Drill Down on Second Round PPP Loans
The Consolidated Appropriations Act of 2021 is a long-awaited bill that combined individual stimulus payments and the expansion of the Paycheck Protection Program. The bill also has far-reaching tax consequences, it confirmed that “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness,” and “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” This means that the forgiven amount from a PPP loan will have no effect on income or tax credits, and a company can now deduct expenses paid for with PPP funds.
“PPP 2” is a new, more targeted small-business assistance program. Here are the answers to the most frequently asked questions.
When will the new PPP loans will be available?
The application window for Paycheck Protection Program (PPP) forgivable loans was opened Friday, January 15, for lenders with $1 billion or less in assets, and applies for both first- and second-draw PPP loans. The program will begin accepting applications for first- and second-draw loans from large lenders on Tuesday, January 19.
For all types of PPP loans, no collateral or personal guarantee is required. For these new loans, any amount not forgiven becomes a loan at 1% for five years.
What kinds of PPP loans will be available?
- At the high level, there is funding for three categories of PPP loans in this legislation: 1st time PPP loans for businesses who qualified under the CARES Act but did not get a loan;
- 2nd draw PPP loans for businesses that obtained a PPP loan but need additional funding; and
- More funds for businesses that returned their first PPP loan, or did not get the full amount for which they qualified.
- Are there PPP loan maximum amounts?
The loans are capped at $10 million for first-time borrowers, and $2 million for second-time PPP borrowers.
In general, first- and second-time PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs (with a cap per employee of $100,000 annualized) in 2019, 2020, or the year prior to the loan. PPP borrowers with such as hotels and restaurants can receive up to 3.5 times their average monthly payroll costs on second-draw loans.
The maximum for a first-draw PPP loan is $10 million, the same as in the original PPP. Applicants must provide a Form 941, Employer’s Quarterly Federal Tax Return, and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever is used to calculate the loan amount), or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions.
The maximum loan amount for second draw loans is $2 million. In all the examples below, the loan amount caps out at $2 million. Businesses that are part of a single corporate group can’t receive more than $4,000,000 of second draw PPP loans total. An eligible entity may receive only one second draw loan.
As before, a business may qualify for up to 2.5 times average monthly payroll costs. You can arrive at this figure either by one of two methods— your choice (except hospitality businesses see below):
- Multiply average gross monthly payroll cost for the 1-year period before the date the loan is made by 2.5, or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 2.5.
New companies not yet in business for the 1-year period preceding February 15, 2020, will use a slightly different formula to arrive at the average monthly payroll costs. They will divide the payroll costs paid or incurred by the date they apply by the number of months in which those costs were incurred and multiply the result by 2.5 (or 3.5 for hospitality businesses). Again, new businesses must have been in business by February 15, 2020 in order to be eligible.
Seasonal businesses may apply based on the average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020. A seasonal employer is defined as one that:
- “Does not operate for more than 7 months in any calendar year; or
- During the preceding calendar year, had gross receipts for any 6 months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other 6 months of that year.”
Businesses with a NAICS code beginning in 72 (generally hospitality and restaurant businesses) may receive up to 3.5 times average monthly payroll cost using their choice of these two methods:
- Multiply average gross monthly payroll cost for the 1-year period before the loan is made by 3.5 or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 3.5.
Note that all of these methods allow the business to use payroll costs incurred or paid during the applicable time period. (You may incur a payroll cost but not actually pay it until the pay period.)
What are eligible costs? Anything new?
PPP borrowers can have their first- and second-draw loans forgiven if the funds are used on eligible costs. As with the first round of the PPP, the costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities. To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period between eight or 24 weeks.
In addition, the following costs are now eligible:
- Covered worker protection and facility modification expenditures, including PPE, personal protective equipment, to comply with COVID-19 federal health and safety guidelines, including:
- a drive-through window facility;
- an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
- a physical barrier such as a sneeze guard;
- an expansion of additional indoor, outdoor, or combined business space;
- an onsite or offsite health screening capability.
- Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020, that were not covered by insurance or other compensation.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating expenditures, and a number of back-office functions, including accounting. Payments for any business software or cloud computing service for business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
Who is eligible for “simplified” forgiveness?
Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The SBA has yet to create the simplified application form which includes all PPP loans, both under the first round and the new ones, by late January. The form may not require additional materials unless necessary to substantiate revenue loss requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
We recommend considering opening a separate bank account to deposit your PPP funds and track expenditures.
What if I didn’t get a PPP loan before?
There is funding for “first draw” PPP loans and you can apply on terms similar to the original CARES Act. You do not have to demonstrate the 25% revenue loss for a first-time loan, and your business may qualify if it has more than 300 employees, provided it qualifies based on the previous CARES Act rules.
First time PPP loans are available to borrowers that were in operations on February 15, 2020, and are from one of the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations with NAICS codes starting with 72 that have fewer than 500 employees per physical location.
- 01(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” that have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15. 2020. Sports leagues are not eligible.
- News organizations that are majority-owned or controlled by an NAICS code 511110 or 5151 business or not-for-profit public broadcasting entities with a trade or business under NAICS code 511110 or 5151. The size limit for this category is no more than 500 employees per location.
PPP applicants must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records; payroll tax filings; Form 1099-MISC, Miscellaneous Income; Form 1040, Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming; income and expenses from a sole proprietorship; or bank records.
Who is eligible for second draw PPP loans?
