By: Stephanie O'Rourk, CPA, Partner, Tax and Advisory &Jeff Bobrosky, CPA, Partner, Assurance and Advisory, CohnReznick The Small Business Administration (SBA) has released applications for the second round of Paycheck Protection Program (PPP) loans, as well as full information and guidance on who is eligible, how to apply, and more. Loans will soon be available both as “second-draw” loans for borrowers who received funding in the first round, and as “first-draw” loans to first-time borrowers.Current and prospective PPP borrowers will find that many of the guidelines on eligibility, forgiveness, and more have changed from the first to the second PPP round, which has a pool of over $284 billion and is included in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted Dec. 27, 2020. With the new first-draw PPP loan applications and second-draw PPP loan applications available now, we recommend that interested businesses prepare now to apply as soon as their lenders indicate that they can, as funding for the initial wave of loans ran out quickly. Currently, the last day to apply for and receive a PPP loan of any kind – first- or second-draw – is March 31, 2021. Read on for key information regarding the new and updated PPP provisions. Details are subject to change, so please check back for updates as more information becomes available. (SBA has specifically mentioned that they plan to issue “a consolidated rule governing all aspects of loan forgiveness and loan review.”) It’s also worth emphasizing that many of the various rules apply differently to different types of borrowers: first-time borrowers, second-time borrowers, borrowers whose first PPP loans have already been forgiven, certain industries and entity structures, and other groups within the PPP ecosystem. Reach out to our team or another trusted advisor to confirm the details of your particular case. A brief 'orientation' Borrowers cannot receive more than one first-draw loan; an entity that received a first-draw loan in 2020 cannot apply for another in 2021, but may be eligible for a second-draw loan.
If you have already received a first-draw loan, we recommend that you still read the first-draw section, as some first-draw terms have changed and may impact the borrower, such as the opportunity for increases in loan amounts, as well as additions to covered and forgivable expenses. First-draw PPP loans and general PPP guidanceInformation in this section is drawn from the SBA Interim Final Rule (IFR) Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by the Economic Aid Act. We have summarized key points, but in many cases you will find additional detail in the IFR. ELIGIBILITY To be eligible for a PPP loan in this round, a prospective borrower (together with any affiliates): 1) Must have been in operation on Feb. 15, 2020; 2) Must have had employees for which they paid salaries or payroll taxes, have paid independent contractors, or be an eligible self-employed individual, independent contractor, or sole proprietorship with no employees; and 3) Must be one of the following types of organizations:
In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility. Affiliates are determined based on factors including (but not limited to) stock ownership, overlapping management, and identity of interest. Additional affiliate considerations for these PPP loans include:
Partnerships are eligible for PPP loans, but individual partners may not submit separate PPP loan applications for themselves as a self-employed individual. “Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred on a PPP loan application filed by or on behalf of the partnership,” the IFR says. A partnership and its partners, and LLCs filing taxes as a partnership, are limited to one PPP loan. Seasonal employers were newly defined by the Economic Aid Act as an eligible recipient that: 1. “Does not operate for more than seven months in any calendar year;” OR 2. “During the preceding calendar year, had gross receipts for any six months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other six months of that year.” The IFR says that seasonal businesses will be considered as meeting the “in operation as of Feb. 15, 2020” requirement if they were in operation for any 12-week period between Feb. 15 of 2019 and 2020. The following entities are eligible provided that they meet the other eligibility requirements:
The following are ineligible even if they meet the other requirements:
See Page 26 of the IFR for details on whether businesses that are generally ineligible for 7(a) loans under 13 CFR 120.110 are eligible for PPP loans. FIRST-DRAW LOAN MAXIMUM LOAN SIZE Businesses can apply for the lesser of:
Businesses that are part of a single corporate group – defined for this purpose as businesses that “are majority owned, directly or indirectly, by a common parent” – in no event can receive more than $20 million in the aggregate. Applicants that have applied for or received more than that amount must notify their lender and withdraw or request cancellation of any noncompliant pending PPP loan application or approved PPP loan. “Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness,” the IFR states.
DOCUMENTATION AND CERTIFICATIONS Applicants will be required to provide payroll records, evidence of retirement and health insurance contributions, and other documentation from each quarter in the chosen period, as well as documentation from the pay period that included Feb. 15, 2020, to establish that they were in operation at that time. In case of SBA review or audit, borrowers of all sizes should pay close attention to the IFR’s guidance for retaining records related to their spending and other compliance with PPP requirements. Prospective borrowers will be required to make the following good-faith certifications on their applications indicating that they have met or will meet various program requirements.
PAYROLL COSTS Payroll costs are defined as including:
LOAN INCREASES AND REAPPLICATIONS The IFR and subsequently released SBA guidance establish that the following borrowers can work with their “Lender of Record” – the lender reflected in SBA’s system as the current owner of the first-draw loan – to request loan increases. These increases can be made even if their loan has already been disbursed, but not if SBA has remitted a forgiveness payment. (Lenders are permitted to make additional disbursements for the increased amount.) Requests must be submitted on or before March 31, 2021, and will be subject to availability of funds. For more details and instructions, see Pages 74-76 of the IFR and SBA’s Jan. 13 Procedural Notice. (Lenders, see the Procedural Notice for guidance on submitting, reporting, and disbursing these requests and amounts.)
Note that these increased amounts cannot exceed the maximum loan amount the borrower is entitled to, and cannot exceed $10 million for individual borrowers or $20 million for a corporate group. Also, as noted earlier, borrowers that repaid or did not accept all or part of their first-draw loan may be eligible to reapply for new first-draw loans or request an increase. In such cases, the lender must have reported the repayment or rejection to SBA before Dec. 27, 2020, and SBA must have not yet remitted a forgiveness payment.
LOAN TERMS PPP loans will generally be guaranteed under the same terms, conditions, and processes as other 7(a) loans, though there are changes including (but not limited to):
Additionally, “All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan proceeds,” the IFR states. Borrowers may not take multiple loan draws to delay the start of their covered period. The IFR states, “The lender must make a one-time, full disbursement of the PPP loan within 10 calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA.” LOAN FORGIVENESS Like in the first round, new first-draw PPP loans are again forgivable up to the full principal amount of the loan and any accrued interest. “An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained or, if not, an applicable safe harbor or exemption applies,” the IFR states. The covered period is now defined as “the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is eight weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.” With this new guidance, permissible expenses have been expanded – from the defined payroll costs and qualified rent, utilities, mortgage interest, and other interest payments – to also include:
“At least 60% of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed. This percentage is consistent with the limitation on the forgiveness amount set forth in the Flexibility Act. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.” Additional considerations regarding forgivable costs and forgiveness amounts include:
Borrowers that are found to have used PPP funds for unauthorized purposes not only will have to repay those amounts, but may also be subject to additional liability such as charges for fraud. Shareholders, members, and partners can face SBA recourse for any unauthorized use they commit. SBA issued a simplified forgiveness application in October for borrowers with loans of $50,000 or less. The new legislation and guidance simplifies the forgiveness application process for loans up to $150,000; we will provide more information as application materials become available. Second-draw PPP loansThe second-draw loans created by the Economic Aid Act are smaller PPP loans available to certain borrowers that received previous, first-draw PPP loans. Many of the same terms, conditions, and processes of first-draw PPP loans apply for second-draw PPP loans; still, there are a number of key differences and exceptions, which are specified in a second IFR, Paycheck Protection Program (PPP) Second-Draw Loans. Read on for an overview of key ones to know, and see the IFR for complete information. ELIGIBILITY A second-draw borrower can be a business concern, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a first-draw PPP Loan, veterans organization, tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization, or an eligible nonprofit news organization, with all terms defined as they are in the first-draw IFR. They must have used or have plans to use their first-draw loan’s full amount on or before the date of disbursement of the second-draw loan.
The second-draw IFR includes specific definitions and rules for what constitutes “gross receipts.”
AFFILIATION RULES Affiliation rules for second-draw loans are the same as for first-draw loans, but waived for:
The maximum loan amount is smaller for second-draw loans. In general, borrowers can apply for the lesser of:
Second-draw applicants are also subject to additional documentation requirements to establish that they experienced the required revenue reduction; see Page 15 of the IFR for details and examples. Submission for that documentation varies:
LOAN FORGIVENESSForgiveness terms and conditions are the same for second-draw loans as for first-draw loans, with the only additional requirement (at this time) being that, as mentioned above, borrowers with a principal amount of $150,000 or less must provide the required revenue reduction documentation with their forgiveness application if they did not do so with their loan application. What does CohnReznick think?The very first round of PPP funding ran out quickly, so acting prudently and expeditiously may boost your chances of a successful application. Contact our PPP team for assistance, and find full details and updated application materials on the SBA website.
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