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Additional Guidance Regarding Second Round of PPP Loans: What You Need to Know

The U.S. Small Business Administration (“SBA”) announced that the Paycheck Protection Program (“PPP”) will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. To 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 PPP Second Draw Borrower Application Form can be found here.

The SBA issued updated guidance surrounding the PPP program on January 6th, which addresses changes made in accordance with the Economic Aid to Hard-Hit Small Business, Non-Profits, and Venues Act (“Act”).

Eligibility Narrowed for Second Draw PPP Loans

A borrower eligible for the Second Draw PPP generally must have 300 or fewer employees and experience a revenue reduction in 2020 relative to 2019. The Second Draw PPP Loan may only be made to an eligible borrower that:

  • Has received a First Draw PPP Loan and
  • Has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan is disbursed

How are Employees Measured?

The SBA calculates the number of employees in accordance with 13 C.F.R .121.106. In order to determine whether a borrower has 300 or fewer employees, an employer must calculate the average number of people employed for each pay period over the business’s latest 12 calendar months. Any person on the payroll must be included as one employee regardless of hours worked or temporary status. SBA affiliation rules do apply.

When is the Full Amount of the First Draw PPP Loan Deemed Used?

The guidance issued by the SBA clarifies that the full amount of the borrower's First Draw PPP Loan must include any increase that is allowed for the First Draw PPP Loan that was permitted by the Act. In addition, the funds spent on the First Draw PPP Loan must be made on eligible expenses in order to be eligible for the Second Draw. Remember that the eligible expenses that the First and Second Draw PPP funding can be used on has been expanded to include not only covered payroll costs, payment on the covered mortgage and rent obligations, and covered utility payments but also covered operation expenditures, damage costs, supplies costs and worker protection expenditures.

The requirement to spend the full amount of the First Draw PPP before receiving the Second Draw PPP Loan could affect borrowers who did not accept the full amount or returned a portion of First Draw PPP funding they were approved for, but may also affect partnerships who did not include any amount for partner compensation when applying for their First Draw PPP Loan.

Under Section 312 of the Act, for an eligible recipient that returned all or part of an included First Draw PPP, the eligible recipient may reapply for a First Draw PPP Loan for an amount equal to the difference between the amount retained and the maximum amount applicable. In addition, the Act clarifies an eligible recipient that did not accept the full amount of the First Draw PPP loan also may request a modification to increase the amount of the First Draw PPP to the maximum amount applicable.

How do You Measure a Revenue Reduction?

The Act made clear that to be eligible for a Second Draw PPP Loan, the borrower 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 in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019.

Example:

Measuring a Revenue Reduction

Assuming all other eligibility requirements are met, this employer would be eligible.

How do You Determine Gross Receipts?

The Act did not define gross receipts but instead, alerted businesses that the SBA guidance would be provided within 10 days. The SBA guidance issued aligns the gross receipts test with the already existing definition of receipts in 13 C.F.R. 121.104 of SBA’s size regulations.

Receipts means all revenue in whatever form received or accrued 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 “gross income”) plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms (such as Form 1120 for corporations; Form 1120S for S corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 for partnerships; Form 1040, Schedule F for farms; Form 1040, Schedule C for other sole proprietorships). Receipts do not include net capital gains or losses; 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; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. For size determination purposes, the only exclusions from receipts are those specifically provided for in this paragraph. 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 receipts.

So how do you determine gross receipts if business tax returns are not yet filed or drafted? The definition clarifies that if an eligible entity has not filed a Federal income tax return with the IRS for a fiscal year which must be included in the period of measurement, SBA will calculate the concern's annual receipts for that year using any other available information, such as the concern's regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts.

In addition, SBA guidance made it clear that any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.

What Documents Are Required?

Loans of $150,000 or less:

The most recent SBA Guidance states that if an eligible employer was in existence for all four quarters in 2019 and 2020 and experienced a reduction in annual receipts of 25% or greater, the banks are allowed to accept the 2019 and 2020 annual tax returns to substantiate its revenue reductions. After all, if a revenue reduction of 25% is reflected for the entire year, it can be assumed for at least one quarter. The SBA felt that this method would help small borrowers who might not have quarterly revenue information available. Don’t panic about filing a 2020 tax return immediately. Remember, the Act states that for PPP Second Draw loans of $150,000 or less the entity can wait to submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits their loan forgiveness application.

