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PPP Loans: A Second Wave of Relief

Businesses still seeking relief from the impact of COVID-19 may be able to find it in the second round of PPP loan legislation passed by Congress in late December of 2020. The Consolidated Appropriations Act, 2021 seeks to overcome some flaws of the first round of the Paycheck Protection Program (PPP) while providing additional assistance to businesses still suffering in the wake of the COVID-19 pandemic.

Even those who were unable to get funding during the first round of PPP loans can apply for their first-draw under the new guidance. With relaxed rules on which expenses are eligible for forgiveness and specific funding set aside for lenders who operate in lower-income areas, businesses owned by POC, and small businesses, this round of PPP loans is better suited to serve the American population as a whole equally.

Since the program’s initial launch, our team of experts have had a chance to review the program in greater detail and want to provide our findings below. We know navigating through this legislation can be tricky, just know we are here to provide support and guidance to business leaders in need.

Quick Overview of Changes:

  • Dramatically expanded payroll and non-payroll expenses eligible for forgiveness
  • Additional clarity on loan terms
  • Updated limits on loan amounts
  • Clarity on forgiveness and tax savings opportunities
  • Flexibility on the covered period of the loan
  • Revenue reduction proof requirements
  • PPP Loans: The Changes for Round 2

Covered Expenses

To be eligible for PPP loan forgiveness, borrowers must use the funds on approved, covered expenses. Under the new legislation, the 40/60 split is still required: borrowers must use 60% of the funds on payroll expenses and can use up to 40% on approved, non-payroll expenses.

However, covered expenses in both categories have been expanded. Existing payroll costs included:

  • Salary, wages, commissions, tips
  • State and local payroll taxes
  • Paid leave
  • Healthcare payments
  • Retirement plan contributions

Expanded payroll costs now include:

  • Group life insurance
  • Group disability insurance
  • Group vision insurance
  • Group dental insurance

Existing covered non-payroll expenses included:

  • Interest on mortgage payments, excluding prepayments
  • Rent
  • Utilities
  • Interest on debt obligations incurred before the covered period

Additionally, the new legislation expanded forgivable non-payroll expenses to include:

  • Certain operational expenditures like software and cloud computing service payments used to facilitate business operations, accounting, service or product delivery, payroll processing, billing, inventory, and HR functions
  • Property damage costs incurred during public disturbances that happened in 2020 and were not covered by insurance
  • Select supplier costs including payments to suppliers of goods that are essential to operations
  • PPE equipment and other worker protection expenses incurred to comply with CDC, HHS, OSHA, or state and local government authority after March 1, 2020, until the president’s national emergency declaration expires

Note that expenses for HSAs, QSEHRA, and Commuter Benefits like mileage reimbursement are still not covered under the new PPP guidance.

PPP Loan Terms

The new legislation brings additional clarity to the terms of PPP loans. Here are some of the highlights:

  • Interest rates are fixed at 1%
  • Interest is non-compounding and non-adjustable
  • No yearly fees
  • No guaranteed fees
  • No prepayment penalty
  • Borrowers are not required to provide collateral or a personal guarantee

Providing this guidance ensures that lenders cannot take advantage of borrowers seeking PPP loans. Additionally, while the maturity for PPP loans is five years, payments aren’t required until borrowers know how much of the loan will be forgiven.

Borrowers who do not apply for PPP loan forgiveness, however, will have to make payments within 10 months of the last day of their covered period.

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Loan Funding Limitations

For first-draw borrowers, there is a limit of $10 million or 2.5 times the average monthly payroll and healthcare costs; whichever is less. Some exceptions may exist for restaurants and other hospitality businesses.

The loan limit for second-draw borrowers is $2 million and includes a stricter method of calculation, which is:

  • 2.5 times the average monthly payroll and healthcare costs in the year prior to when the loan was received or the 12-month period prior to when the loan was made
  • Most hospitality and entertainment businesses, including hotels and restaurants, are eligible for up to 3.5 times the average monthly payroll and healthcare costs using the same methodology as above

If borrowers with an outstanding, unforgiven PPP loan would have been eligible for more resources under the new, expanded covered costs, they may amend their loan application and request a higher amount. Loans that have already been forgiven are not eligible to be amended.

Forgiveness and Tax Deductibility

With the expanded eligible expenses, forgiveness is much easier to receive. Additionally, the SBA has simplified the forgiveness process so that borrowers with loans of $150,000 or less may utilize a one-page application.

Tax benefits also exist for PPP loans. The funds are not included in any gross income that a business is required to report. Better yet, expenses that are paid for using the funding from a PPP loan are tax-deductible. That creates a double tax benefit as no taxes are due on the amount received and business can deduct expenses paid using the funds.

The Covered Period

New legislation has provided additional flexibility as to when borrowers use their PPP loan funds. While the covered period for the first-draw remains unchanged, second-draw borrowers can choose a covered period anywhere between 8 to 24 weeks after receiving the loan. This provides much-needed freedom to utilize the funds as necessary and eliminates the restrictions faced during the first-draw covered period.

Updated Eligibility Requirements

First- and second-draw loan recipients each have specific eligibility requirements. Both types of applications require that a business was operational before February 15, 2020, and remains operational. The first difference occurs in the required number of full-time, part-time, or seasonal employees:

  • First-draw applicants: Must have less than 500 employees
  • Second-draw applicants: Must have less than 300 employees or less than 300 employees per business location

Additional Eligibility Requirements for Second-Draw PPP Loans

Proof of 25% Revenue Reduction
One of the more stringent expectations of second-draw borrowers is the required proof of revenue reduction. In order to qualify, borrowers must show a revenue reduction of at least 25% in the first, second, or third quarter of 2020 when compared to that same quarter in 2019. The following are all required to be included in the revenue calculation:

  • Fees
  • Dividends
  • Commissions
  • Sales of products or services
  • All revenue from every source in whatever form received or accrued by the borrower and any affiliates

The funding from first-draw PPP loans is, however, excluded from this revenue calculation.

Only loans totaling over $150,000 will require borrowers to submit documentation to prove revenue decline during the application process. However, all borrowers will need to submit this information when applying for forgiveness. Here are some forms that will help provide the proper documentation:

  • Relevant tax forms
  • Quarterly financial statements
  • Bank statements

Fully Used First-Draw PPP Loan
In order to be eligible for a second-draw PPP loan, borrowers must have already used or will use their entire first-draw PPP loan.

Eligible Businesses

The following are eligible businesses for both first- and second-draw PPP loans:

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • Certain 501(c)(6) non-profit organizations
  • Seasonal employers
  • Faith-based organizations that have less than 150 employees
  • Housing cooperatives that employ less than 300 people

For further information on which businesses are eligible, visit the SBA website.

Ready to Apply?

Applications are ready for borrowers now and will remain live until March 31, 2021. Funds are first come, first serve so it’s best to apply as soon as possible. Finding lenders is easier than ever using the SBA’s Lender Match website.

Before applying, it’s best to gather these documents for both 2019 and 2020:

  • Tax returns, if available
  • Financial statements, including profit & loss
  • Bank statements
  • Payroll records and reports

Borrowers can also review the first-draw application and second-draw application when preparing to apply. When in doubt, hiring a professional accountant can help borrowers get the maximum amount from their PPP loans.

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