to the lender of the loan forgiveness amount, whether partial or full.”

Borrowers with loans in excess of $2 million may consider paying particular attention to this new guidance in case the government challenges their original eligibility for a PPP loan.

Why Keeping in Compliance with PPP Changes is Still Important
The PPP saga continues with the reopening of the first round, the introduction of the second round, and the release of new guidance. All affected borrowers (and potential borrowers) may consider reviewing this new guidance to determine whether they are eligible for additional proceeds under the first round as well as to maximize their second-round loan.