Eligibility Expanded for Second Round of PPP Loans

paycheck-protection-program-round-two-ppp

More Farmers Will Qualify Under New Rules

By Austin Coyan, CPA, CFE

A second round of Paycheck Protection Program (PPP) lending is one of the most important provisions of the COVID-19 stimulus legislation recently enacted, creating a new pool of $284 billion available to small businesses and farmers.

The goal of the second round of PPP funding is to help small businesses that are still suffering financially due to the continuing COVID-19 pandemic. The new round of funding includes new rules designed to help smaller businesses and specific industries that have been hardest hit by the pandemic. It also expands the availability of PPP loans for farmers and ranchers.

Online applications are now being accepted by the Small Business Administration, and business owners who want to access funds need to know the rules governing this round of PPP lending, as some of them have changed from the first round.

A limited application period opened on January 11, 2021, specifically for applicants who had not received PPP loans last year and certain other businesses, with maximum loan amounts set at $10 million. These loans and those made in 2020 are referred to as first draw PPP loans.

The broader application period – open to all other eligible applicants – opened on January 13, 2021, with maximum loan amounts set at $2 million.  Applications are open to those who have already received a PPP loan and meet certain requirements and are requesting a second PPP loan. These loans are called second draw PPP loans.

While PPP loans are potentially forgivable, loan recipients must apply for forgiveness and meet all the eligibility requirements. Loans that are not forgiven are repayable at 1% interest over a period of five years.

Know the Rules

Certain requirements of the PPP program are the same in the second round. For instance, to qualify for loan forgiveness, recipients must meet the government’s requirements around how the loan proceeds are spent. At least 60% of the money must be spent on wages, healthcare benefits, and other qualified payroll costs; the remainder can be used to cover the costs of rent, mortgage interest, and utilities.

But under the new legislation, additional costs may be covered by PPP loan proceeds, including personal protective equipment (PPE), facility modification expenses related to COVID-19 safety, certain property damage costs, payments to suppliers, and payments for software and cloud services related to remote work necessitated by COVID-19, certain service and product delivery services, and back-office functions.

If you received a PPP loan during the first round in 2020, you may be eligible to receive an additional draw on your original loan in this round, but that is not guaranteed. You may be able to qualify if you paid all or part of your original loan back or if you did not receive the full amount of PPP you were eligible for if your loan was not forgiven by December 27, 2020. Talk with your lender about the new rules and how they affect you.

The second draw PPP loans are limited to businesses with fewer than 300 employees, down from 500 for the first round in 2020 and those looking to make a first draw PPP loan.

To qualify for a second draw PPP loan, a business must be able to document a 25% reduction in gross receipts for any quarter in 2020 compared to the same quarter in 2019. Gross receipts include sales, commissions, royalties, interest, and dividends. The guidance by SBA clearly excludes capital gains but provides no guidance on ordinary gains.

A greater than 25% reduction in gross receipts for the full year of 2020, compared with the full year of 2019, also qualifies.

Per the SBA, if the amount of the loan being sought is less than $150,000, the applicant does not need to provide documentation of the 2020 reduction in gross receipts at the time of application. However, the documentation must be provided when the loan recipient applies for forgiveness. Individual lenders may require this documentation upfront, so it is important to work with your lender when completing your application.

Loan applications for more than $150,000 require documentation at the time the application is submitted by the SBA.

Loan Calculation

Loan amounts are still based on 2.5 times your business’s average monthly payroll costs (capped at $100,000 per employee). Restaurants, hotels, and those businesses with a NAICS code starting in 72 may calculate their loan amounts at 3.5 times average monthly payroll costs. The wage base from either 2019, 2020, or the 365 days prior to the loan may be used.

Farmers and ranchers will see an expanded ability to access PPP loans in the new round. The prior PPP program required farmers to use their net income, line 34 on the Schedule F, which may have been negative due to depreciation expense. The new rules allow the use of gross income (line 9) from the Schedule F capped at $100,000 in the calculation for farmers with no employees. Farmers that did have employees but did not have a $100,000 net income on the Schedule F have a calculation to complete to see if they will qualify for additional funds using their gross income (line 9).

How to Prepare

If you are planning to apply for a PPP loan, the first step is to determine your eligibility under the new rules. Produce the documentation necessary to prove your 2020 reduction in gross receipts. A financial statement or monthly financial reports will suffice, but you can also include tax filings or bank statements.

It is important to talk with your lender now to ensure you are gathering the proper information they will require to process your loan. All PPP applications once again must be completed through a qualified SBA lender.

Expanded Employee Retention Tax Credit

The new COVID-19 stimulus legislation also expanded the Employee Retention Tax Credit, which was enacted in March 2020 to encourage employers to keep workers on the payroll during the pandemic.

Under the first round of PPP loans, businesses could not utilize both PPP loans and the ERTC. The rules under the new Act allows PPP loan recipients to utilize the ERTC for payroll-related costs that are in excess of those covered by their PPP loans.

The extended credit is available for wages paid from January 1, 2021, through June 30, 2021. The credit is 70% of qualified wages paid. Maximum amount equals 70% of up to $10,000 wages – this means up to $7,000 per quarter per employee ($10,000 x 70% =$7,000).

Employers can re-visit their 2020 wage base to check if they qualified for ERTC in 2020 with a greater than 50% decrease in revenue or shutdown due to government order. The original credit was 50% of qualified wages up to a limit of $5,000 for the year. If an employer did not complete this credit when filing their normal quarterly reports, they can amend the returns or claim a refund using Form 7200.

If the numbers are close and you won’t be able to utilize both a PPP loan and the ERTC, have a discussion with your Adams Brown tax advisor to determine which will be more beneficial to your business.

The application period for the new rounds of PPP loans closes on March 31, 2021. Contact your Adams Brown advisor soon to discuss whether a PPP loan will benefit you and your business.