Paycheck Protection Program (PPP)
As the second round of the Paycheck Protection Program (PPP) sets to kick off on Jan. 11, NSBA has updated our analysis of the new rules and what the new round will look like, both for first- and second-draw loans. These rules authorize banks to start lending on a tiered basis starting Jan. 11.

SBA released two interim final rules on Wednesday, Jan. 6 which establish two tracks by which someone could get a PPP loan: a) 2021 first-draw PPP loans which are very similar and have many the same qualifications and limits as the first round (those processed in 2020); and 2) second-draw PPP loans which include key changes that were outlined in the Economic Aid Act.
With assistance from Marilyn Landis, owner of Basic Business Concepts Inc., a company providing CFO-level advice to small firms, we have updated our analysis on these regulations to provide you a very detailed outline of what to expect.

Second-Draw Rules:
These loans follow generally the same rules as the 1st draw, as amended by the Economic Aid Act, but with several key changes. These rules are specific to the second draw and do NOT apply to the first draw regardless if the first draw was made during 2020, or in 2021 under the 2nd round.
Loan Size:
  • The second-draw rules reduce the cap on second-draw PPP loans from $10 million to $2 million (2021 first-draw loans can still qualify for up to $10 million).
  • The maximum loan size is 2.5 times the monthly payroll of the business with a maximum of $2M, however, businesses in the accommodation and food services can get 3.5 times payroll.
  • In determining loan size based on an average monthly payroll, businesses must calculate:
  • 12 months prior to the date of second draw loan – precise 12 months;
  • OR full year 2019;
  • OR full year 2020;
  • Exceptions for seasonal businesses, those not in existence for a full 12 months and those with NAICS beginning 72; and
  • Self-employed and partnerships must use the same rules as under the new first-draw rules – self-payment can be considered as payroll for sole proprietors and 1099 contractors, however, you can NOT include payments you made to a 1099 contractor toward your payroll costs.
  • Loan size for corporate groups, which totals the aggregate of loans to individual companies in a corporate group – are capped at $4 million. A corporate group is defined as the share parent company who has a majority (or greater) ownership in individual companies in the group.
  • Allowable expenses under the loan have been expanded to include existing supplier contracts and equipment and expenses related to COVID – this is true for first- and second-draw loans. This is true for first- and second-draw loans. More specifically:
  • Payroll costs
  • Employee benefits and leave
  • Mortgage interest, rent, utility and other interest payments
  • Refinancing a 2020 EIDL loan
  • Business operations such as software, cloud computing, product/service delivery, payroll services, etc…
  • Property damage as a result of looting or vandalism in 2020
  • Supplier costs that are essential to operations, pursuant to a contract or in effect prior to the loan
  • PPE or other worker protection expenses
Eligibility:
  • The company MUST have spent the full amount of the first draw on eligible expenses.
  • Businesses must have been in business on Feb. 15, 2020.
  • Seasonal businesses (defined as not operating for more than 7 months in a calendar year) who were dormant on Feb. 15, 2020, are eligible if they can demonstrate they were in operation for any 12-week period between Feb. 15, 2019, and Feb. 15, 2020.
  • Self-employed individuals are eligible and can apply at the same time as all other businesses.
  • The definition of eligible small businesses was dropped to firms with fewer than 300 employees and have at least a 25 percent drop in revenues/gross receipts.
  • Definition of gross receipts/revenues:
  • INCLUDES:
  • All revenue – cash or accrual basis; and
  • Includes sale of products or services, interest, dividends, rents, royalties, fees or commissions net of returns and allowances.
  • EXCLUDES:
  • Capital gains or losses;
  • Taxes collected for remittance to a taxing authority (e.g.: sales tax);
  • Proceeds from transactions with domestic and foreign affiliates;
  • Amounts collected for another – ex. travel agent, real estate agent, advertising agent, freight forwarder, etc.; and
  • First-draw forgiveness is excluded from gross receipts.

  • Calculations for the 25 percent drop in revenues/gross receipts:
  • The look-back requires a comparison of one quarter in 2020 to the same quarter in 2019 (no restriction on which quarter used) – or – full-year 2019 compared to full-year 2020.
  • Documentation required to support the 25 percent reduction:
  • If you use 2019 for the 2nd draw and have the same lender as the 1st draw – no additional documentation is required.
  • For loan amounts greater than $150,000, documentation to support 25% reduction IS required with the application.
  • For loan amounts less than $150,000, documentation is not required with the application but must be submitted with the forgiveness application.
  • The 25 percent drop must be calculated including all affiliates using SBA’s affiliate rule which:
  • Entities may be considered affiliates based on factors including, but not limited to stock ownership, overlapping management, and identity of interest. All companies related by common ownership or management contract must be aggregated. 
  • The affiliation rule is waived, however, for franchises, hospitality businesses (those in the NAICS code beginning with 72), business with investment funded by SBIC’s, broadcasting businesses (NAICS code 511110) and non-profits (NAICS code beginning 515).
  • For businesses in the hospitality industry, even those with multiple locations are eligible provided each location has less than 300 employees and can meet the 25% revenue reduction test – and has a unique EIN.

Businesses that are NOT eligible
  • If, after receiving the 1st draw the company was determined ineligible (some retroactive changes – like foreign affiliates – allowed companies to be grandfathered if the loan was made before the regulation clarified the issue) – they are ineligible for a second draw PPP.
  • The company is ineligible if it is permanently closed – companies must demonstrate that any break-in operation is a temporary closure or suspension of operations and plans are in place to reopen.
  • Businesses that are in bankruptcy proceedings are NOT eligible.