A borrower that did not experience a 25% annual decline in revenues, or that was not in operation in all four quarters of 2019, may still meet the revenue reduction requirement under one of the quarterly measurements.

Loans greater than $150,000:

For loans with a principal amount greater than $150,000, the applicant must submit documentation at the time of the application adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. Such documentation that should be deemed adequate by the banks include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.

Provided a Business is an Eligible Entity for the Second Draw, How is Payroll Cost Calculated?

In general, the Act provides that the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million, or $4 million for businesses that are part of a single corporate group. The SBA guidance clarified that the relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP Loan is either the calendar year 2019 or 2020. Calculating payroll costs based on the calendar year 2020, rather than the twelve months preceding the date the loan is made as directed by the Act, will simplify the calculations and documentation requirements for borrowers because payroll records are more commonly created and retained on a calendar-year basis. Allowing borrowers to calculate payroll costs based on the calendar year 2020 is also not expected to result in a significant difference in payroll costs compared to the twelve months preceding the date the loan is made because all Second Draw PPP Loans will be made in the first quarter of 2021. The payroll costs allowed to be included in the calculation mimics the First Draw PPP Loan guidance and caps an employee’s annual compensation to not exceed $100,000.

The 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:

  • Used calendar year 2019 figures to determine its First Draw PPP Loan amount,
  • Used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020) and
  • 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.

Are There any Additional Benefits for the Floundering Hotels and Restaurants?

Multiple Location Employee Identification

Any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and employs not more than 300 employees per physical location is eligible to receive a Second Draw PPP Loan provided all other tests are met. In addition, SBA’s affiliation rules (13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 300 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity and employs not more than 300 employees, each hotel or restaurant location is permitted to apply for a separate PPP loan provided it uses its unique EIN.

Increased Loan Amounts

The Act provides that the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of three and half months of the borrower’s average monthly payroll costs or $2 million, or $4 million for businesses that are part of a single corporate group, provided their NAICS code begins with 72.

We will continue to update you regarding SBA guidance as it continues to be issued. Please reach out to your Bonadio advisor or our CARES Consulting Team to navigate the additional SBA guidance and coordinate other recent law changes made through the Act.

Will Debt Forgiveness be Granted on the Second Draw PPP?

Second Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the loan forgiveness period:

  1. Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan (regarding FTE testing and a salary reduction of greater than 25% for employees who make $100,000 or less annually).
  2. The loan proceeds are spent on payroll costs and other eligible expenses (payment on covered mortgage, rent, and utility payments as well as operational expenditures, damage costs, supplies costs, and worker protection expenditures).
  3. At least 60% of the proceeds are spent on payroll costs.

The loan forgiveness period for both First and Second Draw PPP loans has been revised to include the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period:

  • Beginning on the date that is 8 weeks after the date of disbursement and
  • Ending on the date that is 24 weeks after the date of disbursement.

In other words, it is no longer required that it is only an 8 or 24-week period, but instead, a covered period can end sometime between the 8 and 24-week period. Identifying the covered period is important as a loan forgiveness application is required to be submitted to the lender within 10 months after the end of the loan forgiveness covered period.

Lastly, the forgiveness of First or Second Draw PPP will not be included as cancellation of debt income, and the expenses paid with PPP debt ultimately forgiven will be deductible for federal income tax purposes.

Additional Funding Potentially Available from First Draw PPP

The most recent SBA guidance also clarifies that a First Draw PPP loan can be increased if a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation. If this applies to a business, the lender is directed to electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation. Self-employment income of general active partners can be reported as a payroll cost, reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties multiplied by 0.9235. Compensation includible in the PPP calculation is capped at $100,000 on an annualized basis. Any request for an increase must be submitted on or before March 31, 2021.

Please reach out to your Bonadio advisor or our PPP Consulting Team to navigate these recent SBA changes. Careful consideration and coordination will be needed in order to maximize federal stimulus funding, including PPP, Employee Retention Credit, Shuttered Venue programs, EIDL grants, and more.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.