On December 27, 2020, President Trump signed the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act into law. The largest expenditure in the Act is nearly $330 billion in business relief, which includes approximately $284 billion for a second draw of the Paycheck Protection Program (PPP) launched in the CARES Act. In addition to funding for PPP round two, the Act also includes expanded forgiveness parameters related to both round one and round two funding. Additionally, it provides for tax deductibility of forgiven expenses under both rounds.
What We Know about PPP Round Two
Below is a high-level outline of key details, loan terms and eligibility requirements:
- Eligible entities: Businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. The legislation does have specific types of entities that are ineligible. Please contact your RKL advisor if you have questions on your eligibility status.
- In order to receive a “second draw” PPP loan, eligible entities must meet the following requirements:
- Employ not more than 300 employees
- Have used or will use the full amount of their first PPP loan for authorized purposes on or before the expected disbursement date; and
- Demonstrate at least a 25 percent reduction in gross receipts in any calendar quarter of 2020 relative to the same 2019 quarter. There is also an option to compare full year 2020 versus full year 2019 if the borrower was in existence prior to January 1, 2019. There are other provisions for businesses that were not in operation throughout all of 2019.
- First time borrowers may qualify under original rules.
- 501(c)(6) organizations are also eligible for PPP round two loans if they meet certain criteria, including employee count and limits on lobbying receipts and activities.
- Employees of foreign affiliates are counted in the total employee count when assessing eligibility
- Companies receiving a grant under the Shuttered Venue Operator Grant program are ineligible.
- Publicly traded companies, private equity firms and hedge funds and businesses in bankruptcy are ineligible. Private equity portfolio companies are eligible if they meet affiliation rules or have a waiver to those rules and meet the economic uncertainty/loan necessity certification.
- Businesses that have permanently closed are not eligible. Businesses that have temporarily closed or suspended operations are eligible.
- An eligible entity may only receive one PPP second draw loan.
- No second draw loan can be greater than $2 million. A first draw loan may still be up to $10 million.
- Loan amount calculations:
- Generally, borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs in the one year prior to the loan or the 2019 or 2020 calendar year.
- Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020.
- A seasonal employer is an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.
- New entities that did not exist during the one-year period preceding February 15, 2020 may receive loans of up to 2.5X the sum of average monthly payroll costs based on an undefined historical period.
- Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs.
- Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location (or 500 for first draw loans) (this mainly applies to businesses in NAICS 72, such as restaurants and hotels) and franchises.
- Gross receipts 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. 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.
- SBA guidance specifically excludes certain items from gross receipts, such as sales taxes collected and remitted.
- Any forgiveness amount of a first draw loan during 2020 does not count as gross receipts.
- The loan application certifications are expected to be the same as round one but with additional certifications relating to rules for second draw loans.
- Simplified loan application: For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits their loan forgiveness application and nonprofit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.
- Provisions for borrowers who returned all or part of their PPP loan to reapply for the maximum amount applicable so long as they have not received forgiveness
- As a reminder, the CARES Act and PPP Flexibility Act loan terms remain in effect:
- Five years at 1.00% interest
- No payments due first 10 months or while a forgiveness application is in process (interest accrues during that time period)
- Interest on loan forgiven if loan is forgiven
- No collateral or guarantee requirements
- No prepayment penalties
- Loans are 100% guaranteed by the SBA
- Selection of covered period for forgiveness: Borrower can elect a covered period ending at the point of the borrower’s choosing between eight and 24 weeks after the loan origination date.
- Additional allowable and forgivable eligible expenditures:
- Round one originally included:
- Payroll costs
- Covered mortgage obligations
- Covered rent obligations
- Covered utility payments
- Round two includes the following additional expenses:
- Covered operations expenditures
- Covered property damage costs
- Covered supplier costs
- Covered worker protection expenditure
- For loans not already forgiven from round one, these additional expenses can be utilized for forgiveness purposes
- The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness will continue to apply for both round one and round two loans.
- Existing full-time equivalent and salary/wage reduction haircuts remain in effect as do related safe harbors.
- Round one originally included:
- Loans under $150,000 will submit a simplified, one-page application for forgiveness.
- Clarifies that a business or organization that was not in operation on February 15, 2020 shall not be eligible for an initial PPP loan from round one nor a PPP loan from round two.
- Community financial institutions will have a two-day head start for applications.
- PPP round two is open until March 31, 2021.
How to Prepare for PPP Round Two
While we would expect there to be a little less fury this time and some lenders may not be ready right away, it is worthwhile to gather some information ahead of time.
- Assess eligibility
- Determine your lender’s process and timing
- Gather documentation
- Payroll costs to calculate maximum loan amount (calendar year 2019 or trailing 12 months)
- For non-self-employed borrowers, documentation includes 941s and state quarterly wage unemployment insurance tax reporting forms.
- Partnerships must provide K-1s.
- Documentation for self-employed individuals (with or without employees) is provided in SBA guidance.
- Evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions must also br provided.
- Support and calculations for 25% gross receipts decline
- For borrowers seeking second draw loans of more than $150,000, this is part of the loan application process.
- For borrowers seeking second draw loans of $150,000 or less, this is required on or before applying for loan forgiveness on the second draw loan.
- Employee count: Are you under the 300-employee threshold for second draw loans (or 500 employees for first draw loans) or do you have an exception based on alternative size or NAICS 72 physical location standards?
Refresher: Acceptable Payroll Costs for PPP Loan Application
- 2.5 months of average monthly payroll costs, defined as:
- Gross pay – salary, wages, commissions or tips (capped at $100,000 annually for each employee); PLUS
- Payment for vacation, parental, family, medical or sick leave; PLUS
- Allowance for separation or dismissal; PLUS
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; PLUS
- Payment of state and local taxes assessed on compensation of employees; PLUS
- For an independent contractor or sole proprietor: wage, commissions, income or net earnings from self-employment or similar compensation
EXCLUDES
-
- Amount of annualized compensation in excess of $100,000 (e.g. if an employee earned $125,000, then $100,000 is eligible and $25,000 is not)
- Employer payroll taxes
- Compensation of employees with a principal residence outside the United States
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of FFCRA
- Independent contractors (1099-MISC)
What We Don’t Know: Questions for PPP Round Two
- Will all forgiveness applications remain the same? Apart from 3508-EZ and 3508-S, what will the new simplified forgiveness application look like for loans under $150,000? Will this effectively be the 3508-S but apply to loans up to $150,000?
- Will the caps on eligible compensation for forgiveness for owners and employees earning >$100,000 (annualized) be flexible based on the selected covered period between eight and 24 weeks?
- How will lenders react, especially since many are bogged down with existing PPP forgiveness applications?
- Will lenders accept SBA form applications or will they require borrowers to use online forms or complete lender-approved workbooks as many are doing for the forgiveness process?
- Will lenders enforce a stricter standard for borrowers applying for second draw loans, such as requiring they have applied for forgiveness for their first draw loan?
- How long will the funds last?
Keep in mind, the SBA has 10 days from enactment of the Act to implement PPP provisions, which means we should get more information early in the new year. In the meantime, contact your RKL advisor to discuss specific questions regarding eligibility and loan calculation and visit our Business Recovery Resource Center for continuing coverage of coronavirus relief provisions.
