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Second Draw Paycheck Protection Program Loans

For certain eligible employers who have already received and used (or will use) the proceeds of a PPP Loan, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) provides funding for a Second Draw PPP Loan until March 31, 2021. These Second Draw PPP Loans are generally subject to the same terms, conditions, and processes as First Draw PPP Loans.

Eligibility: Under the Act, any employer which was in operation on February 15, 2020 and has or will use all of their first PPP loan may apply for a Second Draw PPP Loan if the employer (a) has 300 or fewer employees, and (b) experienced a 25% or greater reduction in gross receipts during at least one quarter in 2020. Second Draw PPP Loans are generally subject to the same affiliation rules as First Draw PPP Loans. The Act also excludes several entities, including lobbying organizations, entities with certain affiliations to China and Hong Kong, covered entities owned by certain government officials or their spouses, publicly traded companies, foreign agents, and entities that receive a Shuttered Venue Operator Grant.

Loan Amount: For most employers, the maximum loan amount will be the lesser of (a) $2,000,000 or (b) 2.5 times the average total monthly payment for payroll costs incurred or paid by the employer during either, at the election of the employer, the 1-year period before the date on which the loan is made or 2019. For seasonal employers, the maximum loan amount will be the lesser of (a) $2,000,000 or (b) 2.5 the average total monthly payments for payroll costs incurred or paid by the employer during any 12-week period selected by the employer between February 15, 2019 and February 15, 2020.

For employers that are assigned a NAICS code beginning with 72, the maximum loan amount will be the lesser of (a) $2,000,000 or (b) 3.5 times the average total monthly payment for payroll costs incurred or paid by the employer during either, at the election of the employer, the 1-year period before the date on which the loan is made or 2019.

Note that special rules apply to entities that did not exist during the 1-year period preceding February 15, 2020.

Allowable Uses: Like First Draw PPP Loans, Second Draw PPP Loans can be used may be used for: (1) payroll costs; (2) mortgage payments; (3) rent payments; and (4) utilities. Additionally, the Act expanded eligible expenses to include:

  1. Covered operations expenditures for any business software or computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses;
  2. Covered property damage and vandalism or looting costs caused by public disturbances during 2020 that were not covered by insurance or other compensation;
  3. Covered supplier costs for goods that are essential to the operations of the employer at the time the expenditure is made and is pursuant to a contract, order, or purchase order either in effect before the covered period of the loan or, with respect to perishable goods, in effect before or during the covered period; and
  4. Covered worker protection expenditures for operation or capital expenditures, including personal protective equipment, necessary to facilitate the adaptation of business activities to comply with COVID-19-related health and safety guidance.

Loan Forgiveness: A Second Draw PPP Loan is eligible for forgiveness in the same manner as a First Draw PPP Loan. Namely, an employer which spends the loan proceeds for allowable uses will be eligible for loan forgiveness on amounts that the employer spends during the covered period. The Act allows the employer to select the length of its covered period, which must end between 8 and 24 weeks after loan origination. Similar to First Draw PPP Loans, an employer must spend at least 60% of loan proceeds on payroll costs during the covered period.

Loans of 150,000 or Less: An employer who applies for a Second Draw PPP Loan of not more than $150,000 may submit a certification attesting that the employer experienced the 25% reduction in gross receipts; however, if the employer submits such a certification, the employer must produce adequate documentation that demonstrates that the employer met the revenue loss standard when the employer applies for loan forgiveness.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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