Publications

01.21.2021

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) permits certain eligible Paycheck Protection Program (“PPP”) borrowers that previously received a PPP Loan (a “First Draw PPP Loan”) to apply for an additional loan under the PPP (a “Second Draw PPP Loan”). The below addresses certain provisions of the Economic Aid Act governing the issuance of Second Draw PPP Loans. The below is intended to be a general summary of the provisions. If you have any questions regarding the PPP or any other SBA loan programs, please contact our Banking and Finance team.

What to do before applying for a Second Draw PPP Loan?

PPP borrowers are encouraged to confirm whether they are entitled to an increased principal amount under their First Draw PPP Loan. In addition to authorizing Second Draw PPP Loans, the Economic Aid Act modified the calculation for determining the principal amount of loans for Seasonal Employers, New Entities and Farmers and Ranchers. Borrowers that are eligible for an increased First Draw PPP Loan principal amount based on these changes in the Economic Aid Act are permitted to request an increase from their lender so long as such borrower has not yet already received forgiveness from the SBA for its First Draw PPP Loan. The updated calculations for these specific categories are described in greater detail below.

When are Second Draw PPP Loans available?

As of the date of this FAQ, all eligible PPP lenders are now able to submit Second Draw PPP Loan applications. Second Draw PPP Loans must be made by March 31, 2021.

Who is eligible for a Second Draw PPP Loan?

A borrower is eligible for a Second Draw PPP Loan only if the borrower meets the following eligibility requirements:

• It received a First Draw PPP Loan and it has used, or will use, the full amount of the First Draw PPP Loan (including the amount of any increase received) on eligible expenses on or before the date on which the Second Draw PPP Loan is disbursed;
• It employs not more than 300 employees (or in the case of businesses with a North American Industry Classification System (“NAICS”) code beginning with 72 or eligible news organizations, it has not more than 300 employees per physical location (described in further detail below)), subject to the SBA’s affiliation rules; and
• It experienced a reduction in gross receipts of 25% or greater in any quarter of 2020 compared to the corresponding quarter in 2019.

In addition to the foregoing, the borrower must comply with all other existing requirements under the PPP, including without limitation, providing a certification in good faith that (a) the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower, (b) the proceeds of the loan will be used for purposes permitted under the program, and (c) the borrower has not received another Second Draw PPP Loan.

How is “gross receipts” defined for purposes of the Second Draw PPP Loan?

For purposes of Second Draw PPP Loans, the term, “gross receipts” is generally defined by the SBA as “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.” Any amount received by the borrower from the forgiveness of the First Draw PPP Loan is excluded from the calculation of “gross receipts”.

What entities are not eligible for a Second Draw PPP Loan?

An entity that is ineligible to receive a First Draw PPP Loan would also be ineligible for a Second Draw PPP Loan. The Economic Aid Act would also prohibit the following entities from receiving a Second Draw PPP Loan:

• A business concern or entity primarily engaged in political activities or lobbying activities;
• Certain entities with ties to China;
• Any person or entity required to submit a registration statement under the Foreign Agents Registration Act;
• A person or entity that receives a grant for shuttered venue operators under Section 234 of the Economic Aid Act;
• Entities in which the President, Vice President, head of an Executive department, or a Member of Congress, or the spouse of such person owns, controls, or holds at least 20% equity; or
• A publicly traded company.

What are the terms of the Second Draw PPP Loans?

Generally, the Second Draw PPP Loans will be made on the same terms as the First Draw PPP Loans. Any portion of the loan that is not forgiven will accrue interest at the rate of 1% per annum and will have a 5-year maturity. No personal guaranty will be required and the Second Draw PPP Loans will be fully guaranteed by the SBA.

Are the Second Draw PPP Loans subject to SBA’s affiliation rules?

The Second Draw PPP Loans are generally subject to the same affiliation rules governing the First Draw PPP Loans, except as specifically modified by the Economic Aid Act. For purposes of the Second Draw PPP Loans, the affiliation rules have been waived for (a) any business that has a NAICS code beginning with 72 and employs no more than 300 people per location, (b) franchise businesses with SBA franchisor identifier codes, (c) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act (SIBCs), (d) affiliation between two organizations if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion; and (e) any business that has a NAICS code with 511110 or 5151 (or is majority owned or controlled by a business concern with those NAICS codes) and employs no more than 300 people per location.

How is the principal amount for a Second Draw PPP Loan calculated?

For most borrowers, the maximum loan amount for a Second Draw PPP Loan will be the lesser of (a) 2.5 times (or 3.5 times for borrowers with NAICS code 72 designation at the time of disbursement) the average total monthly payment for payroll costs (which may be based on calendar year 2019, calendar year 2020 or the trailing twelve months, at the borrower’s election) or (b) $2 million.

How is the principal amount calculated for Seasonal Employers?

The maximum loan amount for Seasonal Employers is the lesser of (a) 2.5 times (or 3.5 times for borrowers assigned a NAICS code beginning with 72 at the time of disbursement) the average total monthly payments for payroll costs incurred or paid by the borrower for any 12-week period between February 15, 2019 and February 15, 2020 (at borrower’s election) or (b) $2 million. Note that this is a departure from the existing rules, which required Seasonal Employers to calculate their average monthly payroll based on any 12-week period between May 1, 2019 and September 15, 2019.

The Economic Aid Act also expanded the definition of “Seasonal Employer” to include any employer that during the preceding calendar year (2019), had gross receipts for any 6 months that were not more than 33.33% of the gross receipts of the employer for the other 6 months of that year. The definition of Seasonal Employer would also include any employer that does not operate for more than 7 months in any calendar year.

