Everything you need to know about Round 2 of the Paycheck Protection Program
The Paycheck Protection Program (PPP) was resurrected with the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) which was included in the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. The Economic Aid Act contains several provisions to support entities impacted by the Coronavirus pandemic, including $284.5 billion appropriated for another round of PPP funding. Many provisions of this round of PPP are the same as the CARES Act, but the Economic Aid Act expands eligibility to additional entities and permits entities that meet certain eligibility requirements to apply for a second PPP loan. The following is a deep dive into the rules and provisions entities need to know before applying for more PPP funds.
Boyer & Ritter is prepared to help businesses and nonprofits seeking a first or second loan under the new Payroll Protection Program. Contact us today. Our team can assist with helping determine eligibility and, if appropriate, applying for a PPP loan using an existing banking relationship or by providing an alternative lender.
Jump to a section below:
|Timing||Economic Necessity Certification|
|Loan Calculation||Covered Period|
|Revenue Reduction Test||Improved Coordination Between PPP and ERTC|
|First Draw PPP Loan Increases||Additional Resources|
Most banks will be able to start submitting PPP applications to the SBA beginning Tuesday, January 19. All PPP loan applications must be submitted and funded by March 31, 2021.
How long will the money last? The short answer is, we do not know. The CARES Act appropriated $350 billion for PPP loans and the money was gone within two weeks. Shortly thereafter, Congress passed the Paycheck Protection Flexibility Act which provided an additional $320 billion, bringing the available amount to $670 billion, but the program petered out and ended with $522 billion in approved loans. This round of PPP permits a new group of PPP borrowers to obtain a PPP loan for the first time, but significantly limits which businesses may obtain a second PPP loan and limits their loans to $2 million.
Lenders are anticipating a very quick start to this round of PPP funding and entities should act fast if they believe they are eligible and want to participate in this round of PPP.
Eligibility for this round of PPP will depend on whether it is an entity’s first PPP loan (first draw) or if it is an entity’s second PPP loan (second draw).
For entities receiving their first draw PPP loan in 2021
The following entities may be eligible if they were in operation on February 15, 2020 and together with its affiliates (if applicable):
- Any business (Partnership, C-Corp, S-Cop, LLC), sole proprietors, independent contractors, self-employed individuals, 501(c)(3) non-profit organization (including faith-based organizations), 501(c)(19) veterans organizations, or Tribal business concern that:
- Employs no more than 500 employees, or
- Meets the size standard in number of employees established by SBA in 13 C.F.R. 121.201 for the entities industry, or
- Meets the alternative size standard – had (1) maximum tangible net worth is not more than $15 million; and (2) an average net income after Federal income taxes (excluding carry-over losses) of the businesses for the two full fiscal years before the date of the application is not more than $5 million.
- Entities with a NAICS Code that begin with 72 (Accommodation and Food Services) that employ no more than 500 per location.
- 501(c)(6) organizations (NEW) that:
- The organization does not receive more than 15% of its receipts from lobbying activities;
- The lobbying activities of the organization do not comprise more than 15% of the total activities of the organization;
- The costs of the lobbying activities of the organization did not exceed $1,000,000 during the most recent tax year of the organization that ended prior to February 15, 2020; and
- The organization employs not more than 300 employees.
For entities receiving their second draw PPP loan in 2021
The following entities may be eligible if together with its affiliates (if applicable):
- Received a first draw PPP loan;
- 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;
Note: some lenders are requiring borrowers to provide a loan forgiveness application or other supporting documentation in addition to the certification on the second draw borrower application form. This is not explicitly required in guidance.
- Employs no more than 300 employees;
- Entities with a NAICS Code that begin with 72 (Accommodation and Food Services) that employs no more than 300 per location; and
- Experienced a revenue reduction in 2020 relative to 2019 of at least 25% during a quarter (see revenue reduction below for additional information)
The SBA, in consultation with the Department of Treasury, issued FAQ 14 to assist borrowers in determining their number of employees.
