It’s Back! More from the Paycheck Protection Program: First Time PPP Loans and Second Draw Loans

Taylor Gaver, Steve Kesten

President Trump signed into law the Consolidated Appropriations Act of 2021 on December 27, 2020, which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”), which reopens the Paycheck Protection Program (“PPP”) for small and medium sized businesses that have yet to receive a PPP loan and allows certain small and medium sized businesses particularly affected by the COVID-19 pandemic that have already received PPP loans under the original CARES Act program (“First Draw Loans”) the opportunity to obtain a second PPP loan (“Second Draw Loans”). Then, on January 6, 2021, the Small Business Administration in conjunction with the Department of Treasury published an Interim Final Rule on the Paycheck Protection Program (“PPP”) Second Draw Loans.

On February 22, 2021, President Biden announced important changes to the PPP. Specifically, businesses and non-profit entities with fewer than 20 employees have an exclusive window to apply to receive PPP loans. This special application window began February 24, 2021 and closes March 10, 2021. This will allow certain small businesses priority in claiming a loan from the general PPP pool over their larger counterparts. Additionally, sole proprietors, independent contractors, and self-employed individuals can calculate their PPP loan amount based on gross income instead of based on profit reported on an annual tax return. Further, small business owners with recent non-fraud related felony convictions and those who are delinquent on federal student loan debt are not disqualified from applying for PPP loans.

To read a full description of the changes adopted by the SBA pursuant to President Biden’s announcement, click the link here.

First Draw Loans
The PPP reopened the week of January 11, 2021, for certain eligible small and medium sized entities that have yet to receive a PPP loan. The eligibility rules are the same rules that were in place under the CARES Act, prior to the enactment of the Economic Aid Act. Borrowers can apply for First Draw Loans until March 31, 2021.

Key Terms of PPP First Draw Loan and Second Draw Loans

TermFirst Draw PPP LoansSecond Draw PPP Loans
Interest Rate1%1%, calculated on a non-compounding, non-adjustable basis
Maturity 5 Years5 Years
Maximum Loan AmountThe lesser of (i) 2.5 times average monthly payroll costs or (ii) $10,000,000
**average monthly payroll costs are measured during the 1-year period before the date on which the loan is made
The lesser of (i) 2.5 times average monthly payroll costs or (ii) $2,000,000
**average monthly payroll costs are measured at the election of the borrower during the 1-year period before the loan is made or the calendar year 2019
*** for hotels, restaurants, etc. (NAICS code of 72), the maximum loan amount is 3.5 times average monthly payroll costs up to $2,000,000
Eligibility (Maximum Number of Employees)500 or less300 or less
Waiver of Affiliation RulesAffiliation rules are waived for:
- Hotels, Restaurants, etc. (NAICS Code of 72) with 500 or less employees
- A franchise with a franchise identifier code
- A business that receives financial assistance from an SBA-licensed Small Business Investment Company
- Housing cooperatives, 501(c)(6) organizations or destination marketing organizations with no more than 300 employees
Same, except that Hotels, Restaurants, etc. can only have 300 or less employees
Eligibility (Reduction in Revenue)None needed to be shownReduction of 25% or more in 2020 relative to 2019
Ineligible EntitiesSee Is Your Business Ineligible For A PPP Loan?Same as First Draw Loans, plus (in pertinent part) the following are ineligible:
- businesses engaged in political activities or lobbying
- entities organized under the laws of China or Hong Kong
- entities owned or controlled 20% or more by the United States President, VP, head of an executive department or member of Congress, or such person’s spouse
- publicly traded companies
Collateral RequiredNoNo
Personal Guarantee RequiredNoNo
Eligible for ForgivenessYesYes
Covered Period8 weeks, or if a PPP loan was taken out prior to June 5, 2020, Borrower’s choice of (i) 8 weeks after the disbursement of the PPP loan or (ii) 24 weeks after the disbursement of the PPP loanBorrower’s choice of (i) 8 weeks after the disbursement of the PPP loan or (ii) 24 weeks after the disbursement of the PPP loan

Maximum Loan Amount

While many of the terms of a Second Draw Loan are similar to those for First Draw Loans, one of the major deviations is the maximum loan amount. The maximum amount of a Second Draw Loan is much lower, being the lesser of (i) 2.5 times average monthly payroll costs or (ii) $2,000,000; provided, however, that entities with NAICS Code 72 (Hotels, Restaurants, etc.) may receive loans of up to 3.5 times their average monthly payroll costs. Another minor distinction between the First Draw Loans and Second Draw Loans is that average monthly payroll costs for First Draw Loans were measured during the one-year period before the date on which the loan was made, but for Second Draw Loans, the average monthly payroll costs are measured at the election of the borrower during the one-year period before the loan is made or the calendar year 2019.

Maximum Number of Employees

To be eligible for a First Draw Loan, a borrower, together with its foreign and domestic affiliates, had to have 500 or less employees. For Second Draw Loan, that number has been reduced to 300. It is important to note that the same affiliation rules will apply for Second Draw Loans.

