Interim Final Rules and Application Released for Second Draw PPP Loans

On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) (Pub. L. 116-260) into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic.

Section 311 of the Economic Aid Act added a new temporary section 7(a)(37) to the Small Business Act (15 U.S.C. 636(a)(37)) that authorizes the U.S. Small Business Administration (SBA or the Administration) to guarantee Paycheck Protection Program Second Draw Loans (PPP Second Draw Program), under generally the same terms and conditions available under the Paycheck Protection Program (PPP) established under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).  Under Section 311, SBA may guarantee loans under the PPP Second Draw Program through March 31, 2021 (“Second Draw PPP Loans”) to borrowers that previously received a PPP loan under section 7(a)(36) of the Small Business Act (“First Draw PPP Loans”) and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.

On January 6, 2021, the SBA and U.S. Treasury Department issued interim rules applicable to the Second Draw PPP loans. This post will highlight some of the key provisions.

Terms:

Second Draw PPP Loans are generally subject to the same terms, conditions and requirements as First Draw PPP Loans. These include, but are not limited to the following terms:

1. The guarantee percentage is 100 percent;
2. No collateral will be required;
3. No personal guarantees will be required;
4. The interest rate will be 100 basis points or one percent, calculated on a noncompounding, non-adjustable basis;
5. The maturity is five years;
6. All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds; and
7. FAQ and other guidance issued by the SBA and/or Treasury with respect to First Draw PPP loans generally apply to Second Draw PPP Loans

Eligibility:

The Economic Aid Act includes terms and conditions, including but not limited to terms relating to eligibility and a borrower’s maximum loan amount, that apply only to Second Draw PPP Loans and do not apply to First Draw PPP Loans, regardless of when the First Draw PPP Loan is made. The Economic Aid Act generally provides that a borrower is eligible for a Second Draw PPP Loan only if:

1. It was eligible for a First Draw PPP Loan;
2. It received a First Draw PPP Loan;
3. It 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 borrower
4. It has 300 or fewer employees; and
5. It experienced a revenue reduction in 2020 relative to 2019 (see below).

Who is Excluded:

An entity is not eligible for a Second Draw PPP Loan even if they otherwise meet the eligibility requirements if:

1. It was excluded from eligibility under the Consolidated First Draw PPP rules;
2. It is primarily engaged in political activities or lobbying activities
3. It has certain connections China, including those with a director who is a resident of China;
4. It is required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612)
5. It receives a grant for shuttered venue operators under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act;
6. The President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the entity;
7. It is a publicly traded entity;
8. It has already received one Second Draw PPP Loan; or
9. It has permanently closed.

Revenue Reduction Requirement:

The Economic Aid Act provides 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 may calculate this revenue reduction in the calendar year 2020 in several ways:

1. For a borrower in businesses for all quarters of 2019:
   1. It had gross receipts during the first, second, third, or fourth quarter in 2020 that demonstrate at least a 25 percent reduction from the applicant’s gross receipts during the same quarter in 2019.  For example: a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters, and is therefore eligible for a Second Draw PPP loan.
   1. Annual tax forms demonstrate that it experienced a reduction in annual receipts of 25 percent or greater in 2020 compared to 2019.  This method will be particularly important for small borrowers that may not have quarterly revenue information readily available. Moreover, this approach is was deemed to be appropriate because, if annual filings show a 25 percent revenue reduction, then at least one quarter in 2020 would have had at least a 25 percent revenue reduction.

• For a borrower not in business during the first or second quarter of 2019, but in business during the third and fourth quarters:
  • It had gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the applicant’s gross receipts during the third or fourth quarter of 2019 (for example, an applicant that had gross receipts of $50,000 in the third quarter of 2019 and had gross receipts of $30,000 in the third quarter of 2020–demonstrating a reduction of 40 percent from the applicant’s gross receipts during the third quarter in 2019); or

• For a borrower not in business during the first, second or third quarter of 2019, but in business during the fourth quarter:
  • It had gross receipts during the first, second, third, or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the fourth quarter of 2019 (for example, an applicant that had gross receipts of $50,000 in the fourth quarter of 2019 and had gross receipts of $30,000 in the fourth quarter of 2020–demonstrating a reduction of 40 percent from the applicant’s gross receipts during the fourth quarter in 2019); or

• For a borrower not in business during 2019, but in operation on February 15, 2020:
  • It had 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 (for example, an applicant that had gross receipts of $50,000 in the first quarter of 2020 and had gross receipts of $30,000 in the fourth quarter of 2020 – demonstrating a reduction of 40 percent from the applicant’s gross receipts during the first quarter in 2020).

