Paycheck Protection Program Returns

The December 2020 COVID relief package was one of the final acts of the 116th Congress and, among other actions, it breathed new life into the Paycheck Protection Program (PPP), which was originally created by the CARES Act nearly a year ago. Ten months and countless federal regulations later, the PPP is back with a $284 billion second-draw loan opportunity for small businesses affected by the pandemic and related economic downturn.

Qualifications for Second-Draw PPP Loans

A small business considering a second draw should consider the following factors:

  • Whether it obtained a first-draw PPP loan
  • Whether it needs additional funds if it already took one PPP loan
  • Whether it returned its first PPP loan or did not take the full amount to which it was legally entitled

Additionally, some types of businesses, including some 501(c)(6) corporations, may be eligible for second-draw loans despite being ineligible for PPP loans last year. Small businesses that received PPP loans last year and may be eligible for a second draw include: nonprofits, veterans’ organizations, agricultural cooperatives, sole proprietors, self-employed people, and independent contractors.

Businesses seeking second draws cannot have more than 300 employees and must have at least a 25 percent reduction in revenues in at least one quarter of 2020 when compared to previous quarters.[1] If a business with more than one location qualified for the first round of PPP loans, they may also qualify for a second draw if each location employs fewer than 300 people. Affiliation rule waivers remain applicable.

Restrictions on Second Draws

Businesses seeking a second draw must have used their full initial PPP loans for authorized purposes or must expect to use it on or before the anticipated disbursement date of their second-draw loan. Some businesses are ineligible for second draws; those include businesses whose primary activity is lobbying, those with certain ties to China, and publicly traded companies.

Second-draw PPP loans are capped at $2 million, and corporate groups cannot obtain more than $4 million overall. Eligible entities can get only one second-draw loan.

“Payroll” Defined

In general, the definition of “payroll” remains the same as it was in the CARES Act, except that “group benefits” now include group life, disability, vision, or dental insurance coverage.

Payroll does not include wages paid to employees residing outside the United States or independent contractors who are issued 1099 forms for tax purposes; independent contractors may apply for PPP loans themselves.

For businesses that did not obtain a PPP loan in 2020, some of the new funding will be allocated to “first draw” loans, terms of which are similar to those set forth in the CARES Act. Such businesses do not have to demonstrate the 25 percent revenue loss for a first-time loan, and a business may qualify if it has over 300 employees if it would otherwise qualify based on the previous CARES Act rules.

If a business took an initial PPP loan, it may be possible to obtain additional loan funds from that first loan, if the business qualifies and if the Small Business Administration (SBA) has not already remitted a forgiveness payment to the lender. To request an increase in an initial PPP loan, the borrower must be willing to continue to work with the “lender of record” (i.e., the lender involved in the first loan).

Loan Forgiveness for New PPP Loans

Loan forgiveness may be available for new PPP loans if they are spent appropriately (primarily on payroll) during the appropriate time. As we previously wrote about here, a simplified forgiveness application is also now available for loans of $150,000 or less, and a one-page loan forgiveness application is available for loans of $50,000 or less.

The new PPP application window opened first for historically underserved businesses last month and is now open to all eligible businesses.

[1] This calculation can get complicated; businesses need to compare gross receipts of one quarter in 2020 to that same quarter in 2019 to determine whether revenues decreased by at least 25 percent. If an applicant was not in business for the first half of 2019 but was in business during the second half, it can compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether there was a 25 percent decrease in gross receipts. And if it was only in business in the fourth quarter of 2019, it may compare any quarter of 2020 with the fourth quarter of 2019 to identify a 25 percent decrease in gross receipts. Businesses must have been in business by Feb. 15, 2020 to apply for a second draw. If an applicant was not in business in 2019 but was in business before Feb. 15, 2020, it will need to compare its gross receipts from the second, third, or fourth quarter of 2020 with the those of the first quarter of 2020.