The FAQ states borrowers may use their average employment over the same time periods (as they used for determining payroll costs) to determine their number of employees, for purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operation for 12 months).
Further, Section 121.106 of the Small Business Act defines how the SBA calculated number of employees. The SBA counts all individuals employed on a full-time, part-time, or other basis. Part-time and temporary employees are counted the same as full-time employees.
The following entities are specifically ineligible for a first or second draw PPP loan even if the above eligibility is met:
- Entities engaged in any activity that is illegal under Federal, state, or local law;
- You are a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20% or more of the equity of the entity is presently incarcerated or, for any felony, recently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony with the last year;
- You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government;
- Entity received or will receive a grant under the Shuttered Venue Operator Grant program under section 324 of the Economic Aid Act;
- 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 your business;
- Entity is an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f);
- Entity has permanently closed;
- Entity affiliated with the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, or that retain a China-resident person as a member of the entity’s board of directors;
- Entity registered under the Foreign Agents Registration Act;
- Entities in bankruptcy proceedings; or
- Entities that previously received a second draw PPP loan.
In general, first and second draw loans for borrowers with employees are calculated as 2.5 times average monthly payroll costs. First draw PPP loans are limited to $10 million, while second draw loans are limited to $2 million. Entities with a NAICS code beginning with 72 (Accommodation and Food Services) obtaining a second draw PPP loan can calculate their loan as 3.5 times average monthly payroll costs, limited to $2 million.
How to compute average monthly payroll costs
Borrowers who apply for a PPP loan in 2021 and who are not self-employed (including sole proprietorships, independent contractors, and partnerships) are permitted to use the greater of 2019, 2020 or the precise 1-year period before the date on which the loan is made to calculate payroll costs.
Payroll costs include gross wages and tips; employer contributions to employee group health, life, disability, vision, and dental insurance; retirement contributions; and state and local taxes assessed on employee compensation. There has been no change in payroll costs from 2020 PPP loans.
Payroll costs are reduced by compensation paid to an employee in excess of $100,000, compensation to non-US residents, and other adjustments.
Average monthly payroll costs can be computed using the following methodology:
- Aggregate payroll costs from 2019, 2020 or precise 1-year period before the date on which the loan is made.
- Subtract any cash compensation to employees paid in excess of $100,000 and compensation paid to non-US residents.
- Calculate average monthly payroll costs (divide the amount from step 2 by 12)
Seasonal employers – a borrower can qualify as a seasonal employer if it does not operate more than 7 months in any calendar year or, during the preceding calendar year, it had gross receipts for any 6 months of that year that were not more than 33.33% of the gross receipts for the other 6 months of that year. Seasonal employers can use the average total payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019 and ending February 15, 2020.
Entities that did not exist during the 1-year period preceding February 15, 2020 – can use the sum of the total monthly payments by the borrower for payroll costs paid or incurred by the borrower as of the date on which the borrower applies for the second draw PPP loan by the number of months in which those payroll costs were paid or incurred.
Sole proprietors, independent contractors, and self-employed individuals – borrowers who file a Form 1040, Schedule C may include the net profit reported on line 31 of their 2019 or 2020 Schedule C, capped at $100,000, in addition to payroll costs paid to employees for purposes of calculating average payroll costs.
Partnerships – can use the sum of net earnings from self-employment of individual general partners in 2019 or 2020, 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 0.9325, that is not more than $100,000 for each partner, in addition to payroll costs paid to employees for purposes of calculating average payroll costs.
Farmers and ranchers – borrowers who file a Form 1040, Schedule F may include gross income on line 9 of their 2019 or 2020 Schedule F, capped at $100,000. Additional guidance from the SBA requires farmers or ranchers to subtract any employee payroll costs from gross income to avoid double-counting amounts that represent pay to the employees of the farmer or rancher.
