Paycheck Protection Program: Key Terms of the PPP First Draw and Second Draw
January 11, 2021
Updated 1/14/2021 at 11:30am ET
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (The Economic Aid Act or the Act) was signed into law. The Economic Aid Act authorizes the U.S. Small Business Administration (SBA) to guarantee a new round of loans under the Paycheck Protection Program (PPP). The Act provides an opportunity for businesses that missed out on the first round of PPP funding to obtain a First Draw PPP Loan. Additionally, some businesses that received funding in the first round may now be eligible to obtain a Second Draw PPP Loan. Loan applications can be submitted through March 31, 2021, unless allocated funding is exhausted prior.
In connection with the Act, the SBA issued a set of Interim Final Rules (IFRS) to clarify the loan terms, eligibility requirements, and application process for both First Draw and Second Draw PPP Loans. Below are some of the key terms outlined in the IFRS.
First Draw PPP Loans
PPP loans granted via CARES Act funding are now referred to as First Draw PPP Loans. The Act granted the SBA authority to make additional First Draw PPP Loans to businesses that did not participate in the CARES Act PPP round. The Act also revises certain PPP requirements going forward.
The Act expanded eligibility to include businesses that are 501(c)(6) housing cooperatives, news organizations, and destination marketing organizations. Publicly traded entities are now excluded from eligibility.
The definition of payroll costs has been clarified to include payments for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance.
Consistent with the initial forgiveness terms, at least 60% of the proceeds must be used on payroll costs with the remaining 40% used on covered nonpayroll costs. The Act expanded nonpayroll costs to include:
- Business software or cloud computing costs
- Property damage due to public disturbances not covered by insurance
- Supplier costs
- Worker protection costs
Additionally, EIDL advances no longer reduce the forgiveness amount.
Flexible Covered Period
Borrowers may now choose a forgiveness period within a window of 8-24 weeks after loan origination.
Increase in Original Loan Amount
The Act allows for certain borrowers that returned all or a portion of the original PPP loan amount to reapply or request an increase in their original PPP loan amount. Partnerships that did not include partners’ compensation in determining payroll costs may apply for an increase in the original amount. Lastly, seasonal employers may request an increase based on revised maximum loan calculations. All requests for increases must be submitted by the March 31, 2021 application deadline.
Second Draw PPP Loans
- Generally subject to the same terms, conditions, and requirements as First Draw PPP Loans
- Eligibility for Second Draw Loans is narrower than the requirements for a First Draw PPP Loan
- Size of eligible business reduced from 500 or fewer employees to 300 or fewer employees (NAICS code 72 exclusion still applies)
- Business must have experienced a quarterly revenue reduction in 2020 relative to the same quarter in 2019 of 25% or greater
- Must have received a First Draw PPP Loan and fully exhausted (or will fully exhaust) the loan amount prior to obtaining a Second Draw PPP Loan
- Must have been in business as of February 15, 2020 and still in operation
- Businesses that are 501(c)(6) housing cooperatives, news organizations, destination organizations now eligible
- Several categories of borrowers are specifically excluded from receiving a Second Draw PPP Loan
- Publicly traded entities
- Business primarily engaged in political or lobbying activities
- Entities organized under or with ties to China or Hong Kong
- Maximum loan amount reduced from $10 million to $2 million
Revenue Reduction Requirement
The most significant revision to eligibility conditions for Second Draw PPP Loans is the addition of a revenue reduction requirement. A borrower must be able to show a revenue reduction of 25% or greater by comparing quarterly gross receipts for one quarter in 2020 with gross receipts for the corresponding quarter of 2019. Gross receipts are determined as follows:
- Includes the following amounts received or accrued (in accordance with the entity’s accounting method):
- Sales of products or services, net of returns and allowances
- Interest and dividends
- Fees and commissions
- Gross receipts based on definition in Internal Revenue Code section 6033 and include the following:
- Contributions, gifts, and grants
- Dues or assessments from members or affiliated organizations
- Sales from business activities (including unrelated business activity)
- Amounts received from sales of assets
- Gross amount received as investment income (interest, dividends, rents, royalties)
The IFRS further noted that any forgiveness received on First Draw PPP Loans will be excluded from the gross receipts calculation.
Payroll Cost Calculation
The calculation remains consistent with First Draw PPP Loans and is based on 2.5x the average monthly payroll amounts. NAICS Code 72 businesses may borrow up to 3.5x the average monthly payroll amount. The IFRS provide tailored examples to assist borrowers with these calculations based on various situations (seasonal employers, self-employed individuals, partnerships, etc.).
The IFRS note that application and documentation requirements remain largely unchanged. Furthermore, the borrower will not have to provide duplicate documentation to support payroll cost amounts if the borrower (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 and (iii) the lender remains the same.
Loans greater than $150,000 must submit documentation to support the required revenue reduction. Documentation may include relevant tax forms, quarterly financial statements, or bank statements. Loans less than $150,000 are not required to provide documentation for the revenue reduction at the time of application and can wait to submit documentation when applying for forgiveness.
Second Draw PPP Loans are eligible for forgiveness on the same terms and conditions as First Draw PPP Loans.
Community financial institutions can accept First Draw PPP Loan applications beginning Monday, January 11, 2021 with Second Draw PPP Loan applications starting Wednesday, January 13th, 2021. Shortly thereafter, the PPP program will open to all participating lenders.