New and Second Draw PPP Regulations

Late on January 6th, the Treasury and SBA released the much anticipated guidance for the newly revised PPP.  We now have some timelines, applications and more to guide us through this second round.  If you are interested in the full versions directly from the SBA you can find it here for new PPP participants, and here for those looking to take a second draw, but follow along for a brief overview.  Also, while the initial program provided $525 billion in forgivable loans, this third round only has $284 billion available and only $35 billion is earmarked for first-time loans, with $15 billion earmarked for loans of $250,000 or less.

When Can I Apply For a PPP Loan?

The new application for Paycheck Protection Program was released on January 8th, you can find the first draw application here, and you can find the application for the second draw here.  $30 Billion was made available to first draw PPP loans as of Monday (January 11) to certain Community Financial Institutions, which include Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), Certified Development Companies (CDCs), and Microloan Intermediaries.  Those CFIs can start making loans to Second Draw PPP participants starting Wednesday January 13th.

We are still waiting to hear from the SBA as to when other larger banks and institutions will be allowed to accept applications.  It might be smart, however, to go ahead and check out the guidelines yourself and try to get the information necessary to fill out the application.

How Long do I have to Apply for a PPP?

The PPP applications will be available until either the funds run out or until March 31st.  There are a lot of experts that think this round will go quickly, so make sure you have your documents in order as soon as possible.

Important other things to know about the new PPP.

There are five pretty important things to know about the Paycheck Protection Program that have had a lot of concerns throughout 2020.

  1. Expenses paid for by the PPP are now tax deductible.  While the IRS and the Treasury had made comments to the contrary, these new regulations have put a final bow on the matter.  If you spent PPP money on eligible expenses and had it forgiven, you can still fully deduct those expenses.
  2. Simplified Forgiveness:  Borrowers that received (or will receive) PPP loans of $150,000 or less will have a new forgiveness application and process that is not more than 1 page in length and may not require any additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements.  The SBA is required to have this form ready by January 20th.
  3. You can now utilize the Employee Retention Tax Credit as well as the PPP, as long as both the ERTC and the PPP are used on different wages.  This is great, especially in 2021 where the new ERTC rules for this year make it easier to obtain, and much more advantageous.
  4. If you received an Economic Injury Disaster Loan (EIDL) Grant, then that no longer counts against your PPP forgiveness, which is huge for those who received the EIDL Grant that usually amounted to $1000 per employee up to $10,000.
  5. Eligible costs have been widened to include more than just rent, payroll costs and qualified utilities.

You can read about these things and more in detail here.

First-Time PPP Borrowers Things to Know

A lot of the initial guidelines for the PPP still applies to those who have not applied for the PPP, were denied, or refused forgiveness.  For instance, you are eligible for a first-time PPP loan if:

  • Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
  • Sole proprietors, independent contractors, and eligible self-employed individuals.
  • Not-for-profits, including churches.
  • Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 500 employees per physical location.
  • Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” that have 300 or fewer employees and do not receive more than 15% of receipts from lobbying.

One change is that if a business is ineligible to participate if it is publicly traded or controlled (directly or indirectly) by someone in Congress, the President, Vice President, or any head of executive departments.

Second-Draw PPP Loans

If you have already received a PPP Loan and have spent all of it on eligible expenses (even if you have not obtained forgiveness), then you would be eligible for a Second-Draw of the Paycheck Protection Program.  There are some changes in eligibility though, including:

  • 300 or fewer employees
  • Your business had to have experienced a reduction of 25% or more in all or part of 2020 as compared with all or part of 2019.  So basically, if your revenue was down 25% or more in all of 2020 compared to 2019 or in any particular quarter, you could be eligible.
  • Also, if your business was new and formed before February 15, 2020 there will be different rules that apply to you, for instance you can pick a different period in which your revenue was down 25% or more.
    • We will write about this more in another blog article soon.

What is the Maximum PPP loan amount?

