At the end of 2020, the Consolidated Appropriations Act, 2021 was passed to provide additional COVID-19 financial relief to the small business and nonprofit community, including a second round of Paycheck Protection Program (PPP) funding (PPP Second Draw Loans).
By way of background, on March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted to authorize the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provided up to 24 weeks of cash-flow assistance through federally guaranteed loans (Original PPP Loans) to eligible recipients. Borrowers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover other qualified expenses.
1.Who is Eligible for a PPP Second Draw Loan? To qualify for a PPP Second Draw Loan, a taxpayer must have taken out an Original PPP Loan. In addition, prior PPP borrowers must meet the following conditions to be eligible for the PPP Second Draw Loans:
- Employ no more than 300 employees per physical location;
- Have used or will use the full amount of their first PPP loan; and
- Demonstrate at least a 25% reduction in gross receipts in the first, second, third, or fourth quarter of 2020 relative to the same quarter in 2019.
Eligible entities include for-profit businesses, certain nonprofit organizations, self-employed individuals, sole proprietors, and independent contractors.
2. What are the Key Terms of the PPP Second Draw Loans? Borrowers may receive a PPP Second Draw Loan of up to 2.5x the average monthly payroll costs in the one year prior to the loan or in calendar year 2019. Borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5x average monthly payroll costs.
PPP Second Draw Loans may be forgiven for payroll costs of up to 60% (some exceptions apply) and non-payroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of a PPP Second Draw Loans will not be included in income as cancellation of indebtedness income.
3. Deductibility of Expenses Paid with PPP Loan Proceeds. The CAA 2021 clarifies that expenses paid both from the proceeds of loans under Original PPP loans and PPP Second Draw Loans are deductible.
If your company is eligible for a PPP Second Draw Loan, you should quickly contact your lender and get the application process started. Contact Perkins Law at 804.205.5162 or [email protected] if we can be of assistance with your small business or nonprofit organization.
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