SBA Issues Guidance on the Second Round of PPP

The Small Business Administration’s interim final rules regarding the latest round of the Paycheck Protection Program answered some key questions.

PPP will be open to businesses wanting to apply for first and second loans the week of Jan. 11. According to the U.S. Treasury Department and SBA, “[t]o promote access to capital, 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. The PPP will open to all participating lenders shortly thereafter.”

The SBA’s loan portal is now open, and you can go here for full details. According to the SBA, “[t]he documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans. However, no additional documentation to substantiate payroll costs will be required if the applicant:

• “(i) used calendar year 2019 figures to determine its First Draw PPP Loan amount,
• “(ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and
• “(iii) the lender for the applicant’s Second Draw PPP Loan is the same as the lender that made the applicant’s First Draw PPP Loan.”

Previously, we released a blog that hit on some of the new PPP highlights. Here, we’ll recap the questions that the SBA’s guidance addresses.

• To qualify for a second PPP loan, a borrower must have received a PPP loan during the first round, which closed Aug. 8, 2020. Borrowers who want to apply for their first PPP loan will need to meet the eligibility requirements that are in the CARES Act and restated in the Jan. 6 interim final rules.
• Those who apply for a second PPP loan will need to have spent the full amount of their first loan before they’ll get the money from their second.
• Borrowers for a first or second loan will need to show that they suffered a 25% reduction in gross receipts during one quarter in 2020 compared to the corresponding 2019 quarter. Those gross receipts will include all revenues from the normal business operation before expenses. But they don’t include amounts the business borrowed, and that includes received and forgiven PPP loans.
  • For the SBA’s purposes, “receipts” means all revenue a business receives in whatever form received or accrued from whatever source. This includes revenue 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 “gross income” for sole proprietorships, plus “cost of goods sold.”
• A business will need to be an “eligible entity,” while the interim rules define as:

• A business
• An independent contractor, an eligible self-employed individual
• A sole proprietor
• A nonprofit organization eligible for a first-draw PPP loan
• A veteran’s organization
• A tribal business concern
• A housing cooperative, A small agricultural cooperative
• An eligible 501(c)(6) organization
• An eligible nonprofit news organization
• Certain first and second PPP borrowers can get a loan of up to 2.5 times their average monthly payroll costs for 2019, 2020, or the year before the loan. Hotels and restaurants can get as much as 3.5 times their average monthly payroll costs for second PPP loans. The max for a first PPP loan is $10 million and $2 million for a second loan. There’s a $4 million cap for businesses that are part of a single corporate group.
• For loans over $2 million, an eligible-entity business will need to satisfy the “necessity test” if they’re applying for a second loan. This test is based on whether a business can certify that the PPP loan is “necessary to support the on-going operations of the applicant.” This test can be hard to prove, so make sure to talk with your financial and legal advisors. The SBA has previously said it won’t question necessity certifications of borrows whose loans don’t exceed $2 million. But the IRS and other watchdog groups could still question the certification.
• The SBA will forgive loans of $150,000 or less if the borrower submits certification that:
  • Is not more than one page in length,
  • Includes a description of the number of employees the borrow was able to keep on staff because of the loan,
  • Lists the estimated total amount of the loan spent on payroll costs, and
  • Includes the total loan amount. (The SBA hasn’t released the simplified form but plans to do so by Jan. 20.)
• Unlike the first round of PPP, the relevant period for calculating a borrower’s payroll costs for a second PPP loan is the 12 months before when the loan is made or calendar year 2019.
• Businesses that have declared bankruptcy can’t receive a second PPP loan.
• If a borrower previously applied for a PPP loan but then returned the money, they can still apply for the second round.

If you have questions about the latest round of PPP funding and if it’s right for your business, we can help you decide.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.