The economic fallout from COVID-19 has continued to wreak havoc with hundreds of thousands of small businesses shuttering their businesses. After months of Congressional wrangling, the recently passed 2021 Consolidated Appropriations Act provides $284 Billion additional funding to support new Paycheck Protection Program (PPP) forgivable loans.

The new funding will allow small businesses that sustained significant revenue reductions in 2020 to apply for a second PPP loan. Additionally, first loans will be available to small businesses meeting the expanded qualifying criteria.

The loan application window closes March 31, 2021. Small businesses that move quickly will  be served first.

What are criteria and provisions for second-time borrowers?

Businesses that qualify for a PPP “Second Draw” loan can have no more than 300 employees, must show a 25% year over year decline in quarterly gross revenue in any of the four quarters of 2020, and have used 100% of their first PPP loan. Businesses, certain non-profit organizations, self-employed workers and independent contractors will qualify for second-draw loans.

If your business started in 2019, you’ll have to limit your year over year revenue decline analysis to just the full quarters your business existed during 2019. If your business was formed in 2020, you’ll have to compare Q2, Q3, and Q4 against 2020 Q1.

Second Draw loan amounts will be capped at $2Million. Small businesses assigned to the industry NAICS code 72 (Accommodation and Food Services) will receive PPP second draw loans equal to 3.5X average monthly payroll costs to help these businesses combat onerous state and local restrictions.

Borrowers should be aware it is unclear whether or not the necessity requirement will be modified with the Second Draw Loans. The first PPP loans required all borrowers to certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” as of the date on which the PPP loan application was submitted. We expect to see specific guidance on the certifications required in the coming weeks.

New disqualifying criteria also emerged for the new PPP loan programs. The following businesses will be excluded from First or Second Draw PPP loans:

  • any business primarily engaged in political or lobbying activities, including think tanks, research, and advocacy groups;
  • any business publicly listed and traded on a stock exchange and
  • businesses organized under Chinese or Hong Kong laws or with significant operations in or significant ownership by Chinese or Hong Kong entities are specifically excluded from second draw loans

What’s different for first-time borrowers?

Most of the criteria and calculations for the original PPP program remain in place, e.g., must have fewer than 500 employees, loan is based on 2.5 months of payroll and benefits, loans are eligible for 100% forgiveness, loan cap is $10Million.  There are, however, many improvements for both First Draw and Second Draw borrowers.

What improvements are included in PPP 2.0?

    • As part of the new Act, all expenses used to qualify for forgiveness for PPP loans will be tax-deductible. Earlier, it was clear loan forgiveness was deemed to be non-taxable income, but now the expense deductibility makes the PPP loans fully tax-free. This also applies to the first round of PPP loans.
    • PPP borrowers’ are eligible for full forgiveness during a “Covered Period” of their choosing between 8 and 24 weeks. With up to a 24 week covered period, most borrowers will be able to qualify for full forgiveness based on payroll costs alone.
    • PPP borrowers borrowing less than $150,000 will have streamlined loan forgiveness applications – forgiveness applications will be one page, with self-certifications (of need), with figures showing headcount retained, amount of loan spent on payroll costs and the total loan amount. More than 85% of the first round of PPP loans were under $150,000.
    • Certain 501(c)(6) non-profit organizations, local media (newspaper, tv and radio stations), companies in bankruptcy not originally eligible will be eligible as long as the entities do not receive more than 15% of their revenue from lobbying.
    • Loan amounts will again be based on 2.5 months of payroll and benefits expenses, but the borrower will be able to rely on 2019 payroll records or payroll records for the 12 months preceding the loan application as the basis for the loan calculation. As mentioned above, accommodation and food service businesses will be eligible for loans based on 3.5 months of payroll and benefits expenses.
    • Loan amounts for certain organizations (e.g., farmers and ranchers) will have separate loan amount calculations and will better align with recent years’ income.
    • PPP allowable and forgivable expenses expand to include supplier costs on existing contracts and purchase orders, including the cost for perishable goods at any time, costs relating to worker protective equipment and adaptive costs, and technology operations expenditures. Our analysis and experience suggests, however, that most companies will qualify for full forgiveness based on payroll expenses alone.

How can we help?

CFOs2GO started developing PPP subject matter expertise the day after the CARES act was announced. Our group is working non-stop to support clients in their efforts to secure these loans and have them forgiven. We are equipped to help your small business in all phases of the PPP loan process as well as provide consulting and advisory support for managing your business during and beyond the Covid-19 pandemic.