By Jennifer Mailhes, CPA – Shareholder

The Small Business Administration (SBA) has released formal guidance on the second-draw Paycheck Protection Program (PPP) loan, enacted as part of the Consolidated Appropriations Act of 2021, for those businesses that previously received a PPP loan in need of another.

Who Qualifies for a Second Draw

The second-draw PPP authorizes the origination of new loans up to $2 million to businesses that meet the following requirements:

  • Meet the definition outlined as an eligible person or entity.
  • Employ not more than 300 employees.
  • Have used or will use the full amount of its original PPP, if applicable.
  • Demonstrate at least a 25% reduction in gross receipts calculated based upon the first, second, third or fourth quarters of 2020 compared to 2019. Note, forgiven first-draw PPP loans should not be included in the 2020 gross receipts.

Applying for the Loan

The second-draw PPP application process will operate under many of the same premises set forth in the first round of funding. Outlined below are some of the key modifications and timing requirements.

Eligible Loan Amounts

General rules are that the loan maximum is the lesser of 2.5 times the computed average monthly payroll and $2 million. Payroll costs will be calculated much like before. The calculation period should include the twelve-month period prior to when the loan is made, calendar year 2020 or calendar year 2019. Sole proprietors and independent contractors are able to use the precise one-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs.

Borrowers assigned a NAICS code beginning with 72 (accommodations and food services), have a maximum loan amount of 3.5 months of payroll costs.

Documentation Requirements

When applying for the second-draw loan, borrowers must submit documentation to support their payroll and gross receipts calculations.

Payroll costs: The same documentation required during the first draw of PPP loans is required for the second-draw loans. If applying through the same lender and using the average payroll for 2019, additional documentation may not be required.

Gross receipts reductions: In general, gross receipts include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.

For loans greater than $150,000, the borrower must also submit documentation to adequately support the 25% reduction or greater in 2020 from 2019, such as tax forms, quarterly financial statements or bank statements.

However, for loans of $150,000 or less, borrowers do not have to submit documentation at the time of application, but on or before the date they apply for loan forgiveness.

The guidance also allows for the lenders to request additional documentation, if necessary from the borrower.

Separate rules for calculating affiliates’ gross receipts have been established.

Application Timing: The SBA will begin taking applications from community financial institutions for second-draw PPP loans as early as Jan. 13, 2021. The process is expected to open up to other financial institutions shortly after and run through the end of March.

Borrowers should consult with their lenders regarding their specific application process and timing.

Assistance Applying

Doeren Mayhew’s CPA and advisors are here to help you compile the financial data needed to apply for your second-draw loan. Contact us today with any questions, and be sure to register below for our upcoming webcast where we’ll address the many provisions of the new legislation.