*UPDATE* The SBA and Treasury announced that the revamped Paycheck Protection Program will open Monday 1/11/21 for select lenders and borrowers. Read post >>

The U.S. Small Business Administration (SBA) and Treasury issued regulatory guidance Wednesday evening for the revamped Paycheck Protection Program (PPP). The guidance included two interim final rules (IFR), which are subject to public comment but immediately effective due to the short timeframe of this program. Interim final rules are still pending for the forgiveness process. If you qualify for a loan under this program and wish to participate, we recommend you start preparing so that you can file as quickly as you can, as the funding for these loans is limited.

These IFRs provide many rules for second draw PPP loans as well as updates and further changes applicable to first-time borrowers and those borrowers with existing PPP loans.

We’ve included some of the more noteworthy updates and changes to the PPP loan program.

  • Loans to be made in 2021 may use payroll from either 2019 or 2020 as their base period for calculations. This flexibility is intended to prevent borrowers that curtailed their 2020 payroll to not be penalized by only being eligible for a lower loan amount.
  • The new PPP lending program is authorized through March 31, 2021.
  • Provides for first-time PPP loans to companies that did not previously borrow, and second loans for certain companies that did previously borrow.
  • When the SBA loan portal reopens, the first two days of applications will be restricted for community financial institutions to provide for lending to minority, underserved, veteran and women-owned businesses.

First Draw PPP Loans

  • Borrowers can receive up to $10M max based on 2.5x average monthly payroll costs in the year prior to the loan or the calendar year. Eligibility for businesses with 500 or fewer employees includes:
  • sole proprietorships
  • independent contractors and eligible self-employed individuals
  • nonprofits, including churches
  • destination marketing organizations that do not receive more than 15% of its revenues from lobbying activities*
  • 501(c)(6) associations*
  • accommodation/hospitality/foodservice operations with NAICS Sector 72 Codes with fewer than 300 employees per physical location.

*The 501(c)(6) and destination marketing organizations are limited to 300 employees.

Those companies that borrowed the first time but repaid the loan can reapply for the maximum amount available to them.

Eligible Costs for Forgiveness

Costs eligible for loan forgiveness included payroll, rent, covered mortgage interest and utilities. This has now been expanded to include:

  • covered worker protection and facility modification expenditures, including personal protective equipment to comply with COVID-19 federal health and safety guidelines
  • expenditures to suppliers that are essential at the time of purchase to the recipient’s current operation
  • covered operating costs such as software and cloud computing services and accounting needs.

Additional updates include:

  • A simplified forgiveness application process for loans of $150,000 or less. SBA has 24 days post-enactment to create the simplified application form.
  • The requirement that Economic Injury Disaster Loan advances be deducted from forgiveness has been repealed.
  • 60% or more of the loan proceeds must be spent on payroll expenses over the 8- or 24-week covered period.
  • Borrowers must be able to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;” however, a safe harbor exists that a borrower is presumed to have this economic uncertainty if the borrowing is less than $2M.
  • Loans have 5-year terms and bear interest at 1% with no payments if a forgiveness application is submitted within 10 months of the end of your covered period.

Second-Draw PPP Loans

To qualify for a Second Draw PPP Loan, borrowers must meet five requirements:

  1. You’re a business, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization, eligible for a First Draw PPP Loan, veteran’s organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or eligible nonprofit news organization that:
  2. Has 300 or fewer employees, unless you’re a business that satisfies the North American Industry Classification System (“NAICS”) code beginning with 72 or an eligible news organization with more than one physical location, in which case the limitation is 300 or fewer employees per location.
  3. Experienced a gross receipts reduction of 25% or greater in as compared to the same quarter in the prior year and must have spent (or will spend) all of the proceeds they received in a first-round PPP loan.
  4. Received a First Draw PPP Loan
  5. Have 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

Borrowers can receive up to $2M maximum based on 2.5x average monthly payroll costs in the year prior to the loan or the calendar year. NAICS Sector 72 Code borrowers can get 3.5x average monthly payroll but are still subject to the $2M maximum loan. Businesses that are part of a single corporate group cannot obtain more than $4M of second draw PP loans in the aggregate.

Second-Draw Application

To apply for a second draw loan, the borrower must submit to its lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form, not yet available but anticipated shortly) or the lender’s equivalent form. The documentation required to substantiate payroll cost calculations is generally the same as documentation required for first draw PPP Loans.

  • If using calendar 2019 for payroll substantiation, borrowers can use the same number if using the same lender and won’t need to resubmit documentation to the lender.
  • Would need to submit documentation to substantiate the revenue decline. This would be due for loans of $150K or less not when applying for the loan, but rather when applying for forgiveness, and for all other borrowers would be due when applying for the loan.  If the borrower does not apply for forgiveness, such documentation would be required to be presented to SBA upon their request.
  • Gross receipts test is all receipts whether received or accrued (in accordance with the borrower’s accounting method) from sales, interest, dividends, rents, fees or commissions, but permitted to reduce for returns and allowances. First draw PPP loan forgiveness is excluded from the gross receipts test.  Also excluded from gross receipts are taxes collected for and remitted to a taxing authority, proceeds from transactions between a business and its domestic or foreign affiliates, amounts collected for another party and proceeds on sales of investments.
    • There is an option for small businesses that do not produce quarterly financials to use the full 2020 year vs. 2019.
  • The covered period can be anywhere between 8-24 weeks.
  • Last date to apply will be March 31, 2021.

We’re still waiting on additional forms to be issued by SBA, which are expected soon so that banks can start accepting applications, perhaps as soon as early next week.

We will continue to monitor these developments and keep you informed. Our BMF Advisors stand ready to provide guidance on your specific situation.

About the Authors

James E. Merklin
CPA/CFF, CFE, CGMA, MAcc
Partner, Assurance and Advisory

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