Editor’s Note: The SBA will restart the PPP on Monday, January 11th. New borrowers in underserved communities will have priority access Monday and Tuesday. Starting Wednesday, January 13th, existing borrowers will be able to apply for loans. Then, after a few days, the PPP will open up for all borrowers.
On December 27, 2020, the President signed the Consolidated Appropriations Act (the Act) of 2021. The Act includes several favorable changes to the Paycheck Protection Program (PPP) and allocates approximately $284 billion for “Paycheck Protection Program Second Draw Loans.”
The SBA was given 10 days from the passage of the Act to publish guidance and on January 6th released two new Interim Final Rules (IFR).
- The first IFR provides guidance for the legislative changes to the overall PPP.
- The second IFR provides guidance on implementing PPP Second Draw Loans.
Interim Final Rule on the Changes to the Paycheck Protection Program
The changes to the PPP program apply to all outstanding loans that have not already received forgiveness by the Small Business Administration (SBA). In addition, the IFR is intended to be a “consolidated rule governing all aspects of loan forgiveness and loan review, as well as to provide a single reference point for lenders and borrowers.” Lenders and borrowers have been lobbying for a consolidated list of rules for months; therefore, this move by the SBA is much welcomed.
The IFR is organized into four sections to help borrowers and lenders with the process. The four sections include a general section, a focus on borrowers, a focus on lenders and, finally, a section that focuses on what both borrowers and lenders need to know.
Borrowers are now permitted to use a covered period between 8 and 24 weeks. As a result of this change, the Alternative Payroll Covered Period has been eliminated now that borrowers can pick the end date of their covered period. Previously, borrowers only had the option to use an 8- or 24-week period.
Borrowers can now use their PPP proceeds on additional non-payroll related covered costs. The new costs include:
- Covered operations expenditures – “payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
- Covered 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”
- Covered supplier costs – “expenditures made by a borrower 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 with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan”
- Covered worker protection expenditures – The definition in the IFR is very long. These expenses generally relate to personal protective equipment. Page 50 of the IFR contains the full definition.
The IFR includes a simplified forgiveness process for PPP loans of $150,000 or less.
Finally, any advance of an Economic Injury Disaster Loan (EIDL) now does not reduce PPP forgiveness. Borrowers that had their loan forgiveness reduced by an EIDL advance will receive the EIDL advance from the SBA and can use those funds to repay the lender.
Interim Final Rule on Paycheck Protection Program Second Draw Eligibility
The second IFR incorporates the guidance for PPP Second Draw Loans and primarily explains the differences from the First Draw PPP Loans. Those differences are described below.
What are the changes to eligibility for a Second Draw PPP Loan?
Borrowers, generally, must have 300 or fewer employees. (The same affiliation rules that applied to the First Draw will apply to the Second Draw). As of the writing of this article, it doesn’t appear that a business can qualify for a Second Draw loan using the SBA industry size standards or the alternative size standard.
A borrower who has not received a First Draw PPP Loan or has not used, or will not use, the full amount of their First Draw PPP Loan, is not eligible for a Second Draw PPP Loan. It is important to note that the borrower does not have to receive forgiveness for their First Draw PPP Loan at this point in time in order to be eligible for a Second Draw PPP Loan.
Borrowers must show a 25% reduction in revenue in any quarter of 2020 relative to the same quarter in 2019. If a borrower was in business for all of 2019 and has a drop in annual gross receipts of 25% or more in 2020 compared to 2019, the borrower would satisfy the gross receipts test.
Otherwise, a borrower would need to provide quarterly documentation to substantiate a 25% reduction in a relative quarter of 2020 compared to 2019. (If the Second Draw PPP Loan is $150,000 or less, the documentation is not required until the borrower applies for forgiveness.)
How do you define gross receipts?
The IFR defines gross receipts 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.”
What is typically not included in gross receipts?
Any forgiven First Draw PPP Loan is not considered as a gross receipt for purposes of the revenue reduction test. Net capital gains or losses are excluded from gross receipts.
In addition, “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.”
How do I calculate my Second Draw PPP Loan?
The Second Draw PPP Loan is limited to the lesser of 2.5 times your average monthly payroll or $2,000,000. Borrowers calculate their average monthly payroll in either 2019, 2020 or their trailing 12 months. Borrowers with an assigned NAICS code of 72 are allowed 3.5 times their average monthly payroll (but still have a cap of $2,000,000).
Connect with a PPP Advisor
Warren Averett will continue to keep you informed as information is made available. If you have questions about how these provisions impact your business, please reach out to your Warren Averett advisor, or have a member of our team reach out to you