Paycheck Protection Program Applications Open Again for Small Business Owners
On December 27, 2020, as part of a larger government funding bill, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law, which in part, restarted the popular Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA).
With the government funding bill—the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act—signed into law, applications are now open for businesses that obtained loans in the first round of Paycheck Protection Plan (PPP) as well as those that did not. From all available data, it seems that the banks are much more prepared this time for the rollout. Additionally, accountants now have months of experience in the application and forgiveness process, hopefully making the process much easier than last year. Applications are being accepted until March 31, 2021.
First Draw Borrowers
A first draw borrower is either a borrower who has not previously obtained a PPP loan or one whose prior PPP loan has not been forgiven by December 27, 2020. The rules on eligibility and use of funds for first draw borrowers are generally the same as they were in the first round i.e. 2.5x average monthly payroll costs, 500 or fewer employees, with at least 60% being used for payroll. However, loans are now capped at $2 million instead of $10 million, and there is an expanded list of permitted uses including expenses related to protecting workers from Covid-19. Industry experts are urging businesses that may have been rejected last time to contact the lenders they went to, to understand why they were unsuccessful before submitting their applications again.
SBA opens second round of PPP Loans
The SBA is also making available a second draw of PPP Loans. In order to apply for this second round, applicants must have spent the full amount of their first PPP loan before scheduled disbursement of the second loan. Additionally, applicants must show at least a 25% decrease in revenue in 2020 compared to the same quarter in 2019. Alternatively, applicants may show a reduction of 25% for the full calendar year of 2020 versus 2019. Applicants applying for loans for over $150k must submit documentation of revenue reduction of 25% or more during the application process, while applicants applying for loans under $150k don’t need documentation now but will need it later when applying for forgiveness.
Payroll Calculations
Applicants will need to provide the same payroll documentation for this round of loans as was necessary for the first PPP loan. If an applicant used a full 2019 calendar year for the first PPP loan and their second loan is coming from the same lender, no additional documentation is required unless specified by the lender.
Second time borrowers will be able to borrow 2.5x their average monthly payroll as was the case in the first round. However, the hospitality industry is getting a boost in this second round, with restaurants, hotels, and other businesses under the NAICS Code 72 eligible to receive up to 3.5x their average payroll.
Eligibility
If an applicant never applied for the first disbursement of PPP loans, they may apply now under the program’s original eligibility requirements. However, applicants for the second draw of PPP funds must be private companies with fewer than 300 employees. This includes small businesses, some nonprofits, self-employed workers, independent contractors, and sole proprietors. In the second round of loans, certain housing co-ops, news organizations, section 501(c)(6) organizations, and Economic Injury Disaster Loan (EIDL) recipients may also be eligible.
Forgiveness
In order for borrowers to receive full forgiveness for the second draw, like the first disbursement they must spend 60% of the loaned funds on payroll costs over a covered period of 8 or 24 weeks and maintain employee and compensation levels during that period. The other 40% of funds can be spent on other permitted business costs. For loans taken during the second round, there are additional expenses eligible for forgiveness under business costs. Borrowers may use the loan for Personal Protective Equipment and safety equipment against COVID-19. Additionally, they can be used for software, cloud computing, HR, and accounting needs. Borrowers can also spend loan funds on property damage that is not covered by insurance that was caused by public disturbances that occurred in 2020. Finally, borrowers may be forgiven for payments to suppliers that covered costs essential to the business operations at the time the outlay occurred. Note that the expanded list of permitted costs does not apply to first round loans.
Tax Deductions and Treatment
As in the first disbursement, PPP loans that are forgiven are tax-free. Tax-deductible business expenses paid by PPP loan will continue to be deductible.
Originally, businesses that took out PPP loans were prohibited from using the Employee Retention Tax Credit (ERTC) to reduce their tax burden and vice versa. This has been changed so businesses can take advantage of both PPP and the ERTC in 2020 and 2021.
For a full text of guidelines, please refer to the SBA site: https://www.sba.gov/sites/default/files/2021-01/PPP -- IFR -- Second Draw Loans (1.6.2021).pdf
Business Insights is hosted by the Law Firm of KPPB Law (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB Law, practicing in the
area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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