Blogs

By Marty McCarthy, CPA, CCIFP of McCarthy & Company
Published January 8, 2021

Be sure to check out the NASBP Virtual Seminar that features McCarthy's insights and tips into construction accounting and financial statements for 2021.     


Yesterday we addressed the recent guidance from the Small Business Administration (SBA) and Treasury Department on getting a new Payroll Protection Program (PPP) loan. Today we are going to cover the eligibility requirements for a second PPP loan.

The 42-page Interim Final Rule (IFR) “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.

The Consolidated Appropriations Act of 2021,  signed into law on December 27, includes a provision called the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act). This act allows for entities that previously received a PPP loan to get a second one.

The Economic Aid Act authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (PPP Second Draw Program). The key differences between First Draw PPP Loans and Second Draw PPP Loans are described in this IFR, which explains the loan terms, eligibility requirements, and the application process for Second Draw PPP Loans. The SBA will guarantee loans under the PPP Second Draw Program through March 31, 2021.

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 guarantee percentage is 100%.
• No collateral will be required.
• No personal guarantees will be required.
• The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis.
• The maturity is five years.
• All loans will be processed by 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. 

Eligibility Requirements

The Economic Aid Act generally provides that a borrower is eligible for a Second Draw PPP Loan only if it has 300 or fewer employees and experienced a revenue reduction in 2020 relative to 2019. However, there are further eligibility requirements for entities that have over 500 employees, but no more than 300 in a single location. A Second Draw PPP Loan may only be made to an eligible borrower that has received a First Draw PPP Loan, and 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.

The IFR clarifies that “the full amount” of the borrower’s First Draw PPP Loan includes the amount of any increase on such First Draw PPP Loan made pursuant to the Economic Aid Act. The IFR clarifies that the borrower must have spent the full amount of its First Draw PPP Loan on eligible expenses under the PPP rules to qualify for a Second Draw PPP Loan. This clarification will help ensure the program’s integrity by preventing a borrower from receiving a Second Draw PPP Loan if the borrower has not complied with PPP loan program requirements.

Revenue Reduction Requirement

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 must calculate this revenue reduction by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019.

A borrower that was in operation in all four quarters of 2019 is also deemed to have experienced the required revenue decline if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019. The borrower must submit copies of its annual tax return substantiating the revenue decline.

The Economic Aid Act does not include a general definition of gross receipts for purposes of determining a borrower’s revenue reduction. However, the IFR clarifies that gross receipts are consistent with the definition already used by the SBA. 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 defined and reported on IRS tax return forms.

Gross receipts do not include 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.

The IFR specifies that any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.

Business Concerns with More Than One Physical Location

Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and employs no more than 500 workers per physical location is eligible to receive a First Draw PPP Loan. If each hotel or restaurant location owned by a parent business is a separate legal business entity and employs no more than 500 workers, each hotel or restaurant location is permitted to apply for a separate PPP loan provided it uses a unique employer identification number (EIN).

The Economic Aid Act modified this provision for Second Draw PPP Loans by reducing the limit on employees per physical location to 300. A single business entity that is assigned a NAICS code beginning with 72 is eligible to receive a Second Draw PPP Loan if it employs no more than 300 workers per physical location, meets the revenue reduction requirements and otherwise satisfies the eligibility criteria described in this IFR. Under the Economic Aid Act, the same standard applies to certain news organizations.

Affiliation Rules

Generally, the same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP Loans, except for guidance in this IFR. Business concerns with a NAICS code beginning with 72 qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees. Eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.

Excluded Entities

An entity that is ineligible to receive a First Draw PPP Loan under the CARES Act or Consolidated First Draw PPP is also ineligible for a Second Draw PPP Loan.

The Economic Aid Act also prohibits several additional categories of borrowers from receiving a Second Draw PPP Loan, including:

• A business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents.
• 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.
• Any person required to submit a registration statement under the Foreign Agents Registration Act of 1938.
• A person or entity that receives a grant for shuttered venue operators under the Economic Aid Act.
• Entities in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person owns, controls, or holds at least 20% of any class of equity.
• A publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under the Securities Exchange Act of 1934.