Refinancing EIDL loans
First draw borrowers who received an Economic Injury Disaster Loan (EIDL) between January 31, 2020 and April 3, 2020 can refinance the outstanding amount into the PPP loan at the time of their first draw PPP loan application. In order to refinance an EIDL loan, it must also have been used for purposes other than paying payroll costs and other allowable uses for loans under the PPP rules. Borrowers who qualify to refinance their EIDL loan can add it to their first draw PPP loan amount.
Second draw borrowers are unable to refinance EIDL loans with their PPP loan.
As mentioned above, businesses must have experienced a revenue reduction in 2020 relative to 2019 of at least 25% during a quarter to qualify for a second draw PPP loan.
A borrower must calculate this revenue reduction by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the gross receipts for the corresponding quarter for 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% between the quarters and is therefore eligible for a second draw PPP loan. In an IFR issued, the SBA also notes that a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019.
Gross receipts 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.
Gross receipts do not include the following: net capital gains or losses, 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, and investment income.
Additionally, first draw PPP loans and EIDL loans/advances are excluded from gross receipts for purposes of determining whether the revenue reduction test has been met.
For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986. This section defines gross receipts as the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts, (ii) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, (iii) gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T), (iv) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and (v) the gross amount received as investment income, such as interest, dividends, rents, and royalties.
Entities not in operation for all four quarters or who began operating in 2020
If the applicant was not in business during the first or second quarter of 2019, but was in business during the third and fourth quarters of 2019, the applicant 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% from the applicant’s gross receipts during the third quarter in 2019);
If the applicant was not in business during the first, second, or third quarter of 2019, but was in business during the fourth quarter of 2019, the applicant 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 first, second, third or fourth quarter of 2020–demonstrating a reduction of 40% from the applicant’s gross receipts during the fourth quarter in 2019); or
If the applicant was not in business during 2019, but was in operation on February 15, 2020, the applicant 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%from the applicant’s gross receipts during the first quarter in 2020).
For loans greater than $150,000, documentation of revenue reduction is necessary at the time of the loan. Documentation may include relevant tax forms, including annual tax forms, quarterly financial statements, or bank statements.
For loans of $150,000 or less, documentation is not required with the loan application but will be required with the loan forgiveness application.
The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required to first draw PPP loans. However, 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.
Lender requirements vary from lender to lender but primarily consist of providing a payroll summary report prepared by a recognized third-party payroll processor or quarterly payroll tax returns. Other documentation such as support for employee benefits may also be requested.
Entities with self-employed owners (independent contracts, sole proprietors, farmers/ranchers, partnerships) will need to provide filed or drafted annual tax returns to verify self-employment income.
The Economic Aid Act provides entities that either returned amounts or did not accept the full amount of their first draw PPP loan are eligible to receive an increase in the following cases:
- In the case of an eligible recipient that returned all or part of the first draw PPP loan, the eligible recipient may reapply for an amount equal to the difference between the amount retained and the maximum amount applicable.
- In the case of an eligible recipient that did not accept the full amount of the first draw PPP loan, the eligible recipient may reapply for an amount equal to the difference between the amount retained and the maximum amount applicable.
The SBA has not yet provided guidance on how borrowers may apply for this increase.
This provision allows borrowers to potentially increase their first draw PPP loan and obtain a second draw PPP loan in 2021, if eligible.
Among several other certifications, the first and second draw PPP loan applications require borrowers to certify “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.
Previously the SBA and Treasury provided a safe harbor in Treasury FAQ #46 published May 13, 2020 providing that any PPP borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
As of January 18, there has been no additional guidance to indicate whether this guidance is applicable to first and second draw PPP loans in 2021. If it is applicable, we do not know if entities will be required to aggregate their first and second draw PPP loans when applying the safe harbor.
Entities that pursue funding in this round of PPP loans should document their current economic uncertainties that support their certification. It is also important to note that PPP loan recipient information will be public information.
First and second draw PPP loan borrowers can have their entire PPP loan forgiven if the loan proceeds are used on forgivable costs and the entity maintains FTE levels and rate of pay for their employees throughout the covered period. These topics have been covered in multiple webinars and articles previously provided by Boyer & Ritter and have not changed from the CARES Act/Paycheck Flexibility Act and related guidance. It is also important to note that at least 60% of the loan forgiveness must be allocable to payroll costs.