These changes also apply retroactively to First Draw PPP Loans. If a borrower qualifies as an Seasonal Employer and has not yet received forgiveness for its First Draw PPP Loan, the borrower may be eligible to request an additional draw under its First Draw PPP Loan before applying for a Second Draw PPP Loan.

How is the principal amount calculated for borrowers that were not in existence in 2019, but in operation on February 15, 2020?

For “New Entities”, the maximum loan amount for such entities is the lesser of (a) 2.5 times (or 3.5 times for borrowers with NAICS code 72 designation at the time of disbursement) 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 a PPP Loan divided by the number of months in which those payroll costs were paid or incurred or (b) $2 million.

A “New Entity” means any borrower that did not exist during the one-year period preceding February 15, 2020, but was in operation on February 15, 2020. A borrower may establish they were “in operation” on February 15, 2020 by providing a payroll statement or similar documentation from the pay period that covered February 15, 2020.

New Entities that have not already received a First Draw PPP Loan are now permitted to apply for a First Draw PPP Loan.

How is the principal amount calculated for farmers and ranchers?

For a farmer or rancher that (a) operates as a sole proprietorship, independent contractor or is an eligible self-employed individual; (b) reports farm income or expense on a Schedule F (IRS Form 1040); and (c) was in business as of February 15, 2020, the maximum loan amount is dependent on whether such farmer or rancher has employees or not:

• No Employees: maximum loan amount is 2.5 times the gross income of borrower in 2019 or 2020, as reported on a Schedule F (IRS From 1040) (capped at $100,000) divided by 12.
• Employees: maximum loan amount is the lesser of (a) 2.5 times the sum of: (i) the difference between gross income and employee payroll costs of the borrower in 2019 or 2020 (at borrower’s election), as reported on a Schedule F (IRS Form 1040) (capped at $100,000) divided by 12; and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or (b) $2 million.

Previously, the maximum loan amount was based on 2019 net farm profits (or losses) reported on Schedule F. Self-employed farmers that reported losses in 2019 would not have been eligible to receive a loan. Farmers are now permitted to use their gross income for purposes of the principal calculation.

These changes also apply retroactively to First Draw PPP Loans.  Farmers and ranchers that have not yet received forgiveness for their First Draw PPP Loans may be eligible to request an additional draw under its existing loan before applying for a Second Draw PPP Loan.

How is the principal amount calculated for self-employed individuals?

For a borrower that has income from self-employment and files a Form 1040, Schedule C, the maximum loan amount is dependent on whether the borrower has employees or not.

• No Employees: maximum loan amount is 2.5 times (or 3.5 times for borrowers with NAICS code 72 designation at the time of disbursement) the net profit of borrower in 2019 or 2020 as reported on Form 1040 Schedule C (capped at $100,000) divided by 12.
• Employees: maximum loan amount is the lesser of (a) 2.5 times (or 3.5 times for borrowers with NAICS code 72 designation at the time of disbursement) the sum of: (i) net profit of borrower in 2019 or 2020 (at borrower’s election), as reported on IRS Form 1040, Schedule C (capped at $100,000) divided by 12; and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or (b) $2 million.

How is the principal amount calculated for partnerships?

For entities taxed as a partnership, the maximum loan amount is the lesser of (a) 2.5 times (or 3.5 times for borrowers with NAICS code 72 designation at the time of disbursement) the sum of (i) net earnings from self-employment of individual general partners in 2019 or 2020 (at the election of the borrower), as reported on IRS Form 1065 K-1, reduced by section 179 expense deduction claims, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.9235, that is not more than $100,000, divided by 12 and (ii) the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower; or (b) $2 million.

What is the maximum amount of Second Draw PPP Loans a single corporate group may receive?

Any borrowers that are part of a single corporate group cannot receive more than $4 million in Second Draw PPP Loans in the aggregate. A “single corporate group” is defined as any group of businesses that are majority owned, directly or indirectly, by a common parent.

What if borrower has an unresolved First Draw PPP Loan?

If a borrower’s First Draw PPP Loan is under review and/or information in SBA’s possession indicates such borrower may have been ineligible for a First Draw PPP Loan it received, the lender will receive a notification from SBA upon submission of an application for guaranty of a Second Draw PPP Loan (“unresolved borrower”). If lender receives notice that a Second Draw PPP Loan borrower is an unresolved borrower, the lender will not receive an SBA number. The SBA will expedite resolving the issue related to such borrower and notify the lender of the process to obtain an SBA number for the Second Draw PPP Loan, if appropriate.

How are Second Draw PPP Loans forgiven?

Generally, Second Draw PPP Loans are eligible for forgiveness on the same terms and conditions as First Draw PPP Loans. To receive full forgiveness, during the “Covered Period” a Second Draw PPP Loan borrower must (i) maintain employee and compensation levels (or, if not, an applicable safe harbor or exemption applies); (ii) spend the loan proceeds on payroll costs and other eligible expenses; and (iii) spend at least 60% of the loan proceeds on payroll costs and spend not more than 40% of such proceeds on non-payroll costs. The “Covered Period” for Second Draw PPP Loans is a flexible timeframe beginning on the date of loan disbursement and ending on any date selected by the borrower between 8 weeks after the disbursement date and 24 weeks after the disbursement date. Unlike First Draw PPP Loans, Second Draw PPP Loan borrowers with a principal loan amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

The information contained in this document is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon for such.

The information in this document may not reflect the most current developments as the subject matter is extremely fluid and may change daily. The content and interpretation of the issues addressed herein is subject to revision. Koley Jessen, P.C., L.L.O. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this document to the fullest extent permitted by law. Do not act or refrain from acting upon the information contained in this document without seeking professional or other advice.