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.
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.
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:
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:
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.
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