Paycheck Protection Program Round Two: Eligibility, Forgiveness, and Considerations for Borrowers.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. Sections 1102 and 1106 of the CARES Act include the Paycheck Protection Program (PPP), which provides Small Business Administration (SBA) loans to assist businesses with maintaining their workforce during the COVID-19 pandemic.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) became law. The Economic Aid Act extends the authority to make PPP loans through March 31, 2021, and revises certain PPP requirements. Congress has authorized a total program level of $806,450,000,000 to provide guaranteed loans under sections 7(a)(36) (First Draw PPP Loans) and 7(a)(37) (Second Draw PPP Loans).

Loans guaranteed under the Paycheck Protection Program (PPP) will be 100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. First Draw Loans are available to applicants that did not receive a PPP Loan during the initial round, while Second Draw Loans are available to applicants who have previously received a PPP Loan. For both First Draw and Second Draw Loans, the application deadline is March 31, 2021.

The following outlines the key provisions related to First Draw and Second Draw PPP Loans, including eligibility requirements, qualifying expenses, loan details, and requirements for forgiveness down the road.

First Draw PPP Loans

Eligibility

First Draw PPP Loans are available for borrowers which have not previously received a PPP Loan. The following entities affected by Coronavirus (COVID-19) may be eligible for a First Draw PPP Loan:

• Sole proprietors, independent contractors, and self-employed persons
• Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard)
• Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or tribal business concern with the greater of: (a) 500 employees, or (b) that meets the SBA industry size standard if more than 500
• Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location

Additionally, eligible applicants must have been in business before February 15, 2020, and must certify that the current economic uncertainty makes their loan request necessary to support the ongoing operations of the business.

Loan Application

An applicant must submit the Paycheck Protection Program Borrower Application Form (SBA Form 2483), or the lender’s equivalent form, along with relevant payroll documentation. The lender must also submit SBA Form 2484, Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty.

To begin the application process, applicants should call their Small Business Lender, or visit sba.gov to find a Small Business Lender in their area.

Maximum Loan Amount

The maximum loan amount available under a First Draw PPP Loan is the lesser of $10 million or an amount calculated using a payroll-based formula. The amount depends primarily on payroll costs and generally follows a five-step approach outlined by the SBA. Applicants should work with their Lender to determine the correct amount, but may review the SBA Guidance on calculating the maximum amount and follow the five-step approach highlighted below for a general idea:

Step 1:     Aggregate payroll costs (defined in detail below in subsections 4.g. and 4.h.) from 2019 or 2020 for employees whose principal place of residence in the United States.

Step 2:     Subtract any compensation paid to an employee above $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.

Step 3:     Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4:     Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5:     Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you seek to refinance. Do not include the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

Second Draw PPP Loans

Eligibility

Second Draw PPP Loans are available for those borrowers that previously received a PPP Loan. Any borrower who received a PPP loan in 2020 received a First Draw PPP Loan and is not eligible to receive another First Draw PPP Loan, but may be eligible for a Second Draw PPP Loan. The eligibility requirements for a Second Draw PPP Loan are more stringent. Generally, a borrower will be eligible for a Second Draw PPP Loan if the borrower:

• Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
• Has no more than 300 employees; and
• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Loan Application

An applicant must submit the Paycheck Protection Program Second Draw Borrower Application Form (SBA Form 2483-SD), or the lender’s equivalent form, along with relevant payroll documentation.

To begin the application process, applicants should call their Small Business Lender, or visit sba.gov to find a Small Business Lender in their area.

Maximum Loan Amount

For most borrowers, the maximum loan amount of a Second Draw PPP Loan is 2.5x average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector (use NAICS 72 to confirm), the maximum loan amount for a Second Draw PPP Loan is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million.

PPP Round 2: Forgiveness Considerations for Borrowers

PPP Loan Details

PPP Loans are available to help pay for the Qualifying Expenses shown below. The SBA will forgive loans if all employee retention criteria are met, and the funds are used for Qualifying Expenses. Additional loan details are highlighted below:

• PPP loans have an interest rate of 1%.
• Loans issued after June 5, 2020, have a maturity of five years (loans issued before June 5, 2020, have a maturity of two years).
• Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower’s loan forgiveness amount to the lender.
  • If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 weeks or 24 weeks).
• No collateral or personal guarantees are required.
• Neither the government nor lenders will charge small businesses any fees.

“Qualifying Expenses” and “Payroll Costs” Covered

Similar to the first round of Paycheck Protection Program loans, this round recognizes payroll, rent, covered mortgage interest, and utilities as qualifying expenses. The 60/40 rule still applies—borrowers must spend at least 60% of PPP funds on payroll costs during the covered period. This is essential for loan forgiveness.

However, a few new expenses have been added to the list of “Qualifying Expenses” which should be taken into consideration when deciding how to allocate PPP funds. Below is a list of all the Qualifying Expenses, as outlined in the latest SBA guidance:

• Payroll costs
• Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums
• Mortgage interest payments (but not prepayments or principal payments)
• Rent
• Utilities
• Interest payments on any other debt obligations incurred before February 15, 2020
• Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
• Worker protection and facility modification expenses to comply with COVID-19 health and safety guidelines
• Property damage costs related to damage, vandalism, or looting due to public disturbances and not otherwise covered by other compensation or insurance claims
• Supplier expenses that are essential to the business's operations at the time of purchase
• Covered operating expenditures

Additional spending considerations may arise for self-employed individuals.

“Payroll costs” may consist of the following expenses:

• Compensation to employees (whose principal place of residence in the United States) in the form of salary, wages, commissions, or similar compensation
• Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips)
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for separation or dismissal
• Payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement
• Payment of state and local taxes assessed on the compensation of employees
• For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation

Requirements for Loan Forgiveness

Borrowers may be eligible for complete loan forgiveness if, during the 8-to24-week covered period following loan disbursement:

• Borrower’s employee and compensation levels were maintained (or for Second Draw borrowers, maintained in the same manner as required for the First Draw PPP Loan);
• Loan proceeds were spent on payroll costs and other qualifying expenses; and
• At least 60% of the proceeds were spent on payroll costs.

A borrower can apply for forgiveness once it has used all loan proceeds for which the borrower is requesting forgiveness. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.

The SBA has outlined a 4-step process to follow to apply for loan forgiveness:

1. Contact your PPP Lender and complete the correct form
   1. Your lender can provide you with either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a Lender equivalent.

2. Compile your documentation

Payroll:

• Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
• Tax forms for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
  • Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
  • State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
• Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.

Non-payroll (for expenses that were incurred or paid during the covered period and showing that obligations or services existed before February 15, 2020):

• Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements.
• Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks verifying eligible payments.
• Business utility payments: Copies of invoices and receipts, canceled checks, or account statements.

3. Submit the forgiveness form and documentation to your PPP Lender

1. 1. Complete your loan forgiveness application and submit it to your Lender with the required supporting documents and follow up with your Lender to submit additional documentation as requested. Consult your Lender for additional guidance and provide requested documentation promptly.

4. Continue to communicate with your lender throughout the process

If SBA undertakes a loan review of your loan, your lender will notify you of the review and the SBA loan review decision. You have the right to appeal certain SBA loan review decisions. Your Lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable.

Ramifications for Misuse of PPP Loan Funds

• If PPP funds are used by the business for an unauthorized purpose, the SBA will direct the recipient business to repay those amounts.
• If the funds were knowingly misused for unauthorized purposes, the recipient will be subject to additional liability, such as charges for fraud.
• If the funds were misused for an unauthorized purpose by a business’s shareholder, member, or partner, then the SBA will have recourse against that individual, rather than the business itself.

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