In addition, this IFR provides that an entity that has previously received a Second Draw PPP Loan may not receive another Second Draw PPP Loan. An entity that has permanently closed also cannot receive a Second Draw PPP Loan.

Payroll Cost Calculation

The Economic Aid Act provides that 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. Unlike First Draw PPP Loans, the Economic Aid Act provides that the relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP Loan is either the twelve-month period prior to when the loan is made or calendar year 2019.

The Act also provides tailored methodologies for certain categories of borrowers. The IFR uses calendar year 2020 to refer to the twelve-month period prior to when the loan is made. Calculating payroll costs based on calendar year 2020 rather than the twelve months preceding the date the loan is made simplifies the calculations and documentation requirements for borrowers because payroll records are more commonly created and retained on a calendar-year basis. Allowing borrowers to calculate payroll costs based on calendar year 2020 is also not expected to result in a significant difference in payroll costs compared to the twelve months preceding the date the loan is made because all Second Draw PPP Loans will be made in the first quarter of 2021. However, the rule notes that Second Draw PPP Loan borrowers who are not self-employed (including sole proprietorships and independent contractors) are also permitted to use the precise one-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs.

Consistent with the Economic Aid Act, the IFR include tailored calculation methodologies for seasonal businesses (meaning an employer that does not operate for more than 7 months in any calendar year or that during the preceding calendar year, had gross receipts for any 6 months of that year that were not more than 33.33% of the gross receipts of the employer for the other 6 months of that year), new entities that did not exist for the full twelve-month period preceding the Second Draw PPP Loan, and borrowers assigned a NAICS code beginning with 72 at the time of disbursement. For borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the Economic Aid Act provides that the maximum loan amount is equal to 3.5 months of payroll costs rather than 2.5 months. It also provides for a borrower with a NAICS code beginning with 72 that would fall into more than one category (a seasonal business or a new entity without 12 months of payroll costs), the borrower may calculate its average monthly payroll costs based on the methodology that applies to the entity but may use the 3.5 multiplier applicable to businesses with a NAICS code beginning with 72.

The IFR include tailored calculation methodologies for self-employed individuals and partnerships. These methodologies are based on the corresponding methodologies for self-employed individuals and partnerships that are used for First Draw PPP Loans. These methodologies have been adjusted to eliminate the provision for refinancing an Economic Injury Disaster Loan (EIDL), which does not apply to Second Draw PPP loans and to apply the choice of time period for calculating payroll costs, consistent with other Second Draw PPP loans. The IFR also addresses how farmers and ranchers should calculate payroll costs for a Second Draw PPP Loan.

Businesses that are part of a single corporate group shall in no event receive more than $4,000,000 of Second Draw PPP Loans in the aggregate.

Second Draw PPP Loan Application and Documentation Requirements

The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans. However, no additional documentation to substantiate payroll costs will be required if the applicant used calendar year 2019 figures to determine its First Draw PPP Loan amount, used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and 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, 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 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.

For loans with a principal amount greater than $150,000, the applicant must also submit documentation to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. Such documentation may include tax returns, quarterly financial statements, or bank statements. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan, but it must be submitted on or before the date the borrower applies for loan forgiveness. If a borrower does not submit an application for loan forgiveness, such documentation must be provided upon SBA’s request.

Loan Forgiveness

Loan forgiveness of Second Draw PPP Loans and the loan review process for Second Draw PPP Loans are generally subject to the interim final rules regarding Loan Forgiveness and SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, as modified to conform to the Economic Aid Act by the Consolidated First Draw PPP IFR.

This IFR includes information for lenders, as well as Frequently Asked Questions (FAQs) for both borrowers and lenders. We encourage you to read the IFR for more information.

Be sure to check out the NASBP Virtual Seminar that features McCarthy's insights and tips into construction accounting and financial statements for 2021.     

Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company, PC. Known to be a proactive and astute businessman, he is valued for bringing issues to a client’s attention before the client even knows that something may be wrong. Marty keeps a close eye on what is happening in his clients’ businesses and industries, as well as changes to the tax law, accounting pronouncements, and government regulations, so clients can focus on their businesses. Clients trust Marty’s thoughtful and candid advice. Marty can be contacted at 610.828.1900 or Marty.McCarthy@MCC-CPAs.com.