Forgiveness Rules
Although the formal regulations governing forgiveness have not yet been published, the law and some references in the new regulations outline what borrowers can expect when it comes to forgiveness.
  • PPP loan recipients can get full forgiveness if at least 60 percent of the loan is spent on payroll costs, otherwise, forgiveness will be prorated to match payroll spending ratios. This is true for both first-draw and second-draw PPP loans made in 2021.
  • Full deductibility is extended for otherwise allowable expenses using PPP funds, regardless of loan forgiveness. This is true for ALL PPP loans, first-draw 2020 (meaning retroactive deductibility) or 2021 and second-draw.
  • There is a simplified forgiveness process for loans of up to $150,000, likely the application is streamlined, but nothing has been formally released yet.
  • The new rules eliminate the requirement that EIDL loan advances be subtracted from PPP forgiveness.
  • Forgiveness applications must be submitted to the lender by the borrower within 10 months and the covered forgiveness period is up to 24 weeks after disbursement of the PPP loan.
  • Payroll costs that are qualified wages taken into account in determining the Employer Retention Tax Credit (ERTC) are NOT eligible for loan forgiveness.

Program Roll-Out
A tiered roll-out of the PPP begins Monday, Jan. 11, however not all banks will be able to begin taking applications at that time.
  • Larger banks will most likely NOT be opening up their application process until later in the week;
  • On Monday, Jan. 11, only community financial institutions will be able to start taking first-draw PPP loans (these are smaller banks, credit unions, CDFI’s and basically any other lender with less than $1B in assets);
  • On Wednesday, these same institutions will be allowed to start taking applications for second-draw PPP loans;
  • SBA is planning to post the new application sometime this weekend so borrowers can get an idea of what’s required ahead of the formal application process opening up next week; and
  • SBA’s loan number generation will NOT be automatic as before – meaning the process may take a bit longer to allow more human oversight on the loans in order to protect against fraud
  • Background:
  • The economic Aid Act established set-asides for both new and second-time borrowers with fewer than 10 employees in an effort to ensure the smallest and hardest-hit small businesses had access to funds.
  • $15 billion for loans issued by mission-lenders, including community development financial institutions (CDFIs), minority-depository institutions (MDIs), and SBA 504 and Microlenders, as well as another $15 billion set-aside for certain smaller depository institutions, such as credit unions and farm credit institutions.
  • $35 billion for borrowers who were unable to apply for an initial PPP loan, of which $15 billion is for smaller borrowers with up to 10 employees or loans of up to $250,000 in low-income areas; and $25 billion for second PPP loans for the same small borrower category;

First-Draw PPP Loans – Round Two
There are a number of notable changes implemented to the PPP for first-draw applicants. Among those changes:
  • First-draw PPP loans can still be up to $10 million.
  • Borrowers can only receive ONE first-draw loan but may apply for a second-draw loan also.
  • 501(c)6 non-profits are newly eligible for 2021 first-draw PPP loans, they were which were excluded from the first round of PPP and there are some restrictions.
  • If you have an existing PPP loan:
  • If you apply for forgiveness after 12/27/20, follow the amended rules for forgivable expenses: minimum of 60% of proceeds used for payroll, expanded forgivable expenses, and greater flexibility in selecting the covered period.
  • If you have already received notice of forgiveness and your bank has received a remittance of the funds you can not request a change to include the new rules.
  • Calculating maximum loan – new borrowers can use 2019 or 2020 payroll to calculate the average monthly payroll amount.
  • The new regulations stipulate the use of the SBA affiliate rule for eligibility:
  • Entities may be considered affiliates based on factors including, but not limited to stock ownership, overlapping management, and identity of interest. All companies related by common ownership or management contract must be aggregated. 
  • The affiliation rule is waived, however, for franchises, hospitality businesses (those in the NAICS code beginning with 72), business with investment funded by SBIC’s, broadcasting businesses (NAICS code 511110) and non-profits (NAICS code beginning 515).
  • For businesses in the hospitality industry, even those with multiple locations are eligible provided each location has less than 300 employees and can meet the 25% revenue reduction test – and has a unique EIN.
  • New applicants (borrowers and all affiliates) are limited to 300 or less employees.
  • Note the regulation states number of employees vs the existing forgiveness application which uses FTE for measuring decline, if any, in work. The guidance for the new 1st draw PPP is the same as the previous EXCEPT when specifically changed by the Economic Aid Act 12/27/20.
  • Counting number of employees – must include all foreign and domestic affiliates
  • The business must have been in operation on 2/15/20 and must submit documentation to that effect, including payroll records, payroll tax filings, 1099, tax form Schedule C or F, or bank records.
  • Non-eligible companies include:
  • Companies with an SBA loan that is currently delinquent or defaulted on an SBA loan in the last 7 years are NOT eligible.
  • The company is ineligible if it is permanently closed – companies must demonstrate that any break-in operation is a temporary closure or suspension of operations and plans are in place to reopen.
  • Businesses who are in bankruptcy proceedings are NOT eligible.
  • For loans under $150,000, borrowers will not have to submit any documentation beyond the application for forgiveness, but simply must retain relevant documents for 4 years; and
  • LLC’s are only eligible for one PPP loan—partners cannot apply separately.

Ongoing Assistance
Below are various resources NSBA has provided in the last week to provide further assistance.
  • On Wednesday, we held a webinar about PPP – you can view that here.
  • Thursday, NSBA posted an initial analysis on the regulations here.
  • Friday, we posted an update on the roll-out of the program here.

Additionally, SBA has a great deal of good information on their website as well if you have questions. You can see a list of approved SBA lenders here.