New SBA Guidance on First and Second-Draw PPP Loans
- Charles Ciaccio
- January 13, 2021
On Monday, January 11, The U.S. Small Business Administration (SBA), in consultation with the U.S. Treasury Department, reopened the Paycheck Protection Program (PPP) loan portal. Below is a summary of First and Second-Draw PPP loan eligibility requirements.
On December 27, 2020, the Consolidated Appropriations Act, 2021, became law. Title III of that act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) re-opened and made modifications to the Paycheck Protection Program loans (PPP Loans). Eligible companies who did not receive a PPP Loan in previous rounds may apply for a PPP Loan beginning January 11, 2021 (First-Draw PPP Loan).
Eligible companies who did receive a PPP Loan in previous rounds and who have spent all their PPP Loan funds may apply for a second PPP Loan (Second-Draw PPP Loan), although most lenders are not yet taking applications for Second-Draw PPP Loans. Both programs end March 31, 2021.
The SBA announced that starting on Jan. 13, participating community financial institutions may begin submitting application information to SBA for Second-Draw PPP loans. Additional lenders will be able to submit First and Second Draw PPP loan applications a few days later, according to the SBA.
Changes to the PPP Loan Program: First and Second-Draw PPP Loans
The Economic Aid Act made some borrower-friendly modifications to the PPP Loan program for First-Draw PPP Loans that expanded eligibility for certain types of companies and that broadened the permissible uses of PPP Loan funds. Generally, though, the qualification requirements for First-Draw PPP Loans remain the same as in previous rounds of PPP Loans (e.g., qualification by having 500 employees or fewer), and the same affiliation rules apply.
Second-Draw PPP Loans are capped at $2 million per borrower and are more restrictive in their eligibility requirements. Applicable to most potential borrowers is that eligibility requires having 300 employees or fewer and being able to demonstrate a 25% reduction in gross receipts in one calendar quarter of 2020 versus the same calendar quarter in 2019.
Certain lenders are already accepting applications for new First-Draw PPP Loans.
Clarifications and Expanded Eligibility for All PPP Loans
- All borrowers now have the choice of a “covered period” of either 8 weeks or 24 weeks from the date of receipt of the PPP Loan funds.
- New expanded eligibility for certain news organizations and broadcast stations; destination marketing organizations; and entities undergoing a reorganization in bankruptcy.
- Prohibition on borrowers affiliated with the U.S. president, vice president, heads of federal executive departments, members of congress, or their respective spouses. Existing borrowers must disclose these affiliations.
- Entities that receive a new Shuttered Venue Operator grant are ineligible for any PPP Loan
- Confirmation of full tax deductibility of expenses for which PPP Loan funds are used to the extent such expenses would have been deductible if non-PPP Loan funds were used.
- Clarification that group life, disability, vision or dental insurance costs are included as eligible payroll costs.
- Requirement that the SBA put into place a new simplified forgiveness application for PPP Loans up to $150,000
- Expansion of permissible uses for PPP Loan funds, which now include the following:
- Covered operations expenditures: “payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
- Covered property damage costs: “cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation”
- Covered supplier costs: “an expenditure made by an entity to a supplier of goods for the supply of goods that (A) are essential to the operations of the entity at the time at which the expenditure is made; and (B) is made pursuant to contract, order, or purchase order (i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan”
- Covered worker protection expenditures: expenditures to facilitate adaptation of business activities to comply with laws regarding COVID-19. These are things like personal protective equipment or upgrades to physical facilities to, e.g., install plexiglass protection barriers.
First-Draw PPP Loan Requirements
• Only available if the borrower has not yet received a PPP Loan
• Same eligibility standards as for the first rounds of PPP Loans (e.g., companies with 500 or fewer employees may qualify)
• All borrowers now have the choice of a “covered period” of either 8 weeks or 24 weeks from the date of receipt of the PPP Loan funds
• New expanded eligibility for certain news organizations and broadcast stations; destination marketing organizations; and entities undergoing a reorganization in bankruptcy
Second-Draw PPP Loans Requirements
- Generally, the same eligibility rules (including the same affiliation rules), the same usage requirements and the same forgivability rules as First-Draw PPP Loans, with certain tightened eligibility requirements:
- Only applicants with 300 or fewer employees will qualify (or, for businesses with NAICS Code 72 and for certain news organizations and broadcast stations, with 300 or fewer employees per location). Although applicants may use the SBA industry standards for small businesses or the SBA alternative size standard in order to qualify for First-Draw PPP Loans, they may not use those rules for Second-Draw PPP Loans. The 300-employee test is the only method for complying with the size requirement here.
- Applicant must have had gross receipts in one calendar quarter of 2020 that demonstrates at least a 25% reduction from gross receipts during the same calendar quarter in 2019. Note that applicants with affiliates must aggregate affiliates’ gross receipts with their own for purposes of these calculations.
- Same exceptions to affiliation rules generally apply
- An applicant must have previously received a PPP Loan and spent those funds in full to be eligible for a Second-Draw PPP Loan.
The above is a summary of the First-Draw PPP Loan and Second-Draw PPP Loan rules and is not intended to be an exhaustive explanation of the Economic Aid Act or Paycheck Protection Program. If you have questions regarding your individual situation, we recommend that you reach out to your legal counsel or other professional advisors. The KO Team can be contacted here.
- Text of statute
- Interim Final Rule for First-Draw PPP Loans
- Interim Final Rule for Second-Draw PPP Loans
- Application Form for First-Draw PPP Loans
- Application Form for Second-Draw PPP Loans
The information above is updated as of January 12, 2021