PPP Loans Round 2: Requirements, Eligibilty, Application Process for Small Businesses
The Paycheck Protection Program (PPP) is back for round 2. The first PPP program, which ran between April and August of 2020, distributed $523 billion in forgivable government-backed loans to 5.2 million small businesses to help them keep paying their workers through the Covid-19 pandemic’s economic devastation. This second round of PPP lending, part of an overall COVID economic stimulus package, The Economic Aid Act, which passed on December 27, 2020 provides for a $284 billion in new funding pool of money to help struggling businesses survive during the pandemic; as was recently reported in The New York Times. During the first program, there was a lot of confusion about who got it, how much had to be spent on payroll, loan forgiveness requirements, etc. Since the pandemic is still raging and causing economic harm, this second round of the SBA’s PPP program aims to provide the hardest-hit businesses (especially restaurants, travel, hospitality, event venues, small business) with a chance at a second loan. The PPP round 2 comes with some changes to eligibility requirements and limits on loan amounts. Here is what small businesses need to know.
Who is eligible to apply?
The new round of PPP funding is available to both first-time applicants and returning borrowers. For first time applicants, most of the original rules apply. A company or non-profit organization generally has 500 or fewer employees, although companies in certain industries can qualify with more employees. The applicants also must certify that “current economic uncertainty makes this loan request necessary” to support their continuing operations. This new round is geared towards making sure small businesses can receive it rather than large companies that actually have access to the capital markets. This recent stimulus bill has opened it up to allow more groups, including nonprofit housing cooperatives, newspapers, broadcasters, and local chambers of commerce to be eligible to apply. Check out the SBA PPP guidance on the rules.
For first time applicants, part of the eligibility requirements require that the business must have been in operation on Feb. 15, 2020 to qualify. Self-employed business owners, including independent contractors, are also eligible for loans, but a rule imposed by the Small Business Administration requires sole proprietorships to have shown a profit on their 2019 tax return to qualify. The rules are more strict for those seeking a second loan.
Larger businesses are not eligible: Second-loan applicants must have 300 or fewer workers. (Publicly traded companies, political lobbyists and members of Congress are barred from receiving a second loan.)
They also have to show a certain amount of hardship: a 25 percent drop in gross receipts between comparable quarters in 2019 and 2020. They must also show that they used all of the money from the first loan in allowable ways.
Businesses with 500 or fewer employees that have not previously received a PPP loan may apply for a PPP loan to help with payroll, rent, utilities, healthcare costs and more
Businesses that have already received a PPP loan may apply for a second draw PPP loan if they have used all of their first loan (or will have by the time of disbursement of the second loan), have no more than 300 employees, and can demonstrate a revenue reduction of at least 25%
Cap of $4M for businesses that are part of a single corporate group (1-6-21 IFR) for Second Draw Loans
How do I measure a 25% decrease in revenue or gross receipts?
A Forbes article recently reported that companies may qualify for a second PPP loan by showing a 25% decrease in revenue. According to the latest Interim Final Rule (IFR) on second-draw PPP loans, revenue is captured using gross receipts. The IFR generally 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.
Simplified PPP loan forgiveness process
Bank Of America issued guidance on the PPP loan process which confirms that the new legislation includes provisions that further simplify the PPP loan forgiveness application process for loans of $150,000 or less, whereby a borrower signs and submits a one-page certification to the lender. The legislation requires the SBA to produce a simplified forgiveness application not more than one page in length within 24 days from enactment into law. Borrowers can have their loan forgiven if they follow the program’s rules.
According to reporting from the Journal of Accountancy, the US Small Business Administration (SBA) and Treasury published updated Paycheck Protection Program (PPP) loan forgiveness guidance and forms, including a one-page application for borrowers that received a PPP loan of $150,000 or less. That form, called the PPP Loan Forgiveness Application Form 3508S, can be used by borrowers that received a PPP loan of $150,000 or less.
At least 60 percent of the loan must be used to pay workers, and the rest must be spent on qualifying expenses. Borrowers can choose how much time they want to spend the money, as long as it’s between eight and 24 weeks.
Keep in mind, borrowers don’t have to keep their employees’ headcount and wages at pre-pandemic levels to have their loan forgiven, if they certify that they had to cut staff to comply with federal guidance on “sanitation, social distancing, or any other work or customer safety requirement related to Covid-19.” Loans that aren’t forgiven carry a 1 percent interest rate and a repayment term that will generally run for five years. According to an article from TXCPA Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with congressional intent in the CARES Act.
Loans that aren’t forgiven carry a 1 percent interest rate and a repayment term that will generally run for five years. According to an article from TXCPA, Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with congressional intent in the CARES Act.
When can you apply?
