Numerous changes have been made to the Paycheck Protection Program (PPP) in recent months, primarily stemming from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) signed into law in December 2020 as part of the overall Consolidated Appropriations Act, 2021, and related administrative rules and guidance issued by the Small Business Administration (SBA). In this article, we address frequently asked questions and guidance regarding the eligibility of previous PPP loan recipients to receive a second PPP loan (Second Draw Loans).
Who is eligible for a Second Draw Loan?
Most of the same basic eligibility parameters of First Draw Loans also apply to Second Draw Loans. However, there are some additional or different criteria that Applicants must meet for Second Draw Loans:
- Applicant must have previously received a First Draw Loan (in accordance with eligibility requirements);
- Applicant must have used, or will use, the full amount of its First Draw Loan (including any increase on such loan) for permissible purposes on or before the date on which the Second Draw Loan will be disbursed;
- Together with affiliates, Applicant must have no more than 300 employees (alternative criteria apply for businesses with NAICS code beginning with 72 and eligible news organizations with multiple physical locations); and
- Applicant must be able to demonstrate a quarter-over-quarter reduction in revenue in 2020 compared to 2019 of at least 25 percent.
For additional information on eligibility requirements for First Draw Loans, please see our article "FAQs on PPP First Draw Loans."
Note that Applicants are only eligible to receive one Second Draw Loan.
How is the 25 percent revenue reduction calculated?
This threshold can be met in different ways, depending on when the Applicant was in business, but generally is based on gross receipts. Generally, if the Applicant had gross receipts during any quarter of 2020 that demonstrate at least a 25 percent reduction in Applicant's gross receipts as compared to the same quarter in 2019, the revenue reduction criteria is met.
If the Applicant was not in business during the first or second quarter of 2019 but was in business during the third and fourth quarters of 2019, Applicant can compare third or fourth quarter of 2019 against any quarter of 2020 to demonstrate the revenue reduction. Similarly, if the Applicant was not in business during the first, second or third quarter of 2019, but was in business during the fourth quarter, the Applicant can compare the fourth quarter of 2019 against any quarter of 2020.
Alternatively, if the Applicant who was operational in all four quarters of 2019 is deemed to meet the revenue reduction requirement if it can demonstrate a reduction in annual receipts of 25 percent or more in 2020 compared to 2019 (provided the Applicant can provide annual tax forms substantiating the revenue decline).
Keep in mind, however, that gross receipts of the Applicant must be aggregated with the gross receipts of its affiliates.
If the Applicant was not in business during 2019, but was in operation on February 15, 2020, Applicant will meet the revenue reduction if it had gross receipts during the second, third or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the gross receipts of the Applicant during the first quarter of 2020.
The Applicant should be prepared to provide documentation substantiating the loss in revenue. For loans over $150,000, this documentation must be presented to the Lender at the time of Application; for loans less than $150,000, such documentation will need to be provided at or prior to the time the Applicant applies for forgiveness for the Second Draw Loan (or at the SBA's request).
Note that while the new rules do provide some guidance, there is still some uncertainty surrounding certain Second Draw Loan situations involving changes to affiliates, acquisitions and accounting systems that vary between the comparison periods used to show 25 percent reduction in revenue. We recommend that Borrowers work with their Lenders and counsel to evaluate their particular situations, keeping in mind that additional guidance from SBA is still needed.
What is the definition of “gross receipts?”
Gross receipts include all revenue in whatever form received or accrued in accordance with the Borrowers’ accounting method, from whatever source. Sources include: sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
In general, receipts are considered total income plus the cost of goods sold, excluding net capital gains or losses that are defined and reported on IRS tax return forms. Items such as employee-based costs (e.g. payroll taxes) may not be excluded from gross receipts. In addition, gross receipts of the Borrower must be aggregated with the gross receipts of its affiliates. Gross receipts do not include items such as: taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the Borrower or its employees; proceeds from transactions between the Borrower and its domestic or foreign affiliates; amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customers broker.
What are the terms of a Second Draw Loan?
Generally speaking, the terms of Second Draw Loans will be the same as those for First Draw Loans.
Does my First Draw Loan need to be forgiven before I can receive a Second Draw Loan?
