On January 6, the Small Business Administration (SBA) and Treasury issued new guidance for the Paycheck Protection Program (PPP). The guidance features two interim final rules – for the PPP as Amended by the Economic Aid Act and newly-introduced PPP Second Draw Loans (PPP2).
Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act
- Highlights the rules that govern forgiveness of PPP loans for first-time borrowers
- Modifies provisions related to applications for PPP loans
- Outlines the changes in aid to certain hard-hit organizations, including small businesses and nonprofits
- Confirms that lending under the PPP has been reauthorized through March 31, 2021
The Treasury will now allow first time borrowers to use payroll costs incurred in either calendar year 2019, the 12 months before the loan application, or calendar year 2020 to calculate the maximum loan amount they require. Details of eligibility for loans can be found in this article. The guidance also outlines how to calculate maximum eligibility for loan forgiveness, which we previously discussed here.
Interim Final Rule on Second Draw PPP Loans
Key provisions from the ruling:
- These second draw loans have the same SBA guarantees as the original PPP, which include that:
- no collateral will be required
- the maturity is five years
- the annual interest rate will be 1%
- full loan forgiveness is possible if all criteria are met
- Gross receipts have been defined as:
- For for-profit businesses: “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” *
- For nonprofits, gross receipts include all gross revenue received by the organization, including nonoperating income and investment gross receipts (as defined by IRC section 6033)
Note: if PPP1 forgiveness amount is recorded in 2020, it is excluded from gross revenue calculations.
- Second draw documentation:
- Typically the same as for PPP1.
- If you’re using calendar year 2019 for payroll costs (the same as used for PPP1) you will not have to submit additional documentation if you’re going through the same lender.
- To substantiate revenue decline:
- For loans over $150,000: tax forms, including annual tax forms or, if not available, quarterly financial statements or bank statements.
- For loans under $150,000: documentation not required with the loan application, but much be submitted on or before forgiveness is requested.
- Borrowers will request the second draw with SBA Form 2483-SD.
The key differences between the first and second PPP:
- Eligibility requirements are narrower. The business must have:
- 300 or fewer employees or meet alternative size standard
- experienced a revenue reduction of at least 25% in calendar year 2020 as compared with 2019 or in any quarter of 2020 when compared to the corresponding quarter of 2019. Explanations of how to calculate this revenue reduction as well as other qualifying criteria can be found here
- Recipients of loans under the first PPP may apply for a PPP2 loan only if the borrower has used or will use the full amount of PPP1 funds before the expected date of PPP2 fund disbursement.
SBA Opens PPP Loan Portal
The SBA’s portal for PPP loan applications will reopen on January 11 to select applicants, i.e. those who did not receive a loan in the first draw and who go through what the SBA has termed “community financial institutions” (CDFIs, minority deposit institutions, certified development companies and microloan intermediaries). Applications for PPP2, again through these community lenders, will be allowed beginning January 13. The SBA has not yet announced when the PPP will be reopened to all lenders. Lending will be available until March 31, 2021.
* This definition is taken from the IFR for Second Draw Loans.
We will continue to provide updates and clarity on the latest guidance as we receive and review it. If you have any questions about how these rules may affect you, please contact a member of our tax team at 404-874-6244 or fill in the form below and someone will be in touch.