Need Another PPP Loan For Your Small Business? Here Are The New Rules

second draw loan

Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic. One item of interest for small business owners in the Consolidated Appropriations Act (CAA) is the opportunity to take out a second loan under the Paycheck Protection Program (PPP2). This is also known as the “Second Draw Loan”.

The Basics

The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:

  • Employ no more than 300 employees per physical location.
  • Have used or will use the full amount of your first PPP loan.
  • Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to use gross receipts from the fourth quarter of 2020.

Eligible entities include:

Additional Points

Here are some additional points to consider:

Loan Terms

Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year. However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP2 Second Draw Loan is permitted to an eligible entity.

Gross Receipts & simplified certification of Revenue Test

PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.

Loan Forgiveness

Like the first PPP loan, a PPP2 Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and non-payroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.

Application of Exemption Based on Employee Availability

The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Deductibility of Expenses Paid by PPP Loans

The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans are deductible. The IRS eventually took the position that these PPP expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.

Further Questions

Contact us with any questions you might have about PPP loans, including applying for a Second Draw Loan (PPP2) or availing yourself of forgiveness. We provide accounting services in the greater Milwaukee, Wisconsin and Chicago, Illinois areas.