SBA Provides Rules for Second Draw PPP Loans

Wednesday night, SBA & Treasury released new guidelines for PPP Loans.  The guidance is in two interim final rules. The first is the Business Loan Program Temporary Changes; Paycheck Protection Program as Amended. This updates the rules for PPP loans for first-time borrowers and provides the changes that were made in the recent legislation.   The Second Interim Final Rule provides guidelines for the PPP Second Draw Loans. This update will cover information related to the PPP Second Draw Loans.

Guidelines for PPP Second Draw Loans

To be eligible for the 2nd Draw PPP Loan generally you must (1) have 300 or fewer employees (2) have experienced a revenue reduction of 25% or greater in 2020 in comparison to 2019 and (3) received a First Draw PPP Loan that you have used or will use on or before the expected disbursement date of the Second Draw PPP loan.

The SBA’s Second Interim Final Rule provides these additional clarifications and/or guidelines:

  • Affiliation Rules- The same affiliation rules and waivers that applied for the 1st Draw PPP apply to 2nd Draw PPP except the affiliation rules are waived for businesses with an NAICS code beginning with 72 who have no more than 300 employees or a business that is majority owned or controlled by a business with an NAICS code of 51110 or 5151 or any nonprofit with an NAICS code beginning with 5151.
  • Businesses with more than one location- Businesses with an NAICS code beginning with 72 with more than one physical location may be eligible if they do not have more than 300 employees per physical location.
  • Calculation of the 25% gross receipts reduction- The rule outlines that a business can meet this requirement several different ways. A business may compare any quarter in 2020 to the corresponding quarter in 2019.  If you were not in business in 1st, 2nd or 3rd quarter of 2019 you may compare 4th quarter of 2019 to any quarter in 2020 to determine if you meet the revenue reduction requirement. If you were not in business at all in 2019 but you were in business prior to February 15, 2020 then you may compare Q1 of 2020 to any other quarter in 2020.
  • Simplified method of calculating revenue reduction- The SBA rules clarify that if you were in business for the entire year in 2019 and 2020, you may compare your annual gross receipts in 2020 to the annual gross receipts in 2019 and provide tax returns substantiating the decline.
  • Definition of Gross Receipts- Defined as “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 or allowances.” Generally, receipts are “total income plus “costs of goods sold” and excludes net capital gains or losses. See (c)(2)(i) For businesses with more than one location or affiliates, the SBA provides separate rules. See section (c)(2)(ii) or page 23 of the pdf and (c)(4) or page 24 of the pdf. Amounts from any forgiven First Draw PPP Loan is not included toward any borrower’s gross receipts.
  • Calculating the Loan Amount- The loan is calculated the same as the 1st Draw PPP Loan. It is 2.5 months of your average monthly payroll but the cap for round two PPP is $2 Million.     If you are a business with an NAICS code of 72 then you can use 3.5 months of average monthly payroll. The SBA clarified that the average monthly payroll can be calculated by using (1) calendar year 2020 (2) calendar year 2019 or if you are not self-employed you can also use (3) the one-year period before the loan date.
  • Application Process- The documentation required to apply for the loan is generally the same as the 1st Draw PPP Loan given that the calculation of payroll costs is the same. In fact, the SBA states that if you apply with the same lender for your 2nd draw PPP Loan and you use calendar year 2019 data for both your 1st and 2nd Draw PPP loans, you will not need to submit additional information to substantiate your payroll costs. The one caveat is the documentation supporting the 25% revenue reduction in 2020 relative to 2019.   This documentation may include 941s, annual tax forms, quarterly financials statements or bank statements. For loans under $150,000 you do not need to provide documentation supporting the 25% revenue reduction to apply but you will need to supply this documentation for loan forgiveness.
  • Loan Terms and Conditions- These will be the same as the 1st Draw PPP Loan (no collateral required, no personal guarantees, 5-year maturity date).
  • Loan Forgiveness- Loan forgiveness will be on the same terms as the 1st Draw PPP Loans.

The SBA rule also clarifies that, with the exception of any changes in this latest Interim Final Rule which have been noted above, the past SBA guidance and FAQs for First Draw PPP Loans also applies to Second Draw PPP loans.

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