Gross Receipts:

The Economic Aid Act does not include a general definition of gross receipts for purposes of determining a borrower’s revenue reduction.  The interim rules define 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. Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.  Gross receipts do not include the following: 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.  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 gross receipts.

Importantly, gross receipts do not include any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020.

The interim rule sets forth additional information regarding gross receipts for affiliates and nonprofit organizations.

Maximum Loan Amount:

Generally, 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.  A borrower is in the Accommodation and Food Services sector and has reported a NAICS code beginning with 72 as its business activity code on its most recent IRS income tax return may be entitled to three and a half months of its average monthly payroll costs.

Payroll costs are calculated in the same manner as First Draw PPP Loans, which included the requirement that the borrower must subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the time period during which the payments are made or the obligation to make the payments is incurred.

When calculating payroll costs, the borrow may base the calculation on calendar year 2020, calendar year 2019.  The maximum amount of a typical Second Draw PPP loan is the lesser of:

1. the product obtained by multiplying: (A) the average total monthly payment for payroll costs incurred or paid by the borrower during 2019 or 2020 (at the election of the borrower); by (B) 2.5; or
2.  $2,000,000.

Special calculation rules are established for: 1) seasonal employers, 2) borrowers that did not exist during the 1-year period preceding February 15, 2020, but was in operation on February 15, 2020, 3) borrowers assigned a NAICS code beginning with 72 at the time of disbursement; 4) farmers and ranchers; 5) borrowers who have income from self-employment; 6) borrowers that file taxes as partnerships; and 7) businesses that are part of a single corporate group.  In addition, a borrower is in the Accommodation and Food Services sector and has reported a NAICS code beginning with 72 as its business activity code on its most recent IRS income tax return may multiply its average payroll costs by 3.5 instead of 2.5.

Application and Required Documentation

The applicant must submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form including the required certifications and the required documentation. At the time an applicant submits its loan application form, it must submit the following:

1. General Rule: Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, must be provided.
   1. Partnerships: A partnership must also include its IRS Form 1065 K-1s.

• Self-Employed with Employees: 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, if applicable, must be provided.

• Self-Employed with No Employees:
  • 2019 or 2020 (whichever was used to calculate loan amount) Form 1040 Schedule C;
  • 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; and
  • a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020.

• For loans greater than $150,000: documentation sufficient to establish that the applicant experienced a reduction in revenue, which may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

• For loans in the amount of $150,000 or less: documentation sufficient to establish that the applicant experienced a reduction in revenue on or before the date the borrower submits an application for loan forgiveness.  Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

• NOTE: no additional documentation to substantiate payroll costs will be required if the applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and (iii) 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. In such cases, the Department has stated that additional documentation is not required because the lender already has the relevant documentation supporting the borrower’s payroll costs. The lender may request additional documentation, however, if on further review the lender concludes that it would be useful in conducting the lender’s good-faith review of the borrower’s loan amount calculation.

Certification:

In addition, an authorized representative of the applicant must submit a certification similar to that required for the First Draw PPP Loan, with the following changes:

1. Applicant must certify that the applicant has not and will not receive another Second Draw Paycheck Protection Program Loan; and
2. Applicant has realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period.

In addition, a representative will need to certify that the proper documentation has been provided (loans greater than $150,000) or will be provided when either seeking forgiveness or at the request of the SBA; and that the borrower used the funds (or will have used the funds) from the First Draw PPP Loan prior to disbursement for eligible costs.

In addition, the representative will certify that it is not excluded pursuant to the disqualifying factors discussed above (See “Who is Excluded?”).

Forgiveness:

Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans, except that Second Draw PPP Loan borrowers with a principal amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

Generally speaking, loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs. These expenses must be made over a covered period between eight and 24 weeks, as selected by the borrower.

Covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures were added as eligible expenses in section 304 of the Economic Aid Act. Except for loans made pursuant to section 7(a)(36) of the Small Business Act for which SBA has remitted a loan forgiveness payment to the lender before December 27, 2020, these eligible expenses apply to any loan made before, on, or after December 27, 2020, including forgiveness of such a loan.

For additional information contact Christopher L. Voltz by phone (412-594-5580) or email (cvoltz@tuckerlaw.com).

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