In General, just like for the last round of PPP, both the first and second-draw PPP recipients can qualify for a loan up to 2.5 times the average monthly payroll cost (with a $100,000 per employee cap) of one of the following time periods:

  • 2019
  • 2020
  • The previous 12 months from the loan application date.

Hotels and restaurants, and others with NAICS codes starting with 72 can receive up to 3.5 times their average monthly payroll costs on second-draw loans, which is completely understandable due to the amount of hardship they have faced due to COVID-19.

If you are wondering what costs are included in average monthly payroll, here is what we found:

  • Salary, wages, commissions, tips, bonuses and hazard pay (capped at $100,000 on an annualized basis for each employee)
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
  • State and local taxes assessed on compensation
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee

What are the PPP Changes for Independent Contractors, Self-Employed, and Sole Proprietors?

One big change for this new round of PPP funding, besides keeping funding aside for smaller businesses and loans is that Independent Contractors and the Self-Employed looking to utilize a first draw of the PPP can use their 2019 or 2020 Schedule C net profit to determine your maximum loan amount.  So for instance, if you made more in 2020 than 2019, but can still certify that you need PPP proceeds to continue operations due to uncertainty, then you can utilize your 2020 Schedule C, but you better get on filling it out!  You must provide the 2019 or 2020 form 1040 Schedule C with your PPP application (if using 2020, you still need to include your 2020 1040 Schedule C even if you have not filed your taxes).  Also, just for ease of reference, if you do not have any employees you can find out your maximum loan amount by doing the following:

  1. Find your 2019 or 2020 IRS Form 1040 Schedule C line 31 net profit
    amount (if you are using 2020 to calculate payroll costs and have not yet filed a
    2020 return, fill it out and compute the value). If this amount is over $100,000,
    reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP
  2. Calculate the average monthly net profit amount (divide the amount from
    Step 1 by 12).
  3. Multiply the average monthly net profit amount from Step 2 by 2.5.
  4. Add the outstanding amount of any Economic Injury Disaster Loan
    (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to
    refinance. Do not include the amount of any advance under an EIDL COVID-19
    loan (because it does not have to be repaid)

If you are self-employed or an Independent Contractor without employees and you are looking for a second draw loan because you have spent your first draw on eligible expenses, a lot of the same rules apply as it applies to eligibility and maximum loan amount with one big difference.  You have to use THE LESSER OF the product obtained by multiplying:

  1. the net profit of the borrower in 2019 or 2020, as reported on IRS Form 1040 Schedule C,
    that is not more than $100,000, divided by 12; and
  2. 2.5 (or, only for a borrower assigned a NAICS code beginning with 72 as defined in
    31 subsection (f)(10) at the time of disbursement, 3.5).

As far as I can tell, this means that if you are looking to get a second draw, you will need to fill out your 2020 Schedule C and compare your net profit on line 31 to determine which year to use for this draw.  Also, when you go to apply for the second draw of the PPP, you will need the following documentation.

  1. Your 2019 or 2020 (whichever was used to calculate loan amount) Form 1040 Schedule C,
  2. Your 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; and
  3.  A 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020.
  4. For loans with a principal amount greater than $150,000, applicants will need to provide documentation to show that the borrower experienced the 25% reduction in revenue detailed above, at the time of application.
  5. For loans with a principal amount of $150,000 or less, the applicant can provide the documentation to show the required drop in revenue:
    1.  at the time of application,
    2. on or before the date the borrower submits an application for loan forgiveness,
    3. or, if the borrower does not apply for loan forgiveness, at SBA’s request.
  6. The required documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

More PPP Details are Coming

Please stay tuned as there are more details that continue to be released.  For example, we are still waiting for the simplified forgiveness application for loans of $150,000 and less, and we are waiting to hear

As always, this is not legal advice and we are not CPA’s or your Financial Advisors and do not know your specific situation.  Please consult your tax professional or advisor.

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