Reduction in Revenue

A key eligibility requirement for a Second Draw Loan is that a borrower must show a reduction in gross receipts of 25% or greater in 2020 as compared to 2019. That revenue reduction can be shown on an annual basis comparing gross receipts from 2019 to that of 2020, or can be shown for any given quarter of 2019 as compared to the same quarter of 2020. The IFR clarifies that if a borrower is showing the reduction in revenue on an annual basis, it must submit copies of its annual tax forms substantiating the reduction in revenue. The IFR further clarifies that the definition of “gross receipts” is consistent with the definition of receipts in 13 C.F.R. 121.104 of the Small Business Administration’s size regulations, and means all revenue in whatever form received or accrued (in accordance with the borrower’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. The definition of “gross receipts” does not include the following: (i) any forgiveness amount from a First Draw Loan; (ii) 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); (iii) proceeds from transactions between a concern and its domestic or foreign affiliates; and (iv) amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

Ineligible Entities

A borrower that received a First Draw Loan will only be eligible to receive a Second Draw Loan if such borrower spent the full amount of the First Draw Loan on eligible expenses prior to the date upon which the proceeds of the Second Draw Loan are to be disbursed and if such borrower meets all other eligibility requirements. Similar to the original PPP, a borrower can only receive one Second Draw Loan.

The list of ineligible entities is generally the same for First Draw Loans and Second Draw Loans; except that there are a few additional ineligible entities for Second Draw Loans, being businesses engaged in political activities or lobbying, entities organized under the laws of China or Hong Kong, entities owned or controlled 20% or more by the United States President, Vice-President, head of an executive department or a member of Congress or such person’s spouse, and publicly traded companies. Additionally, an entity that has permanently closed cannot apply for a Second Draw PPP loan.

Application Requirements for Second Draw Loans

Generally, the application requirements for a Second Draw Loan will be the same as a First Draw Loan; however, no additional documentation will be required to substantiate payroll costs if the borrower applying for a Second Draw Loan used (i) 2019 figures to determine the amount of its First Draw Loan, (ii) used 2019 figures to determine the amount of its Second Draw Loan, and (iii) the lender is the same for both loans. Additionally, borrowers receiving loans over $150,000 must provide relevant supporting documentation evidencing 2020 revenue reduction of 25% or greater as compared to 2019.

For loans under $150,000, there will be a simplified application published by the Small Business Administration, and supporting relevant documentation related to revenue reduction does not have to be provided when applying, but it will be necessary to submit such supporting relevant documentation when applying for loan forgiveness.

The Second Draw Borrower Application Form can be found HERE.

Loan Forgiveness

The rules applicable to loan forgiveness for First Draw Loans and Second Draw Loans are similar; provided, that the covered period for a Second Draw Loan is the borrower’s choice of (i) 8 weeks or (ii) 24 weeks. For First Draw Loans, only borrowers receiving PPP loans prior to June 5, 2020, could choose an 8-week or a 24-week covered period. All other borrowers had to use a 24-week covered period. Additionally, the Economic Aid Act now allows for other expenses to be eligible for forgiveness for both First Draw Loans and Second Draw Loans that were previously not eligible under the CARES Act, including:

  1. covered operations expenditures – software, cloud computing and other human resource and accounting needs;
  2. covered property damage – damage from looting or vandalism that was not covered by insurance;
  3. covered supplier costs – expenditures to a supplier that are essential to the operations of an entity; and
  4. covered worker protection expenditures – costs associated with personal protective equipment and other investments to help comply with federal, state and/or local guidance related to COVID-19.

Record Retention

Borrowers receiving PPP loans in amounts greater than $150,000 are required to retain supporting documentation for 6 years; however, borrowers receiving PPP loans in amounts less than $150,000 will only be required to retain supporting documentation for 4 years (instead of 6 years) for employment records and 3 years for other records. This revised record retention policy applies retroactively to cover First Draw Loans.

Clarification of Tax Treatment of Forgiveness of Covered Loans

After the enactment of the CARES Act in March of 2020, there were many questions about how loans received under the PPP would be treated for income tax purposes and whether expenses paid using PPP loan proceeds could be deducted. The CARES Act establishes that forgiven amounts of a PPP loan will not be included in the gross income of a borrower; however, it made no mention of the deductibility of expenses paid using PPP loan proceeds if such PPP loan, or part thereof, is ultimately forgiven. The Internal Revenue Service addressed this issue in Notice 2020-32, and stated that no deduction is allowed for any expenses paid from the proceeds of a PPP Loan to the extent that the PPP loan is forgiven and excluded from taxable income.

The Economic Aid Act has confirmed that the amount of a PPP loan that is forgiven will not be included in the gross income of the PPP borrower, and further clarified (and overruled IRS Notice 2020-32) that PPP borrowers who receive forgiveness are allowed to deduct otherwise deductible expenses that were paid with proceeds from a PPP loan.