Guest Post:
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, referred to as the Economic Aid Act, has earmarked $284.5 billon for a Second Draw of Paycheck Protection Program (“PPP”) loans. The new legislation for the PPP loans is similar to the First Draw with a few significant changes.
Use of PPP funds
- Payroll costs, including paid sick leave and group insurance benefits provided by the employer;
- At least 60% of the total loan amount must be used on payroll expenses to qualify for full loan forgiveness;
- Operating costs, including payments for mortgage, rent, utilities, software, and human resources and accounting needs;
- Property damage sustained during protests and disturbances in 2020, unless covered by insurance;
- Payments to a supplier covering contracts and purchase orders in effect before taking out the second-draw loan; and
- Personal protective equipment and modification made to meet health and safety requirements.
Eligibility requirements
Second Draw PPP Loans narrows the eligibility requirements for First Draw PPP Loans. A borrower must meet the following eligibility criteria:
- 300 or fewer employees;
- Experienced a revenue reduction in 2020 relative to 2019;
- May only be made to an eligible borrower that (i) has received a First Draw PPP Loan, and (ii) 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 to the applicant;
- The borrower must have spent the full amount of its First Draw PPP Loan on eligible expenses under the PPP rules to be eligible for a Second Draw PPP Loan.
Revenue Reduction Requirement
- Borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019.
- If borrower was not in business in 2019 but was in operation on February 15, 2020, the borrower must have gross receipts during the second, third, or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the gross receipts of the entity during the first quarter of 2020.
- If borrower was in operation in all four quarters of 2019, it is deemed to have experienced the revenue reduction if it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.
- The gross receipts of affiliates a borrower is calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate. If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern unless a borrower sold a segregable division during 2020, then the gross receipts will continue to include the receipts of the division that was sold.
- Gross receipts for an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or eligible destination marketing organization, means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986.
- The amount of any forgiven First Draw PPP Loan shall not be included toward any borrower’s gross receipts.
- Employee Size Multiple Locations – Any business concern that has more than one physical location and that employs not more than 300 employees per physical location is eligible to receive a Second Draw PPP Loan if it is assigned a NAICS code beginning with 72 at the time of loan disbursement and otherwise meets the eligibility criteria.
Excluded Entities
Some of the more interesting changes to the exclusions in the Second Draw:
- If you were ineligible for the First Draw the same will apply for the Second Draw.
- Certain entities organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong;
- Business that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China
- A publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange;
- An entity that has previously received a Second Draw PPP Loan; or
- An entity that has permanently closed.
Payroll Cost Calculation
What is the maximum loan amount for a Second Draw PPP Loan – same rules as First Draw regarding payroll costs with a few exceptions – generally – lesser of two and half months of the borrower’s average monthly payroll costs in 2019 or 2020 or $2,000,000. Exceptions – Accommodation and Food industry is 3.5 months or $2,000,000.
Loan forgiveness reduction from EIDL
The December 2020 stimulus bill revised how Economic Injury Disaster Loan (EIDL) grants impact PPP loan forgiveness. Originally, PPP loan forgiveness would be reduced by the amount a business received in EIDL grants. That has been changed so that loan forgiveness will not be reduced regardless of whether a business received an EIDL grant.
Meredith S. Campbell
Chair Employment and Labor Group
Co-Chair Corporate Investigations, Governance & Risk Management
Email mcampbell@shulmanrogers.com T(301)255-0550