No. However, the funds from a First Draw Loan do need to be used up entirely on permissible expenses before the Second Draw Loan is disbursed.
Note that if the Applicant has a First Draw Loan that is currently under review by the SBA (including a loan of $2 million or more that triggered an automatic review), it will not receive a loan number or funds for a Second Draw Loan until the issue related to the First Draw Loan is resolved.
How much am I eligible to receive for a Second Draw Loan?
In general, eligible Applicants can receive up to two and a half months of the Applicant's average monthly payroll costs (which are calculated in the same manner as for First Draw Loans), capped at a maximum of $2 million.
The new rule also provides maximum loan amount calculations for seasonal employers, Applicants who were not in operation during the one-year period prior to February 15, 2020, Applicants operating with a NAICS code beginning 72, farmers and ranchers, partnerships, and those who are self-employed. While the calculations vary slightly, these types of Applicants are all capped at maximum loans of $2 million.
Note that businesses that are part of a single corporate group will be capped at an aggregate amount of $4 million in Second Draw Loans.
The SBA’s instructions regarding loan calculations for different types of applicants can be found here. Note, however that since these instructions were published, the rules have been changed to allow sole proprietors, independent contractors and self-employed individuals to use gross income, rather than net income, when calculating the eligible loan amount.
What documentation will I need to provide to apply for a Second Draw Loan?
Applicants who are not self-employed:
- IRS Form 941 (or similar tax form) for relevant quarters in 2019 or 2020 (whichever was used to calculate loan amount)
- State quarterly wage unemployment insurance tax reporting forms (or equivalent payroll processor records) for relevant quarters in 2019 or 2020
- Evidence of any qualifying retirement and employee group insurance contributions
- Partnerships must also submit their IRS Form 1065 K-1s
Applicants who are self-employed but have employees:
- IRS Form 1040 Schedule C for 2019 or 2020, as applicable
- IRS Form 941 (or similar tax form or equivalent payroll processor records) for relevant quarters in 2019 or 2020
- State quarterly wage unemployment insurance tax reporting forms (or equivalent payroll processor records) for relevant quarters in 2019 or 2020
- Evidence of any qualifying retirement and employee group insurance contributions. In addition, such Applicants must provide a payroll statement or similar documentation to establish that the Applicant was in operation on February 15, 2020
Applicants who are self-employed and do not have employees:
- IRS Form 1040 Schedule C for 2019 or 2020, as applicable
- IRS Form 1099-MISC for 2019 or 2020, as applicable, showing nonemployee compensation received
- 2020 invoice, bank statement or book of record to show Applicant was in operation on or around February 15, 2020
As noted above, for loans over $150,000, documentation to establish the Applicant's reduction in revenue will need to be provided at the time of the Application. For loans $150,000 and under, such documentation will need to be provided on or before the date the Applicant applies for loan forgiveness (or at the SBA's request).
What certifications do I need to make in order to apply for a Second Draw Loan?
In general, an Applicant must make the same certifications to receive a Second Draw Loan as to receive a First Draw Loan. In addition, Second Draw Loan Applicants must also certify that they:
- Have not and will not receive an additional Second Draw Loan
- Meet the required 25 percent reduction in gross receipts threshold
- Have used or will use the full amount of a First Draw Loan only for eligible expenses
- Are not a business concern organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong or have significant operations there, nor have a board member that is a resident of the People’s Republic of China
- Are not required to submit a registration statement under section 2 of the Foreign Agents Registration Act
- Are not primarily engaged in political or lobbying activities
Just as with the First Draw Loan, Applicants are still required to certify that "[c]urrent economic uncertainty makes this [Second Draw Loan] request necessary to support the ongoing operations of the Applicant." Based on the SBA’s updated FAQs, because Second Draw Loan Borrowers must demonstrate that they have had a 25 percent reduction in gross revenues, all Second Draw Loan Borrowers will be deemed to have made the required certification in good faith. However, Applicants should still be careful to evaluate their circumstances to confirm this certification can be made in good faith.
Additional Information
A link to the Second Draw Borrower Application Form is below. Forms and additional guidance can be found on the SBA and Department of Treasury’s websites. We have also included links below to our other articles in this series.
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