January 8, 2021

The guidance clarifies PPP rules for first- and second-time borrowers

As a follow up to the $2.3 trillion Consolidated Appropriations Act, 2021 (CAA), the U.S. Small Business Administration (SBA) and Treasury issued guidance Wednesday night for the relaunched Paycheck Protection Program (PPP). An Interim Final Rule (IFR) entitled “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260. A second IFR entitled “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” issues the guidelines for new PPP loans to businesses that previously received a PPP loan.

PPP applications and instructions for borrowers under this new round of funding are expected to be released by early next week, at which point it will be up to each bank to begin accepting applications. The last day to apply for first or second draw PPP loans is currently March 31, 2021. 

Second Draw PPP Loans

“Second draw” PPP loans are available to businesses and nonprofits meeting certain eligibility requirements, mainly a 25% decrease in gross receipts in any calendar quarter of 2020 as compared to the same quarter in 2019. In addition to the items highlighted in our previous industry alert, the new guidance clarifies the following in regards to second draw loans:

      • Gross receipts are to be calculated using the entity’s normal accounting method (e.g. cash or accrual).
      • EIDL and PPP monies reflected in 2020 revenues are not included in gross receipts. 
      • Gross receipts include monies from all sources, including sales, interest, dividends, rents, royalties, fees and commissions. 
      • Gross receipts for eligible nonprofits are calculated within the meaning of Section 6033 of the Internal Revenue Code. Generally, this is the same amount as Item G on Page 1 of the Form 990. (See Form 990 instructions, Appendix B for more information and an example.)
      • The loan amount is calculated at 2.5 times the average monthly payroll costs for most eligible businesses, and 3.5 times for restaurants, hotels and other hard-hit industries. Payroll costs can be calculated based on 2019, 2020 or the 12 months preceding the application. 
      • The first PPP loan does not need to be officially forgiven before requesting a second draw loan. The second draw is available to eligible borrowers who have used or will use their first PPP loan in full on or before the expected date on which the second draw PPP Loan is disbursed.

Simplified Forgiveness 

Simplified forgiveness applications for loans under $150,000 will be released as a one-page form containing the following fields: borrower attestation that PPP requirements were complied with, loan amount, number of employees retained and an estimate of the loan amount spent on payroll. 

Employee Retention Credit

There were important changes that make the Employee Retention Credit (ERC) more widely available to employers. First, the Act removes the prohibition that employers receiving PPP loans are not eligible. Under the CARES Act, an employer was not eligible if it received a PPP loan, even after the loan was forgiven. Other important changes include the extension of the credit to June 30th, 2021 from December 31, 2020; an increase of qualified wages for calculating the credit from 50% to 70%; and a maximum credit per employee of $14,000 from $10,000. Further, the decline in gross receipts to qualify for the credit has been reduced to a 20% decline from 50%.

Next Steps

While the SBA continues to issue clarifying guidance and application forms, businesses and nonprofits can begin to prepare for a first or second draw loan possibility. GRF CPAs & Advisors’ COVID-19 Response Team will continue to provide updates as information becomes available. Resources are available to the general public through GRF’s newly-updated COVID-19 Response page. For questions about the PPP and other relief provisions, contact your CPA or questions@grfcpa.com.