Following the passing of the Economic Aid Act, which provided that certain Paycheck Protection Program (PPP) borrowers may be eligible for a second draw loan, the Small Business Administration (SBA) has released guidance to further assist borrowers in calculating both the revenue reduction requirement and the amount of the second draw loan. The guidance also clarifies for borrowers the necessary documentation that is needed to support the application for a second draw loan.
As discussed in our alert from January 8, 2021, certain PPP borrowers have the opportunity to take a second draw loan, provided they meet eligibility requirements. Namely, borrowers must have (i) 300 or fewer employees, (ii) experienced a revenue reduction of at least 25 percent in any quarter in 2020 relative to the same quarter in 2019, (iii) previously received a PPP loan, and (iv) used or will use the full amount of their initial PPP loan for authorized purposes on or before the expected date of disbursement of the second draw PPP loan.
Unless a waiver of the affiliation rules is applicable, the revenue reduction requirement is determined by looking at a borrower’s and its affiliates’ aggregate gross receipts. If a borrower acquired an affiliate in 2020 or was acquired as an affiliate during 2020, gross receipts include the receipts of the acquired or acquiring concern. This aggregation applies for the entire measurement period and not just the period after the affiliation arose.
For for-profit businesses, gross receipts generally are all revenue in whatever form received or accrued (in accordance with the borrower’s accounting method) from any source, including from the sales of products or services, interest, dividends, rent, royalties, fees, or commissions, reduced by returns and allowances, but excluding net capital gains and losses. For not-for-profit organizations, gross receipts means the gross amount received by the organization during its annual accounting period from all sources, without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Specifically excluded from the definition of gross receipts are previous PPP loan proceeds and any EIDL advance.
Borrowers must demonstrate at least a 25 percent reduction in gross receipts in any quarter of 2020 as compared to the same quarter in 2019. Alternatively, borrowers in business in 2019 may compare annual gross receipts in 2020 with annual gross receipts in 2019.
Borrowers can substantiate their revenue reduction by providing either quarterly financials, quarterly or monthly bank statements showing deposits from the relevant quarters, or annual federal income tax filings. Borrowers that use a fiscal year to file taxes, as opposed to a calendar year, may document a reduction in gross receipts with their income tax return only if their fiscal year contains all of the second, third, and fourth quarters of the calendar year (i.e., fiscal year start dates of February 1, March 1, or April 1).
For second draw loans in excess of $150,000, a borrower must provide the required documentation substantiating the reduction in gross receipts at the time of the application. For second draw loans of $150,000 or less, the substantiation is provided at the time the borrower seeks forgiveness.
The maximum loan amount for second draw PPP loans is limited to the lesser of (1) the average total monthly payment for payroll costs incurred or paid during either (i) the 2020 calendar year or (ii) the 2019 calendar year, multiplied by 2.5 or (2) $2 million. In the case of borrowers who are not self-employed, the borrower can use the precise one-year period before the date the loan is made or calendar year 2020. For accommodation and food service industries, the multiplier is 3.5 of the average payroll with the same $2 million cap. If a borrower used the precise one-year period when computing the initial PPP loan, it cannot use those figures to compute the second draw loan. Rather, the borrower can calculate its second draw loan using either calendar year 2019 or 2020 payroll costs.
The guidance provides step-by-step examples of how to calculate the maximum second draw loan amount based on the type of borrower and its circumstances as well as the documents required to verify the calculation. Examples for self-employed borrowers, partnerships, S corporations, C corporations, and not-for-profit organizations are also included. Limited liability companies should follow the instructions that apply to their tax status. In addition to the borrower-specific documentation, borrowers may provide IRS Form W-2s and IRS Form W-3 or payroll processor reports, including quarterly and annual tax reports in lieu of IRS Form 941.
If you have any questions regarding this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Samantha Podlas, associate, at spodlas@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.