Everything You Need to Know About the Latest Round of the PPP
The Paycheck Protection Program (PPP), part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted into law in March 2020, was designed to assist eligible business concerns with fewer than 500 employees that have suffered Coronavirus (COVID-19)-related disruptions. The basic purpose of the PPP was to encourage small businesses to keep workers on payroll and/or to rehire workers who were let go during COVID-19-related shutdowns.
The PPP offers forgivable loans, issued by private financial institutions, and then approved and backed by the U.S. Small Business Administration (SBA). Borrowers can qualify for full loan forgiveness on their PPP loans if during the loan’s 8–24 week covered period following loan disbursement:
- employee and compensation levels are maintained;
- the loan proceeds are spent on payroll costs and other eligible expenses; and
- at least 60% of the proceeds are spent on payroll costs.
To the extent a borrower’s PPP loan is forgiven, the forgiven portion of the loan essentially converts to a grant.
From the PPP’s launch in April 2020 through its initial expiration in August 2020, the program distributed $523 billion in forgivable SBA-backed loans to 5.2 million eligible businesses to help them keep paying their workers through the COVID-19 pandemic’s economic fallout.
The PPP as enacted under the CARES Act, and as amended and supplemented by subsequent legislation and applicable federal regulations and interpretive guidance issued by the SBA and Treasury Department, was reauthorized and modified with the enactment of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in December 2020. The Economic Aid Act, part of the Consolidated Appropriations Act, 2021, revived the PPP by appropriating $284.45 billion to the program, including $35 billion for first-time, or first draw, loans and $15 billion set aside for community financial institutions.
In addition to reopening the PPP to eligible businesses seeking first draw PPP loans, the Act expands the authorized uses for PPP loan proceeds and increases flexibility to obtain loan forgiveness. The Act also permits eligible businesses who previously received a PPP loan to apply for a second draw of PPP loan proceeds, or a second draw PPP loan, although by adopting generally more restrictive eligibility criteria and reducing the maximum amount of proceeds available for a second draw PPP loan. Second draw PPP loans can be used to help fund payroll costs, including benefits. Loan funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
The deadline for submitting applications under the revived PPP is currently March 31, 2021; however, legislation has passed the House of Representatives and is pending in the Senate that will extend this deadline to May 31, 2021 should it be enacted into law.
Second draw PPP loan eligibility
The revived PPP permits certain eligible borrowers who previously received a PPP loan to apply for a second draw PPP loan with the same general loan terms as their first draw PPP loan. However, second draw PPP loans are intended to target eligible businesses that have been most harmed by the COVID-19 pandemic’s economic fallout, so the qualifications for second draw PPP loans are narrower than for first draw PPP loans. A PPP borrower is generally eligible for a second draw PPP loan if the borrower:
- Previously received a first draw PPP loan and will or has used the full amount of that loan 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.
Maximum second draw PPP loan amounts
For most borrowers, the maximum loan amount for a second draw PPP loan is determined by their average monthly payroll costs for either 2019 or 2020, multiplied by 2.5, with a maximum loan size of $2 million, but there are exceptions. Self-employed individuals, seasonal employers, farmers and ranchers, new entities, partnerships, and certain hospitality and food services organizations must use specific calculations when determining maximum loan sizing. For borrowers in the accommodation and food services sector (businesses assigned an NAICS code beginning with 72), for example, the maximum loan amount for a second draw PPP loan is determined by their average monthly payroll costs for either 2019 or 2020, multiplied by 3.5, with a maximum loan size of $2 million.
When figuring maximum PPP loan amounts, payroll costs consist of compensation to employees (whose principal place of residence is the U.S.) in the form of:
- salary, wages, commissions, or similar compensation;
- cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
- payment for vacation, parental, family, medical, or sick leave (except those paid leave amounts for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA));
- allowance for separation or dismissal;
- payment for the provision of employee benefits consisting of group health care coverage (including insurance premiums), group life, disability, vision, or dental insurance, and retirement benefits;
- payment of state and local taxes assessed on compensation of employees;
- and, for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
PPP enhancement for Schedule C filers
A recent Biden Administration change to the PPP allows self-employed borrowers who file Form 1040, Schedule C to calculate the owner compensation share of their payroll costs, or the share of their payroll costs that represent compensation of the owner, based on either (1) net profit, or (2) gross income (the amount the borrower reports on line 7 of Schedule C). Note that the gross income alternative is only available for loans approved after March 3, 2021; a borrower whose PPP loan was already approved prior to March 3, 2021 cannot increase its PPP loan amount based on the new calculation methodology. A Schedule C filer with no employees may elect to calculate its maximum loan amount based on either net profit or gross income as reported on Schedule C. A Schedule C filer with employees may elect to calculate the owner compensation share of its payroll costs based on either:
- net profit; or
- gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C.
Expenses reported on lines 14, 19, and 26 of Schedule C represent employee payroll costs and are subtracted from the owner compensation share of payroll costs if the owner uses gross income to calculate its loan amount in order to avoid double-counting these costs.
Calculating the owner compensation share of payroll costs for a Schedule C filer based on gross income will generally result in a larger maximum PPP loan amount and may, in some cases, make Schedule C filers with net operating losses eligible for PPP loans.
Application process and paperwork
When applying for a second draw PPP loan, a borrower must submit to their lender one of two forms:
- SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form Revised March 3, 2021), or the lender’s equivalent form; or
- SBA Form 2483-SD-C (Paycheck Protection Program Second Draw Borrower Application Form for Schedule C Filers Using Gross Income March 3, 2021), or the lender’s equivalent form.
A borrower that files Form 1040, Schedule C, and elects to calculate their PPP loan amount using net profit must use Form 2483-SD. A borrower that files Form 1040, Schedule C, and elects to calculate their PPP loan amount using gross income must use Form 2483-SD-C. A borrower that files Form 1040, Schedule F, and calculates their PPP loan amount using gross income must use Form 2483-SD.
The documents that must be submitted with a second draw PPP loan application will depend on the borrower’s business type (and tax status if an LLC), when the business commenced operations, whether the business has or had employees, the requested loan amount, and other factors. When a second draw PPP loan borrower is using the same lender and same payroll timeframe as it used for its first draw PPP loan and already submitted the required payroll documentation to the lender, no additional payroll documentation is required to be submitted with its second draw PPP loan application to support its maximum requested loan amount. However, a second draw PPP loan borrower will be required to submit with its second draw PPP loan application, or maintain for later submission with its second draw PPP loan forgiveness application, documentation that supports the borrower’s eligibility for a second draw PPP loan.
To develop a better understanding of the PPP and its various rules and requirements (borrower eligibility, maximum loan calculations, application process and supporting documentation, loan forgiveness, etc.) and for discussion with your selected lender, we recommend reviewing the SBA guidance provided below: