This week, the government released updated guidance on the Paycheck Protection Program (PPP) (covering both the “first draw” program, and the recently enacted “second draw” program), including new interim rules governing the second draw loan program and a consolidated interim rule (with frequently asked questions) covering most facets of the first and second draw loan programs.
The government also plans to release an updated application form for second draw loans (SBA Form 2483-SD, not yet released). The government further announced the PPP will reopen the week of January 11 for new borrowers and “certain existing PPP borrowers.”
As part of this reopening, the government states, “initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11 and Second Draw PPP Loans on Wednesday, January 13,” with the PPP “open to all participating lenders shortly thereafter.”
Here is what you need to know about the new guidance and second draw loan program.
The PPP continues to be complex. We can help you sort through the details and comply with newly released regulations.
Eligibility for Second Draw PPP Loans
The new rules state an applicant is eligible for a second draw loan if it is a “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” meeting all of the following criteria:
What does this mean?
Only eligible borrowers who previously received a first draw loan are eligible for a second draw loan. Newly eligible borrowers (like a section 501(c)(6) organization) applying now will apparently apply under the first draw program. Also, the ability to choose a particular quarter for measuring gross receipts may mean borrowers with strong third or fourth quarter 2020 earnings, but weaker first and second quarter earnings demonstrating an applicable reduction to gross receipts, can still be eligible for second draw loans.
Definition of Gross Receipts
Gross receipts are expansively defined to include “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.” Gross receipts include cost of goods sold but do not include net capital gains or losses “as reported on IRS tax return forms.” Gross receipts from an applicable affiliate are also included.
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.” Gross receipts also do not include any forgiven first draw loan proceeds, although the new rules are silent regarding whether other forms of stimulus do constitute gross receipts.
The government cautions that “[a]ll 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 loans with principal amounts greater than $150,000, applicants, when applying, must document their gross receipts, including providing “relevant tax forms”, “annual tax forms,” or, if “relevant tax forms” are not available, a copy of the applicant’s quarterly income statements or bank statements.
What does this mean?
The definition of gross receipts is clearly intended to be all-encompassing by including revenue from whatever source. While first draw loans are excluded from the definition, it is unclear whether other forms of COVID relief (like provider relief funds through the department of Health and Human Services, or Economic Injury Disaster Loan funds) constitute gross receipts.
Eligible second draw borrowers may not readily have access to the necessary documentation for proving gross receipts, particularly because tax filings and year end financial statements may not be completed for another few months. This could result in borrowers having to rely upon bank statements (with, presumably, explanations) to document gross receipts.
Affiliation Rules for Second Draw PPP Loans
Eligibility for second draw loans is governed by the same affiliation rules as first draw loans. This means borrowers must take into account any relevant affiliate’s employee count (for the 300-employee test) and gross receipts (for the gross receipts test).
Exceptions to the affiliation rules include “any business with not more than 300 employees that, as of the date on which the covered loan is disbursed” is assigned the NAICS 72 code. Certain business concerns granted a license by the FCC are also excepted, as are other businesses excepted from the affiliation rules under the first-round loan program (like listed franchises) so long as they otherwise meet the second draw eligibility requirements.
Generally, the maximum amount of a second draw loan is equal to the “lesser of two and half months of the borrower’s average monthly payroll costs or $2 million,” with NAICS code 72 borrowers able to use the lesser of 3.5 months of payroll or $2 million. “Payroll costs” are generally calculated in the same fashion as they were for the first draw program (for instance, any compensation paid to an employee in excess of $100,00 on an annualized basis is not included). The new rules state a “borrower’s average monthly payroll costs may be based on calendar year 2020, calendar year 2019” or a rolling 12 month period ending on the application date. There are special rules for self-employed persons, sole proprietorships, and independent contractors.
What does this mean?
The choice of 12-month payroll periods for certain borrowers may allow those borrowers to maximize their second draw PPP loan. For instance, borrowers with a larger workforce in 2019, as compared to 2020, may choose to use the calendar year 2019 as their measuring point.
Review of First Draw PPP Loans
Certain first draw borrower’s forgiveness applications may be reviewed by the government. The government states that if a first draw 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’)” and the government will work to “expeditiously” resolve the issue related to the unresolved borrower.
Second Draw Loan Forgiveness
The government states that “[s]econd 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 of revenue reduction if such documentation was not provided at the time of the loan application … .”
What does this mean?
This means second draw borrower’s forgiveness amounts can be reduced by any applicable full time equivalency or employee salary reductions. Also, borrowers and advisers may be able to better plan for the second draw forgiveness stage (as compared to the first draw stage) because second draw borrowers can largely rely upon the existing forgiveness guidance. For instance, 60% of eligible expenditures still must go towards eligible payroll, with the remaining 40% going towards eligible overhead expenses (with new expanded categories). Both first and second draw loans up to $150,000 are subject to simplified forgiveness procedures, and we expect an updated forgiveness application reflecting these new procedures.
The Takeaway from Second Draw PPP Loans
Participating lenders are expected to open their application portals for second draw loans in the next week, so potential borrowers may consider gathering the necessary application materials now in order to be ready to apply when the program opens and the second draw loan application is released.
The second draw PPP loans are here. Let us help you work through compliance and loan forgiveness.
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