SBA releases guidance on PPP second draw loans
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Authored by RSM US LLP
The SBA recently released guidance for Paycheck Protection Program (PPP) borrowers looking to obtain a second PPP loan under the recently enacted PPP second draw program. Under this program, a PPP borrower may obtain an additional loan if the borrower meets certain criteria. Prior to the reopening of the loan portals, SBA has released additional guidance on the second-draw program. Once open, the SBA will accept loan applications through March 31, 2021.
Opening of program through March 31, 2021
Maximum loan size
$2 million; $4 million aggregate maximum for borrowers considered a single corporate group
Revenue reduction qualification
Must be a 25% or more reduction for any quarter in 2020 as compared to same quarter in 2019; PPP borrower can use annual reduction if 2020 revenue is at least 25% less than 2019 annual revenue. 2020 revenue does not include amount of first PPP loan
Maximum number of employees qualification
300; for some borrowers 300 per physical location
The PPP second draw program is available to PPP borrowers who can demonstrate a 25% reduction in gross receipts during any quarter in 2020 as compared to the same quarter in 2019. The second draw program also reduces the maximum number of employees a PPP borrower can have from 500 to 300. A borrower must have used the full amount of its initial PPP loan for authorized purposes or will use the full amount prior to the disbursement date of the second draw PPP loan in order to qualify.
Overall eligibility, other than the revenue reduction criteria and change in maximum number of employees, is substantially similar to the original Paycheck Protection Program. Interestingly though, the list of eligible entities does not include a ‘small business concern’, which encapsulates the alternative size standard that could be used to qualify under the original program. In the original Paycheck Protection Program, a small business concern, as defined by SBA, could use the revenue and employee size for its industry per the SBA size standards or the alternative size standard to qualify for a PPP loan.
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
Must have previously received a first draw PPP loan and must have used or will use full amount of first draw loan prior to expected date of the second draw loan disbursement
Must employ not more than 300 employees or for entities that have an affiliation waiver, not more than 300 employees per physical location
Must have experienced a 2020 revenue reduction in excess of 25% as compared to 2019 (quarterly or annual)
Similar affiliation rules (and waivers) as first draw, except ownership affiliation rules are waived for a business concern with not more than 300 employees that is either a business concern that is assigned a NAICS code beginning with 72, a business concern that is majority owner or controlled by a business concern that is assigned a NAICS code beginning with 511110 or 5151, or a nonprofit organization that is assigned a NAICS code beginning with 5151
For purposes of computing employees, all employees of any domestic and/or foreign affiliates are included in the employee count
Entities excluded from eligibility under initial PPP and:
A business concern or entity primarily engaged in political activities or lobbying activities
Any business concern or entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong
Any business concern or entity that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong
Any business concern or entity that is more than 20%, directly or indirectly, owned by a business concern or entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong
Any business concern or entity that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China
Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938
A person or entity that that receives a grant for shuttered venue operators
Entities in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person owns, controls, or holds at least 20% of any class of equity
A publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange
An entity that has previously received a second draw loan
An entity that has permanently closed
Payroll cost calculation
Similar to payroll cost computation under initial PPP loan program
Borrower can calculate average monthly payroll cost using 2020 calendar year, 2019 calendar year or using specific seasonal employer, new entity, Schedule C or Schedule F rules
General rules are that loan maximum is the lesser of 2.5x the computed average monthly payroll and $2 million. For NAICS code 72XXXX borrowers that are not seasonal employers or new entities, the maximum is the lesser of 3.5x the computed average monthly payroll and $2 million
Gross receipts reduction
Borrower must demonstrate at least a 25% reduction in gross receipts using any quarter in 2020 as compared to the same quarter in 2019
Special rules for borrowers that were not in business during certain 2019 quarters
A borrower that experienced at least a 25% annual decline in gross receipts from 2019 to 2020 can use the annual decline. The borrower must submit copies of its annual tax forms to substantiate the decline
Gross receipts includes 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. Generally, receipts are considered ‘total income’ (or in the case of a sole proprietorship, independent contractor, or self-employed individual ‘gross income’) plus ’cost of goods sold,’ and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
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. All 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.
Gross receipts also do not include funds received from the initial PPP loan
There are separate rules for calculating gross receipts of affiliates
For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization or eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986.
This article was written by Mathew Talcoff, Justin Stallard, Ryan Corcoran , Debbie Singer and originally appeared on 2021-01-07.
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