Second Draw PPP Loans Update

On Friday, January 8th, the Small Business Association (“SBA”) released new guidance on what it is calling “Second Draw PPP Loans,” a forty-two page document that serves to define many heretofore ambiguous terms used in the program’s description. The rule takes effect immediately, lenders will determine how soon prospective borrowers can apply, and such borrowers must submit everything required by their lenders by March 31, 2021. 

In order to qualify for a Second Draw PPP Loan, a borrower (which must employ three hundred or fewer employees) must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. A borrower must calculate this revenue reduction by comparing the borrower’s quarterly gross receipts for one quarter with the borrower’s gross receipts for the corresponding quarter of 2019. For example, a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40% between the quarters, and is therefore eligible for a Second Draw PPP loan, assuming all other eligibility criteria are met (i.e., a “First Draw PPP Loan” was received and has been or will be fully used for eligible expenses on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower). Alternatively, if a borrower was in operation in all four quarters of 2019, it can qualify if its annual receipts show a 25% or greater reduction in 2020 compared to 2019.

Critically, the new rule 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.  Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual, the “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax forms.  

Gross receipts do not include: 

(1) 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); 

(2) proceeds from transactions between a concern and its domestic or foreign affiliates; 

(3) amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder, or customs broker; and 

(4) the forgiveness amount of a First Draw PPP Loan received in 2020.  

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.  Certain special requirements are provided in the new rule when determining gross receipts of affiliated employers and employers with more than one physical location. 

Notably, as stated in earlier updates, the maximum amount of a Second Draw PPP Loan is the lesser of two-and-a half months of a borrower’s average monthly payroll costs (three-and-a-half months for borrowers with an NAICS code beginning with 72, or accommodation and food services), or a $2 million cap.  The two-and-a-half months’ salary calculation is the same as for First Draw PPP Loans.  Also, the terms and conditions (including those associated with forgiveness) of Second Draw PPP Loans are the same as those for First Draw PPP Loans.

Finally, the documentation required to substantiate the payroll cost calculation is generally the same as documents required for First Draw PPP Loans.  Because of that, additional documentation to substantiate payroll costs will not be needed if the borrower:   

(1) used calendar year 2019 figures to determine its First Draw PPP Loan amount; 

(2) used the calendar year 2019 figures to determine its Second Draw PPP Loan amount; and 

(3) the lender for the same for the borrower’s Second Draw PPP Loan is the same as the lender for the first draw loan.

Additionally, for loans under $150,000, a borrower does not have to provide documentation of the 25% reduction with the application, although that documentation will be required when requesting forgiveness.  If the above criteria are not met, or if a borrower is requesting a principal amount greater than $150,000, documentation must be submitted proving a 25% or greater revenue reduction in 2020 relative to 2019.  That documentation can include tax forms, quarterly financial statements, or bank statements.

Please contact your MSPC advisor if you have any questions, and we will continue to keep you posted on this and more important developments.