Costs eligible for forgiveness
- Payroll Costs;
- Compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal
- Costs related to the continuation of group health care, life, disability, vision, or dental benefits
- Retirement contributions
- State and local taxes assessed on employee compensation
- Owner income replacement for self-employed borrowers
- Payroll costs do not include:
- Payroll costs for which a credit is claimed under the Employer Retention Tax Credit (ERTC)
- Payroll costs for which a credit is claimed under the Family First Coronavirus Response Act
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- SBA has interpreted a mortgage to be any debt secured by an asset
- Mortgage agreement must be in place by February 15, 2020
- Rent payments;
- Rent agreement must be in place by February 15, 2020
- Related party rent or lease payments are forgivable if payments to a related party are no more than the amount of mortgage interest owed on the property during the covered period is attributable to the space/asset being rented to the entity.
- Utility payments;
- Services must be in place by February 15, 2020
- Covered operations expenditure (NEW);
- Payments for any business software or cloud computing service that facilitates 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).
- Covered property damage costs (NEW);
- Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- Covered supplier costs (NEW); and
- Expenditures made by a borrower to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
- Covered worker protection expenditures (NEW);
- (A) Operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; (B) such expenditures may include—(i) the purchase, maintenance, or renovation of assets that create or expand—(I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in subparagraph (A), as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (ii) the purchase of—(I) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (C) such expenditures do not include residential real property or intangible property.
The Economic Aid Act allows borrowers to choose a covered period between 8 and 24 weeks, beginning on the day the loan proceeds are received by the borrower. Because the Economic Aid Act changed the loan forgiveness covered period from either an 8- or 24-week period to a covered period between 8 and 24 weeks at the election of the borrower, the SBA eliminated the “alternative covered period” previously allowed under prior guidance.
NOTE: The Economic Aid Act requires borrowers to evaluate owner compensation and employees with gross compensation over $100,000 and apply limitations based on the chosen covered period. For example, if a business chooses a 12-week covered period, forgiveness for gross wages paid to a specific employee is limited to $23,077 ($100,000 / 52 X 12).
The Economic Aid Act amended language in the CARES Act and now permits PPP borrowers to also claim the Employer Retention Tax Credit. Entities may be eligible for the ERTC during the covered period of their PPP loan and should consider consulting with their CPA to maximize both opportunities. For example, if an entity is eligible for a second draw PPP loan because gross receipts in Q4 of 2020 is less than 25% of gross revenue in Q4 of 2019, the entity is also eligible for the ERTC in the first quarter of 2021 which will overlap with the covered period of their PPP loan. The same payroll costs cannot be used for both programs. The entity will need to carefully consider which payroll costs should be for each program and will need to also evaluate their non-payroll costs to maximize the benefit. Visit our website for additional resources related to ERTC.
The Economic Aid corrected language in the original CARES Act to ensure borrowers will not have to pay any federal income taxes on PPP loan amounts forgiven and all expenses incurred to obtain PPP loan forgiveness are deductible for federal income tax purposes. It is important to note that not all states conform to the federal tax code and some states may continue to tax the loan forgiveness.
First and second PPP loans obtained in 2021 will be subject to the same preferential tax treatment for federal purposes.
Boyer & Ritter’s Business Relief Advisory Services
We recognize these are challenging times, and the Boyer & Ritter team can provide business relief services to your entity. To learn more about engaging us for business relief assistance please contact us HERE.
Consolidated Appropriations Act (including the Economic Aid Act) https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf
Paycheck Protection Program Borrower Application Form Revised January 8, 2021 - https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form.pdf
Paycheck Protection Program Borrower Application Form Revised January 8, 2021 - https://home.treasury.gov/system/files/136/PPP-Second-Draw-Borrower-Application-Form.pdf
PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf