Alerts and Updates

SBA Releases Rules on PPP Loans in Connection with December 2020 COVID-19 Relief Bill

January 12, 2021

Under the December relief bill, certain businesses that previously applied for and received PPP loan proceeds are now able to apply for and receive a second PPP loan

On January 6, 2021, the Small Business Administration (SBA) released a new interim final rule in connection with the December 2020 omnibus spending bill (the December relief bill) that contained, among other items, significant revisions and additions to the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), and previously amended by the Paycheck Protection Program Flexibility Act (PPP Flexibility Act).

Generally, the SBA rules provide that second-draw PPP loans are guaranteed by the SBA under the same terms, conditions and processes as first draw (i.e., initial) PPP loans and will operate under the same rules in connection with affiliate restrictions and loan forgiveness.

The new interim final rule also provides further clarity on the calculation of gross receipts for determining whether a business suffered a 25% or greater reduction in revenue in 2020, as compared to a corresponding period in 2019. Alternatively, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019.

We expect that the SBA will continue to release further guidance and rules in connection with the December relief bill.

Overview

Under the December relief bill, certain businesses that previously applied for and received PPP loan proceeds are now able to apply for and receive a second PPP loan.

The SBA clarified that, in connection with second-draw PPP loans:

  • Second draw loans will be guaranteed 100%;
  • No collateral will be required;
  • No personal guarantees will be required;
  • The interest rate will be 1%, calculated on a noncompounding, nonadjustable basis;
  • The second-draw loan will mature in five years; and
  • All second-draw loans will be processed by the applicable lender.

Eligibility

The new interim final rule offered further clarification for businesses that are eligible for second-draw PPP loans. Generally, a business with 300 or fewer employees (not 500 employees, as was the case in the first round of PPP loans) and that experienced a 25% reduction in revenue (as compared to a corresponding period in 2019) may receive a second PPP loan. In addition, a business must have (i) received a prior PPP loan and (ii) used, or will use, the full amount of that first PPP loan on or before the expected date on which the second PPP loan will be disbursed to the borrower[1]. Borrowers must also have spent the full amount of their first PPP loan on eligible expenses to be eligible for a second PPP loan (e.g., eligible payroll costs).

Revenue Reduction

The 25% revenue reduction rule for second-draw PPP loans is further clarified by the SBA’s new interim final rule.

Quarter 2020 to Quarter 2019 Comparison 

To calculate whether a business has suffered a 25% reduction in revenue, the business must demonstrate that its quarterly “gross receipts” for any one quarter in 2020 decreased by 25% or more compared to the corresponding quarter in 2019. For example, a business with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 is deemed to have experienced a revenue reduction of 40%, and (because the business suffered a 25% or greater reduction in revenue) is eligible for a second-draw PPP loan.

Fiscal Year 2019 to Fiscal Year 2020 Comparison 

Businesses that were in operation in all four quarters of 2019 will be deemed to have experienced a revenue reduction of 25% or more if they experienced a reduction in annual receipts of 25% or more in 2020 compared to 2019, and the business demonstrates such reduction by submitting its annual tax filings. The SBA intends to make it easier for businesses that operate on an annual basis, including smaller businesses without quarterly accounting in place, to demonstrate the required reduction in revenue to be eligible for a second-draw PPP loan.

In Operation Starting Third Quarter 2019 

If a business was not operating during first or second quarter of 2019, but was operating during the third and fourth quarters of 2019, the business may use gross revenue from any quarter in 2020 as compared to the third and fourth quarter gross revenue numbers to demonstrate a 25% or greater reduction in revenue.

In Operation Starting Fourth Quarter 2019 

If a business was only in operation in the fourth quarter of 2019, the business may use gross revenue from any quarter in 2020 as compared to the fourth quarter gross revenue number to demonstrate a 25% or greater reduction in revenue.

Not in Operation in 2019 but Operating by February 15, 2020 

If a business was not in operation in 2019, but was in operation on February 15, 2020, the business may compare its results from the second, third or fourth quarters of 2020 as against the first quarter of 2020 to demonstrate a 25% or greater reduction in revenue.

What Are Gross Receipts?

“Gross receipts” include all revenue in whatever form received or accrued from whatever source (in accordance with the entity’s accounting method), including from sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances. The SBA states that, generally, gross receipts are considered “total income” (or, in the case of independent contractors, sole proprietorships or individuals, “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses (as such terms are defined on applicable IRS forms). Subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income and employee-based costs (e.g., payroll taxes) must also be included as gross receipts.

Gross receipts do not include taxes collected of and remitted to a taxing authority (e.g., sales taxes) if included in gross or total income; proceeds from transactions between a business and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent or other such broker.

For affiliate businesses that the borrower acquired during 2020, gross receipts include the receipts of the acquired or acquiring concerns during the entire 2020 year, and may not be calculated as of the date of such acquisition[2]. The gross receipts of a former affiliate are not included for the entire year 2020.

Importantly, the amount of loan forgiveness received by a business will not be counted toward gross receipts. 

Affiliation Rules

The affiliation rules applicable for second-draw PPP loans are the same as those which governed prior PPP loans, with an exception for any business that (i) has 300 or fewer employees and (ii) is designated as an NAICS 72 entity, among others[3]. If such businesses employ 300 or fewer employees, then the SBA affiliation rules will not apply.

Excluded Businesses

The interim final rule restates the exclusions outlined in the December relief bill. The interim final rule does make clear that any business that has “permanently closed” will not be eligible for a second-draw PPP loan. See our prior Alert for more information.

Maximum Amount

The interim final rule restates the calculations for determining the maximum amount of a second-draw PPP loan. See our prior Alert for more information. Generally, the new interim final rule provides that the relevant time period for calculating payroll costs used to calculate the maximum amount of a loan can be either (i) the 12-month period prior to when the loan is made (2020) or (ii) calendar year 2019. The SBA states that using calendar year 2020, rather than the 12-month period preceding the loan (as provided under the December relief bill), will simplify the payroll calculations for borrowers.

How to Submit Applications for Second-Draw Loans

Eligible businesses must submit to a lender a completed SBA Form 2483-SD (PPP Second Draw Borrower Application Form) or a lender’s equivalent form, along with the borrower’s Form 941 (or other tax forms containing similar information) and state and quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020[4].

We note that borrowers who apply for a second-draw PPP loan of $150,000 or less may submit documentation evidencing the required reduction in revenue at the time of the initial application for the second-draw loan or any time before or on the date that loan forgiveness is requested. Borrowers of a second-draw PPP loan will not be required to provide documentation for payroll costs if (i) the borrower used calendar year 2019 figures to determine its initial PPP loan, (ii) used calendar year 2019 figures to determine its second-draw PPP loan, and (iii) the lender is the same as in the initial PPP loan. Note, however, that lenders may request further documentation that the lender deems “useful” in reviewing a borrower’s application.

The second-draw PPP application is available on the SBA website. Note that lenders will provide their own application forms, which will contain the same information as the sample form provided by the SBA.

Certifications

Businesses that apply for a second-draw PPP loan must certify, among other items, that:

  • The business has suffered a reduction in revenue of 25% or more relevant to the applicable time period, and that supporting documentation has been or will be (as applicable to loans of $150,000 or less) provided;
  • The business has received and used, or will use, all of its funds under its first PPP loan for eligible expenses;
  • The business is not an entity created under the laws of China or Hong Kong, and is not owned, directly or indirectly, by any such entity;
  • The business is not required to submit a registration statement under the Foreign Agents Registration Act of 1938; and
  • The business is not primarily engaged in political or lobbying activities.

First PPP Loans Under Review

If a borrower’s first PPP loan is under review pursuant to prior SBA rules and guidance, the SBA will not permit an SBA loan number to be assigned for a second-draw PPP loan. The issue will be “expeditiously” resolved by the SBA during the application period for any second-draw PPP loan.

When to Apply for Second-Draw PPP Loans

The SBA has stated that businesses have until March 31, 2021, to apply for a second-draw PPP loan. Businesses can submit applications to their lender before that date. The SBA has released forms online, which will be summarized in further Alerts.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For More Information

If you have any questions about this Alert, please contact Nanette C. HeideStephen Morrissey, Mark Zhuang, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact

Notes

[1] Note that the “full amount” for the first PPP loan will include any additional funds granted under a borrower’s first PPP loan pursuant to the December relief bill.

[2] Note that if a borrower acquired a segregable division of a business, the remaining portions of such business will not count towards gross receipts.

[3] This includes “Accommodation and Food Services” business, such as restaurants, catering companies and casino hotels, among others.

[4] Borrowers may also submit a Form 1040 Schedule C, Form 941 if the borrower is self-employed and has employees. If the applicant is self-employed and does not have employees, it must submit certain tax forms and other documents to demonstrate compensation and the fact that the business was in operation on or around February 15, 2020.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.