Many small businesses and independent contractors may be eligible for second draw PPP loans if they received a PPP loan previously and qualify. First, similar to the first rounds of PPP, eligible small businesses may include:
- Small businesses, nonprofit organizations, organizations for veterans, tribal business concerns, and small agricultural cooperatives.
- Sole proprietors, self-employed individuals or independent contractors.
- Certain small news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible.
Borrowers are eligible for a 2nd-draw PPP loan of up to $2 million, provided they have:
- 300 or fewer employees. Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.
- Used or will use the full amount of their first PPP loan on or before the expected date for the second PPP loan to be disbursed to the borrower. The borrower must have spent the full amount of the first PPP loan on eligible expenses.
- Experienced a revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019. This is calculated by comparing gross receipts in any 2020 quarter with an applicable quarter in 2019, or, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019.
Gross receipts defined 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. Forgiven first-draw PPP loans are not included in the 2020 gross receipts.
Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with certain ties to China. The CARES Act made an exception for certain non-profits and agricultural cooperatives which are not normally eligible for SBA 7(a) loans. Publicly traded companies are not eligible to receive second draw PPP loans.
How is the 25% reduction in revenues calculated?
Business owners will compare gross receipts of the business before expenses are subtracted. They will compare those for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25%.
Businesses must have been in operation by February 15, 2020 to be eligible. What if you weren’t in business all of 2019?
- If you were not in business during the first or second quarter of 2019 but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
- If you were not in business during the first, second or third quarter of 2019, but you were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
- A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020 to determine whether gross receipts were reduced by at least 25%.
The periods are now comparing any of the 4 quarters of 2020 to the corresponding quarter in 2019 –or – the entire 2020 year compared to 2019.
Note that according to the legislation, for loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss. We won’t know exactly what the SBA will consider acceptable until it provides guidance.
Does it matter if the company is cash or accrual based? The application must be made on the same basis as the company’s tax return.
What counts as payroll?
Payroll is the same as defined in the CARES Act with one new addition: Group benefits are defined to include group life, disability, vision, or dental insurance.
Payroll does not include:
- The compensation paid to an employee in excess of $100,000 on an annualized basis;
- Any compensation of an employee whose principal place of residence is outside the United States;
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Do not include amounts paid to 1099 contractors; they may apply on their own!
Self-employed? Independent contractors and the self-employed with no employees will still qualify based on 2.5 months of net profit (capped at $100,000) on their Schedule C tax form for 2019 or 2020. Businesses with a NAICS code beginning in 72 qualify for 3.5 times average monthly payroll.
Partnerships will qualify by using the sum of:
- Net earnings from self-employment of individual general partners in 2019 or 2020 (borrower’s choice), as reported on IRS Form 1065 K-1, reduced by section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.923537, that is not more than $100,000, divided by 12;
- The average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower;
- Multiplied by 2.5 or 3.5 for businesses with a NAICS code beginning in 72.
Can I reapply for a loan if I returned my first one?
Yes! If you returned all or part of your PPP loan, you may apply for an “amount equal to the difference between the amount retained and the maximum amount applicable.” Or, if you did not accept the full amount you may request a modification to allow you to borrow the full amount for which your business is eligible.
Is there loan forgiveness for second draw PPP loans?
Just like the first round of PPP, these loans may be entirely forgiven if spent for primarily payroll during the proper time period. Currently there are three PPP loan forgiveness applications: Form 3508, Form 3508EZ, and Form 3508S. Borrowers can continue to use those forms for PPP loans they received earlier in 2020, unless and until new applications are released. However, we expect Treasury and the SBA to release new loan forgiveness applications.
In addition, there is also simplified (but not automatic) forgiveness for loans of $150,000 or less.
Will an EIDL Grant be subtracted from my PPP for loan forgiveness?
No. The legislation repeals the requirement that an EIDL grant (advance) be deducted for purposes of PPP forgiveness. In addition, the SBA Administrator is required within 15 days of when this legislation is enacted to “ensure equal treatment” for borrowers whose loans have already been forgiven and who had their grants subtracted from the forgiven amount.
How do I apply for one of these PPP loans?
Not all lenders who offered PPP loans in the first round will participate this time around. Lenders approved by the SBA will make these loans. You’ll need to submit the following information with the application:
- If you are self-employed with no employees, your IRS Form 1040 Schedule C (whichever was used to calculate loan amount); documentation that you are self-employed (such as 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.
- If you are not self-employed, 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. A partnership must also include its IRS Form 1065 K-1s.
- If you are self-employed with employees, your 2019 or 2020 IRS Form 1040 Schedule C (whichever was used to calculate loan amount), 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. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
For all of these borrowers, you do not have to include documentation of your reduction of revenues if the loan amount is less than $150,000, but you will have to submit it when you apply for forgiveness.
If the loan amount is greater than $150,000, then you will have to submit documentation of the reduction in revenues, which may include documentation sufficient to establish that your business experienced a 25% reduction in revenue, which may include relevant tax forms (including annual tax forms), or if not available, a copy of the quarterly income statements or bank statements.
If you are applying for a second draw PPP loan with the first lender that processed your first draw loan you don’t need to include duplicate information already submitted.
REACH OUT TO US: Our accountants played a large role in helping many of our clients receive Paycheck Protection Program loans last year. Now, the PPP is back and better, and clients will again need advice and assistance in accessing the 2nd program. We can help you figure out if you are eligible and should apply, whether a 1st time or 2nd time borrower, and how to maximize your forgiveness. We do have the recently released PPP applications and can review them with you. We will continue to delve into this legislation and will provide additional insights by updating this article.We are available for your questions at 855-666-4201.