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Second Draw PPP Loans Are Here: Are You Eligible?

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The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, more commonly known as the Economic Aid Act, changed existing rules for the U.S. Small Business Administration’s (SBA) initial Paycheck Protection Program (PPP) loans to allow certain eligible borrowers that previously received a PPP loan to apply for an additional PPP loan, which is referred to as Second Draw Loan. Second Draw Loans will have same general loan terms as the first PPP loans borrowers received during 2020, which are referred to as First Draw PPP Loans.

Borrowers can now apply for a Second Draw PPP Loan until March 31, 2021. All Second Draw PPP Loans will have the same terms regardless of lender or borrower. Borrowers are permitted to use their average monthly payroll for 2019 or 2020 (excluding costs over $100,000 on an annualized basis) for their Second Draw PPP Loan amount calculation. More detailed calculations provided by the SBA can be found by clicking here.

At least $25 billion of the Second Draw PPP Loan pool is being set aside for eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods.

Second Draw PPP Loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.

If you need assistance to identify if you are eligible and/or help with completing your application, please contact us by clicking here.

Here’s the Second Draw PPP Loan initiative at a glance:

Eligibility

A borrower is generally eligible for a Second Draw PPP Loan if they:

  • received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
  • have no more than 300 employees; and
  • can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020, or a 25% reduction in gross receipts in 2020 when compared to annual gross receipts in 2019.

Loan Terms

  • 1% interest rate
  • 5 year term
  • No collateral required

Full Forgiveness Terms

Second Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:

  • employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan;
  • the loan proceeds are spent on payroll costs and other eligible expenses; and
  • at least 60% of the proceeds are spent on payroll costs.

Maximum Loan Amount and Increased Assistance for Accommodation and Food Services Businesses

For most borrowers, the maximum loan amount of a Second Draw PPP Loan is 2.5 times 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 3.5 times the average monthly 2019 or 2020 payroll costs up to $2 million.

While the official SBA guidance, which be found by clicking here, answers many questions related to eligibility and how to calculate Second Draw PPP Loan revenue reductions and maximum loan amounts, each business has unique needs and special circumstances that may not be directly addressed in the document, as determination most likely will require a detailed review of your financial statements, tax returns and other documentation.

If you need assistance to identify if you are eligible and/or help with completing your application, please contact us by clicking here.

The SBA continues to stress that detailed recordkeeping will be key to loan approval and full forgiveness. Click here for an overview of what businesses should be tracking.

Common questions related to Second Draw eligibility include:

  • What are “gross receipts” for the purpose of determining eligibility for a Second Draw PPP Loan?
  • For all entity types (e.g., for-profit businesses and nonprofits), do “gross receipts” include PPP loan proceeds that are forgiven (or Economic Injury Disaster Loan advances)?
  • What reference periods can be used to determine whether the Applicant can demonstrate at least a 25% gross receipts reduction to qualify for a Second Draw PPP loan?
  • What documentation do I need to provide to corroborate that my entity sustained at least a 25% reduction in gross receipts?
  • If I use my entity’s annual income tax returns to demonstrate a gross receipts reduction of at least 2% , what amounts do I use to calculate gross receipts
  • I am applying for a Second Draw PPP Loan amount greater than $150,000. When do I need to provide the documentation to substantiate the reduction in gross receipts?
  • I am an applicant for a Second Draw PPP Loan amount of $150,000 or less. When do I need to provide the documentation to substantiate the reduction in gross receipts?
  • Can I document my reduction in gross receipts with income tax returns if my entity files taxes on the basis of a fiscal year that differs from the calendar year?

Common questions related to calculating maximum Second Draw PPP Loan amounts include:

  • I am self-employed and have no employees. How do I calculate my maximum Second Draw PPP Loan amount?
  • I am self-employed and have employees. How do I calculate my maximum Second Draw PPP Loan amount (up to $2 million)?
  • I am a self-employed farmer or rancher who reports my income on IRS Form 1040 Schedule F. What documentation must I provide in place of Schedule C and how should my maximum Second Draw PPP Loan amount be calculated (up to $2 million)?
  • How do partnerships apply for Second Draw PPP Loans and how is the maximum Second Draw PPP Loan amount calculated for partnerships (up to $2 million)? Should partners’ self-employment income be included on the business entity level Second Draw PPP Loan application or on separate Second Draw PPP Loan applications for each partner?
  • How is the maximum Second Draw PPP Loan amount calculated for S corporations, C corporations and for eligible nonprofit organizations, veterans organization, and tribal businesses (up to $2 million)?
  • I am an LLC owner. Which set of instructions applies to me?
  • What other documentation can an applicant provide for the purpose of substantiating payroll costs used to calculate the applied-for Second Draw PPP Loan amount?
  • How is the maximum Second Draw PPP Loan amount calculated for a corporation or nonprofit not in operation for the full one-year period preceding February 15, 2020?
  • I am self-employed (or a partnership) and was in operation on February 15, 2020, but was not in operation for the full one-year period preceding February 15, 2020. I have filed or will file a Form 1040 Schedule C or Schedule F (or Form 1065) for 2020. What reference period should I be using to compute my Second Draw PPP Loan amount?
  • If I used payroll costs from the prior 12 months when computing my First Draw PPP Loan amount, can I continue to use those figures to compute my Second Draw PPP Loan amount?
  • Can I enter NAICS code 72 on my Second Draw PPP Loan application if the business activity code line was left blank on my business’s most recently filed income tax return?
  • In addition to pre-tax employee contributions for health insurance, what are the other pre-tax employee contributions for fringe benefits that may have been excluded from IRS Form 941 Taxable Medicare wages and tips that is part of employee gross pay?
  • How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?
  • Is there a limit on the dollar amount of Second Draw PPP Loans a corporate group can receive?

SBA guidance on the questions listed above can be found by clicking here.

NEED HELP?

Ericksen Krentel continues to monitor the ever-changing guidance and requirements for the PPP loan application process to assist you in receiving the maximum benefits allowable. Our team is ready to help create a customized approach for your organization to effectively, and correctly, apply for a PPP loan

If you are interested in applying for a PPP loan and need assistance, please contact us by clicking here.

As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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