Similar to the first program last year, the loans are issued by banks and other lenders. But some lenders got a head start. Starting on January 19th, borrowers can apply. It is expected to have participation from thousands of lenders including major banks like JPMorgan Chase and Wells Fargo, to fintechs like PayPal and Square. According to NYT’s article, A small group of community lenders were able to start taking applications a few days early. They include Community Development Financial Institutions, Minority Depository Institutions, and Certified Development Companies — specially designated lenders that focus on underserved populations, including Black- and other minority-owned businesses.
How much will you get?
First-time borrowers are eligible for 2.5 times their average monthly payroll cost, up to $10 million. (For sole proprietors, the calculation is different. They can borrow 2.5 times the monthly profit they reported on their 2019 Schedule C tax form).
Loans for second-time borrowers are capped at $2 million. Food services and lodging businesses, such as restaurants and hotels, can get loans of 3.5 times their average monthly payroll, but the $2 million cap still applies.
What else can you use the money for?
The other 40 percent can go toward rent, utilities, mortgage interest payments, and other expenses.
The new stimulus bill added some items to the list: payments to suppliers, certain property damage not covered by insurance, Covid-related safety gear for workers, and the cost of erecting barriers and otherwise altering spaces to comply with social distancing guidelines and other health mandates.
How do you find a lender?
The best place to start will be a bank you’ve used already. Last year, many of the larger banks only took applications from borrowers they had worked with before or had an existing relationship. Most borrowers seeking a second loan will be able to apply through the lender that issued their first loan. If you do a Google search for “PPP round 2” lenders are running ads. Thousands of community banks and specialist lenders are also participating. The Small Business Administration runs a Lender Match program to connect applicants with willing lenders.
What paperwork and documents will you need?
More than you may have needed during the spring of 2020, since they have made the program rules more strict. Exact requirements vary by lender, but applicants will generally need copies of their payroll records. Many lenders will also request the business’s 2019 tax return and documents like articles of incorporation, or a state business registration certificate. Those seeking second loans will need records showing that their sales dropped at least 25 percent in one quarter last year. Lenders are not required to collect that proof before making a loan under $150,000, but they must get it before the loan is eligible to be forgiven. Most lenders plan to ask for it during the application process.
Interim Final Rules Released (technical jargon)
The Small Business Administration (SBA) and Department of the Treasury (Treasury) announced that the Paycheck Protection Program (PPP) will reopen for certain borrowers on Jan. 11, 2021, and released the applications for first-and second-draw loans. Additionally, two interim final rules were recently issued on the program. The first interim final rule (IFR) is intended to cover new first-draw PPP loans authorized by the Consolidated Appropriations Act, 2021 (CAA) as well as the forgiveness applications of existing PPP loans for which the forgiveness proceeds have not yet been remitted. The second IFR applies to second-draw PPP loans authorized by the CAA, highlighting key differences between first- and second-draw loans and providing that, unless stated otherwise, the guidance under the first IFR also applies to second-draw loans. The large CPA firm BakerTilly gives a good summary breakdown of the takeaways from each ruling.
IFR 1 - PPP as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act)
Consolidates previously issued IFRs and guidance into one IFR, and incorporates amendments made by the CAA (i.e., expanded costs eligible for loan use/forgiveness, a borrower can now choose the end of their covered period from any date on or between the dates that are eight and 24 weeks after the loan was disbursed)
Allows borrowers to use 2019 or 2020 information to calculate their first-draw loan amount
Allows certain borrowers to re-apply or request an increase in their first-draw PPP loan amount, including:
– Partnerships whose original loans did not include amounts for partner compensation
– Borrowers who returned all or part of a PPP loan, or did not accept the full amount for which they were approved
IFR 2 - PPP second-draw loans
Eligibility requirements for a second-draw loan generally differ from the initial round as follows (though the same affiliation rules largely apply); a business must:
– Have 300 or fewer employees, though businesses in the accommodation and food service industries and eligible news organizations can have 300 or fewer employees per location;
– Be able to demonstrate a 25% reduction in gross receipts during a calendar quarter in 2020, relative to the same quarter in 2019, or experienced a reduction in annual gross receipts
of 25% or more in 2020 when compared to 2019 (if the business was in operation in all four quarters in 2019); and
– Have used or will use their entire first-draw PPP loan for eligible purposes.
Appears to provide that the alternative size standard based on tangible net worth and average income after federal income taxes available to determine eligibility for a first-draw loan does not apply; a borrower must pass the 300-or-fewer-employee test referenced above.
Generally includes “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source” in the definition of gross receipts for the purpose of assessing the 25% reduction test, though forgiven first-draw loan proceeds are specifically excluded.
Provides the maximum loan amount is the lesser of (special rules apply for seasonal employers and “new entities”):
– 2 ½ months of the borrower’s 2019 or 2020 average monthly payroll costs (3 ½ months for businesses in the accommodation and food service industries), or
– $2 million ($4 million in the case of businesses that are part of a single corporate group).