On January 19, 2021 the Second Draw Paycheck Protection Program (PPP) was opened to large lenders to begin processing loan applications. On the same date, the Small Business Administration (SBA) also released revised loan forgiveness applications, a new form for borrowers to disclose certain controlling interests, guidance on Second Draw PPP loan calculations and required documentation, and a new 62-page interim final rule on loan forgiveness requirements and loan review procedures as amended by the Economic Aid Act. New developments identified in these documents are as follows:
Form 3508S
Form 3508S was revised to raise the maximum loan size to use this form from $50,000 to $150,000. Additionally, the questions referencing Economic Injury Disaster Loan (EIDL) advances were removed, as those are no longer taken into account when calculating loan forgiveness, as were references to the borrower’s alternative payroll covered period. The form was also modified to allow the borrower to use this application for either PPP First Draw or Second Draw loans, to include borrower disclosure of their NAICS Code, disclosure of the loan amount spent on payroll costs, and a check-the-box disclosure for loans that when aggregated with affiliates exceed $2M for either First Draw PPP or Second Draw loans. Finally, the number of certifications was reduced from 7 to 2. Additionally, borrowers using Form 3508S are no longer required to submit documentation of their costs used towards loan forgiveness, although the borrower is required to maintain employment records and payroll documentation for four years, and all other documentation for three years from the date the loan forgiveness application is submitted to its lender.
Form 3508 and 3508EZ
Forms 3508 and 3508EZ also removed references to EIDL advances and the disclosure of borrower’s payroll frequency. The form was also modified to allow the borrower to use this application for either First Draw PPP or Second Draw loans and to include borrower disclosure of their NAICS Code. Line items were also added to the forgiveness amount calculation for covered operations expenditures, property damage costs, supplier costs, and worker protection expenditures. In addition, certifications were added to both forms regarding the borrower having fully used the proceeds from First Draw PPP loans prior to receiving a Second Draw loan.
Form 3508D
Borrowers must disclose whether any covered individuals (President, Vice President, head of an Executive department, or member of Congress, or their spouses) own a 20% or greater equity or voting interest as of the date the borrower applied for the PPP loan. Affected borrowers that submitted forgiveness applications before December 27, 2020 must submit the 3508D by January 26, 2021. Those that submitted forgiveness applications on or after December 27, 2020 must submit 3508D within 30 days of submitting their forgiveness application. Affected borrowers are prohibited from receiving a PPP loan after December 27, 2020.
Second Draw PPP Loans – How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide
- “Gross Receipts” for purposes of calculating 25% decline are defined as “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including sales of product or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.”
- “Gross Receipts” for not-for-profit organizations include, but are not limited to contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts; gross amounts received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts; gross sales or receipts from business activities; gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale; and gross amount received as investment income, such as dividends, interest, rents, and royalties.
- Both commercial and not-for-profit entities may exclude from gross receipts any forgiven amount of First Draw PPP loans or EIDL advances.
- For purposes of calculating the 25% decline in gross receipts, the borrower may use any calendar quarter in 2020 compared to the same period in 2019, or calendar 2020 compared to 2019. Alternative comparison periods exist for entities that were not in existence for all of 2019.
- Borrowers applying for a Second Draw PPP loan less than $150,000 are not required to disclose or provide supporting documentation evidencing 25% decline in gross receipts with their loan application. However, that information and supporting documentation must be provided with the borrower’s Second Draw PPP loan forgiveness application.
- Borrowers applying for a Second Draw PPP loan greater than $150,000 must disclose and provide supporting documentation regarding their 25% decline in gross receipts at the time their application is submitted. The guidance lists the following as acceptable forms of documentation:
- Quarterly financial statements – if unaudited the borrower must sign and date the first page and initial all other pages, attesting to their accuracy.
- Quarterly or monthly bank statements – the borrower must annotate which deposits are gross receipts and which are not (loan proceeds, capital contributions, etc.)
- Annual IRS income tax filings (required if using annual reference period). If the borrower has not filed their 2020 income tax return, they must complete the relevant gross receipts value, and sign and date the return attesting that the values entered for gross receipts are the same values that will be filed on the entity’s tax return.
- If a Second Draw PPP borrower is using the same lender and same payroll timeframe as it used for its First Draw PPP and already submitted the required payroll documentation to the lender, no additional payroll documentation is required to be submitted with its Second Draw PPP loan application.
- Self-employed farmers and ranchers that report business activity on Schedule F may use Sch F Line 9 (gross receipts) for purposes of calculating average monthly payroll for Second Draw PPP loans. Guidance issued on January 17, 2021 indicates that this calculation methodology can also be used for First Draw PPP loans for farmers and ranchers.
Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by the Economic Aid Act
- Borrowers that use a covered period of less than 24 weeks must prorate allowable compensation limits on employee and owner wages, and on owner replacement compensation for Sch C or Sch F borrowers.
- Definitions are provided for new categories of non-payroll costs allowable towards forgiveness:
- Covered operations expenditures: a payment 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: a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered supplier costs: an expenditure 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: an operating or capital expenditure to facilitate the adaptation of the business activities to comply with requirements established or guidance issued by DHHS, CDC, OSHA, or any equivalent requirements established or issued by a state or local government related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19, during the period beginning March 1, 2020 and ending the date on which the national emergency with respect to the Coronavirus Disease expires. Various examples of equipment, supplies, and capital improvements that qualify are provided in the IFR.
- Schedule C borrowers may use either 2019 or 2020 net profit to calculate “owner replacement compensation”. Owner replacement compensation must exclude qualified paid leave for which a credit is claimed under section 7002 or 7004 or the Family First Coronavirus Response Act (FFCRA).
- Borrowers applying for a Second Draw PPP must have spent the entirety of the First Draw PPP on allowable expenses before disbursement of a Second Draw PPP loan.
- Borrowers applying for a Second Draw PPP loan greater than $150,000 must submit their First Draw PPP loan forgiveness application before or simultaneously with submitting their loan forgiveness application for a Second Draw PPP loan.
There is still a lot of information to unpack as it relates to the PPP. BerganKDV will continue to monitor the situation as more updates from the SBA regarding loan application and forgiveness unfolds. If you have any questions regarding Second Draw PPP loans and how it may impact you, please contact your trusted advisor or start here.
