The U.S. Small Business Administration (SBA) and Treasury issued guidance Wednesday on the evening of the 10-day deadline enacted with the Consolidated Appropriations Act of 2021. The guidance was released with two interim final rules related to the reestablished Paycheck Protection Program. This morning, the SBA also released top line overviews of the first and second draw programs and indicated they would begin accepting applications from certain lenders Monday January 11.
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We address the key areas of importance in the newly released information below.
The two recently released interim final rules (IFR) and SBA Top Line Overview are below:
- 2021-0001 Consolidated First Draw – Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act (IFR#1)
- Additionally, the SBA provided top line guidance for first draws which can be found HERE
- 2021-0002 Second Draw Guidance – Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans (IFR#2)
- Additionally, the SBA provided top line guidance for second draws which can be found HERE
Due to Congressional intent to deliver COVID relief funds as quickly as possible, guidelines for the PPP provision of he CARES Act were delivered through the issuance of 23 prior IFRs. The guidance released Wednesday incorporates the Economic Aid Act (EAA) amendments, which represents the COVID relief provisions of the Consolidated Appropriations Act of 2021 – CAA 2021.
IFR#1 indicates that in addition to incorporating the changes from the EAA, the IFR consolidates and restates previous released IFRs (but not all) and should be interpreted consistently with SBA FAQs which can be referenced HERE. Of important consideration, the IFR indicates that the Economic Aid Act overrides any conflicting guidance in the FAQs, and that the SBA will be revising the FAQs to fully conform to the EAA as quickly as possible.
PAYCHECK PROTECTION PROGRAM FIRST DRAW LOANS
SBA has indicated it is reopening the Paycheck Protection Program (PPP) for First Draw Loans beginning January 11th. The SBA will initially only accept loan applications from community financial institutions (Community Development Financial Institutions – CDFIs and Minority Depository Institutions – MDIs) starting on January 11, 2021. The PPP will open to all participating lenders shortly thereafter.
Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020 may be eligible to apply for a loan increase under certain limited circumstances which we expand upon as we review the IFR details below.
First draw loans mostly follow the program rules of the original PPP. The CAA 2021 expanded eligibility for some previously excluded organizations and expanded the types of eligible non payroll costs.
All new First Draw PPP Loans will have the same terms regardless of lender or borrower. A list of participating lenders as well as additional information and full terms can be found HERE.
PAYCHECK PROTECTION PROGRAM SECOND DRAW LOANS (AKA PPP2)
SBA will begin accepting Second Draw PPP Loan applications from community financial institutions (as mentioned above) starting on January 13, 2021 and will open to all participating lenders shortly thereafter.
Certain eligible borrowers who received a PPP loan may apply for a second draw. Generally, a borrower will be eligible if the borrower:
- Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
- Has no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
The loan amount is calculated based on 2.5X average payroll as it was in Round 1, though some borrowers with NAICS codes beginning 72 in the hotel and restaurant industry are eligible for 3.5X. The maximum loan amount for Round 2 is $2 million.
All Second Draw PPP Loans will have the same terms regardless of lender or borrower.
MAXIMUM LOAN AMOUNT & CLARIFIED CRITERIA FOR SECOND DRAW
- IFR states that to be eligible to apply for round 2, the borrower must 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. (“full amount” includes the amount of any increase received on a First Draw PPP Loan which will require clarification about if a borrower who requests an increase can include funds already spent on eligible expenses to remain eligible for round 2 before the funding expires).
- NOTE – if you are considering requesting an increase on your first loan, confirm with your lender how this impacts the timing of an eligible second draw and what you need to provide to substantiate the money has been spent.
- IFR#1 provides that newly originated first draw and newly established second draw borrowers may use 2019 or 2020 payroll to calculate the maximum amount of your loan including a technical correction allowing farmers to also have the option to use 2020 payroll.
- Provides that borrowers are limited to receipt of one Second Draw PPP Loan, no greater than $2 million ($10 million for the Consolidated First Draw).
- Imposes a limit of $4 million in the aggregate that a single corporate group may receive of Second Draw PPP loans ($20 million for the Consolidated First Draw).
- No second draw will be issued by the SBA with respect to a borrower with a loan under review. SBA indicates expeditious resolution of loans under review.
- IFR defines gross receipts consistent with the definition of receipts in SBA’s size regulations, at 13 C.F.R. § 121.104 which generally is determined as how the revenue is reported for tax purposes. This is different than the receipts definition to test the Employee Retention Credit criteria. Careful consideration of the competing rules related to receipts, FTEs, and affiliation should be applied to any analysis of the two programs.
- Any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.
- Provides that a borrower that was in operation for all four quarters of 2019 can demonstrate a 25% reduction on an annual basis by submitting the 2020 and 2019 tax returns.
- The IFR prohibits permanently closed businesses from receiving a Second Draw PPP Loan but specifies that a borrower that is temporarily closed or suspended remains eligible.
- The EAA provides that for loans with a principal amount of $150,000 or less, no documentation is required at the time of application to substantiate the gross receipts reduction. Borrowers will be required to substantiate the reduction at the forgiveness application or upon request by the SBA if the borrower does not apply for forgiveness.
- Establishes application and documentation requirements for calculating the loan amount for the Second Draw PPP loans are generally the same as the first round of PPP.
- ** IFR indicates that no additional documentation will be required if applicant used the calendar year 2019 to determine the amount of the first loan, intends to use calendar year 2019 for the Second Draw and will use the same lender. **
- Lists some, but not all, of the documents that may be required to substantiate payroll amount including payroll records, payroll tax filings, bank statements, and Schedules C, F, or K. Provides that borrowers must submit documentation to sufficiently establish eligibility and to demonstrate the eligible payroll amount.
PPP – BORROWERS ELIGIBLE TO REQUEST AN INCREASE IN PPP LOAN AMOUNT
- ** NOTE – the IFR confirms this additional draw should be included in the “full amount” required to be spent before a borrower can apply for a Second draw **
- The EAA authorized the ability for PPP borrowers to request an increase in their first loan amount under various scenarios.
- Seasonal employers who would have been entitled to a greater loan amount under certain circumstances;
- Partnerships that did not include any compensation for its partners;
- Borrowers who returned all of a PPP loan – the borrower may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules;
- Borrowers who returned part of a PPP loan may reapply for an amount equal to the difference between the amount retained and the amount previously approved; and
- Borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.
- SBA will issue additional guidance on the process to reapply or request a loan increase.
- Generally, the same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP.
- Business concerns with a NAICS code beginning with 72 qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees. Eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.
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