Second Draw PPP Loan Application Released by SBA

On January 8, 2021, the U.S. Small Business Administration (SBA) released the Second Draw Borrower Application Form, SBA Form 2483-SD, for borrowers seeking a Second Draw PPP Loan.

IMPORTANT NOTE: Borrowers who previously returned some or all of their First Draw PPP Loan funds or did not accept the full amount will also need to submit a Borrower Application Form, SBA Form 2483 to apply for an increase in their initial draw. Read more here.

The release of the applications came a few short hours after the SBA announced that the portal to accept PPP loan applications will re-open for existing PPP borrowers the week of January 11^th. To promote access to capital, only community financial institutions will be able to make Second Draw PPP Loans on Wednesday, January 13, 2021. The PPP will open to all participating lenders shortly thereafter.

Here’s what you need to know about Second Draw PPP Loans.

Eligibility

A borrower is generally eligible for a Second Draw PPP Loan if the borrower previously received a First Draw PPP Loan and has or will use the full amount, has no more than 300 employees,* and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

*Exceptions in employee numbers apply for businesses in the Accommodation and Food Services sector (NAICS Code beginning with 72).

Alternative calculations are provided for applicants that were not in business for all of 2019 as follows:

• For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
• For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
• For entities not in business during 2019 but in operation on February 15, 2020, applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.

Read our article on how to define and calculate gross receipts.

Borrowing Capacity

For most applicants, the maximum loan amount of a Second Draw PPP Loan is 2.5x the average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector, the maximum loan amount for a Second Draw PPP Loan is 3.5x the average monthly 2019 or 2020 payroll costs up to $2 million.

The following methodology, authorized by the Consolidated Appropriations Act, 2021 (the Act), will be useful for many applicants in calculating the loan amount.

Step 1: Aggregate payroll costs (defined below) from 2019 or 2020 for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5 or 3.5 if the applicant operates in the Accommodation and Food Services sector.

Step 5: Determine the lessor of the result of Step 4 or $2 million.

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave (except those paid leave amounts for which a credit is allowed under Families First Coronavirus Response Act, Sections 7001 and 7003); allowance for separation or dismissal; payment for the provision of employee benefits (including insurance premiums) consisting of group healthcare coverage, group life, disability, vision, or dental insurance, and retirement benefits; payment of state and local taxes assessed on compensation of employees; and, for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

Additional information on how to calculate maximum loan amounts (by business type) can be found in the Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act released on January 6, 2021.

Required Documentation for Payroll Costs

Generally, an applicant will be required to submit the following information:

• If the applicant is not self-employed, the applicant’s Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, must be provided. A partnership must also include its IRS Form 1065 K-1s.
• If the applicant is self-employed and has employees, the applicant’s 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, if applicable, must be provided. A payroll statement or similar documentation from the pay period covering February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
• If the applicant is self-employed and does not have employees, the applicant must provide (a) its 2019 or 2020 (whichever was used to calculate loan amount) Form 1040 Schedule C, (b) a 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; and (c) a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on February 15, 2020.

However, the Interim Final Rule on Second Draw Loans released on January 6th provides administrative relief to applicants. It states that “[a]t the time an applicant submits its loan application form, it must submit the following (detailed above) unless the documentation was submitted to the lender for the First Draw PPP Loan (i.e., the applicant used calendar year 2019 figures to determine both its First Draw PPP Loan amount and its Second Draw PPP Loan amount, and the lender for the applicant’s Second Draw PPP Loan is the same as the lender that made the applicant’s First Draw PPP Loan).”

In our discussions with the lending community, we know that this will lead to diversity across the industry. Lenders are still required to “[c]onfirm the dollar amount of average monthly payroll costs for 2019 or 2020 (whichever was used to calculate loan amount) by reviewing the payroll documentation submitted with the borrower’s application.” Therefore, we expect many lenders will require the submission of the payroll documentation noted above in order expedite application processing time.

Required Documentation for Gross Receipts

For loans with a principal amount greater than $150,000, sufficient documentation establishing that the applicant experienced a reduction in revenue must be provided at the time of application, which may include relevant tax forms, such as annual tax forms, or if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

For loans with a principal amount of $150,000 or less, the applicant must submit documentation sufficient to establish that the applicant experienced a reduction in revenue at the time of application, on or before the date the borrower submits an application for loan forgiveness, or, if the borrower does not apply for loan forgiveness, at SBA’s request. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

Our Take

In our discussions with the small business community, many wonder if the “necessity provision” will apply to Second Draw PPP Loans. Our expectations have been confirmed – applications will be required to certify, in good faith, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

It is unknown whether the SBA will continue operating under the assumption that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith” as noted in FAQ 46.

What’s Next

We expect participating lenders to accept applications across various formats and timeframes.  Businesses should consider where to apply, evaluate eligibility, and gather the appropriate documentation for the respective application(s).

Let Aprio Help

Aprio has established a dedicated PPP team that is continuously monitoring new guidance from the SBA, as well as the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.

To discuss your eligibility for a Second Draw PPP Loan, increases to your First Draw PPP Loan and/or accurately calculate your borrowing capacity, contact Aprio’s dedicated PPP team.

Disclaimer for services provided relative to SBA programs and the CARES Act

Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.

The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.

Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.

You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.

In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.

Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.