The Paycheck Protection Program (PPP) resumed on January 11, 2021 with two distinct paths forward.
- Reapply if you didn’t get money in the first round. The Economic Aid Act reopens the application process for businesses seeking PPP funds for the first time (First Draw PPP Loan).
- Apply for a second round of funding (even if you got money in the first round). The Act also allows eligible businesses to apply for a Second Draw PPP Loan.
As a brief review, the first round of PPP was part of the April 2020 CARES Act. The Small Business Administration manages the program with applications processed by a wide swath of banks and financial institutions. The original $349 billion ran out in less than 2 weeks. Almost immediately, an additional $320 billion was added to the original program (more than $100 billion of this was not distributed). On December 27, 2020, another $284 billion was funded, which the SBA is now making available for First Draw or Second Draw Loans. The Economic Aid Act does include an interim final rule (IFR) related to loan forgiveness.
This new round of funding has an emphasis on assuring small businesses they’ll receive the help that they need. This makes it particularly meaningful to owners of a Solo 401k that operate self-employed businesses.
First Draw PPP Loans
This round has new rules for first-timers and a new application. Your lender submits application to the SBA on your behalf. Any new First Draw PPP Loan has the same terms, regardless of lender or borrower.
New First Draw loans are available through March 31, 2021. New loans have the same general terms and limits as original PPP loans but have key enhancements made by the Economic Aid Act.
- Loans can fund payroll costs including benefits, mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property costs caused by looting or vandalism during 2020 (summer riots), and certain supplier costs and expenses for operations.
- First Draw PPP loans qualify for full loan forgiveness if during the 8 to 24-week covered period (after loan disbursement):
- Employee and compensation levels are maintained.
- The loan proceeds are spent on payroll costs and other eligible expenses.
- At least 60% of the proceeds are spent on payroll costs.
- Loan amounts are limited to the lesser of $10M or 2.5 times the average monthly payroll costs. The SBA offers this guidance for calculating the maximum loan amount.
Seasonal Business Provisions (New)
The Economic Aid Act also added definitions to eligible seasonal businesses. The applicant cannot operate the business for more than 7 months in any calendar year. The business was in operation as of February 15, 2020 (the business qualifies if it was in operation for any 12-week period between February 15, 2019, and February 15, 2020). Gross receipts for any 6 months of a year cannot be more than 33.3% percent of the other 6 months of that year. A seasonal employer determines its maximum loan amount by using the employer’s average total monthly payroll payments for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.
Ineligibility for Certain Businesses
There are also conditions making a business ineligible for a PPP loan:
- The business engages in any activity that is illegal under federal, state, or local law.
- The owners (or 20% or more part owner) is incarcerated, on parole, subject to criminal indictment, or convicted of a felony within the last 5 years (1 year for non-financial felonies).
- Any business that obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last 7 years and caused a loss to the government.
- The business has permanently closed.
- Received or will receive a grant under the new Shuttered Venue Operator Grant Program.
- Household employers are not eligible (have employees such as nannies or housekeepers).
Increases to First Draw Loans
Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020 can increase their First Draw PPP loan amount if they previously did not accept the full amount for which they are eligible. Loan increases or reapplications cannot be made if the SBA has settled a forgiveness payment to the lender for the loan. However, these borrowers may be eligible for a second-draw PPP loan.
All requests for an increase must be submitted by your original lender on or before March 31, 2021 and is subject to the availability of funds.
Borrowers that returned or repaid a First Draw loan can reapply for that loan provided the lender reported to the SBA before December 27 that the borrower had fully repaid the loan or canceled the loan. These borrowers can apply for a new First Draw loan for the amount eligible under current PPP rules.
Businesses that did not accept the full amount of an approved First Draw loan before December 27 can now apply for an increase to the loan up to the amount previously approved. Lenders may approve the request and disburse the funds based on what was reported before December 27 if the borrower did not accept the full amount of the loan.
What if You Already Repaid the First Draw?
Borrowers that returned or repaid part of a First Draw loan can now request a loan increase equal to the difference between the amount not paid back and the amount previously approved. The lender may disburse those funds to the borrower provided that the lender reported to the SBA before December 27 that the loan had been partially repaid. As an example, a borrower that returned $10,000 of a $100,000 loan because the business did not spend the funds during the covered period, the lender can disburse $10,000 back to the borrower as long as other current conditions are met.
Second Draw PPP Loans
The SBA began accepting applications for Second Draw PPP Loans on January 13, 2021. Loans are available through March 31, 2021. As with First Draw loans, the application are submitted to the SBA on your behalf by your lender. The eligibility requirements for the Second Draw loans are narrower than eligibility for First Draw loans.
The narrower requirements should not affect Solo 401k owners because the primary change limits Second Draw loans to businesses with 300 or fewer employees. The other primary requirement is that the business must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019.
Second Draw loans are only available to borrowers that previously received a First Draw loan and have used or will use the full amount of the first loan for authorized purposes on or before the expected date of disbursement of the Second Draw loan. Otherwise, the same terms and conditions for First Draw loans generally apply to second loans.
Provisions on the Second Draw for PPP
At least $25 billion for Second Draw loans is set aside specifically for the smallest businesses and those likely to be the most financially challenged. The eligible small businesses:
- Have a maximum of 10 employees.
- For loans of $250,000 or less to eligible borrowers in low or moderate-income neighborhoods.
- Experienced a revenue reduction of 25% or greater in 2020 relative to 2019.
Generally, revenue is your “total income”. In the case of a sole proprietorship, independent contractor, or self-employed individual “gross income” plus “cost of goods sold” and excludes net capital gains or losses.
The broader eligibility for a Second Draw loan applies if the borrower:
- Has no more than 300 employees.
- Has at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
- Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses.
The amount of any forgiven First Draw loan is not included in the calculation of the borrower’s gross receipts. The forgiven amount also exclude taxes collected. This includes sales or other taxes collected from customers (excluding taxes levied on the business or its employees).
Ineligibility for PPP Second Draw
Businesses not eligible for Second Draw loans include publicly traded companies, businesses primarily engaged in political or lobbying activities, certain businesses connected with China or Hong Kong, and businesses that receive a new Shuttered Venue Operator Grant.
Maximum loan amounts are for the lesser of 2.5 months of the business’s average monthly payroll costs or $2M. Average monthly payroll costs can be based on calendar year 2020 or calendar year 2019. There are special provisions for the accommodation (hospitality) or foodservice industries. These business can ask for 3.5 times their average monthly payroll costs. “Payroll costs” has the same definition for Second Draw loans as it does for First Draw loans.
Second Draw loans are eligible for loan forgiveness based on the same terms and conditions as First Draw loans.
Business financing and tax law are complicated. The Payroll Protection Program has gone through several revisions and still has unanswered questions. Any information provided here is not intended to be a substitute for legal services from a competent professional.
Helpful Blog Posts on the PPP:
You may also want to review these previous blogs:
- Simpler PPP Forgiveness for Loans Under $50000 (Oct. 19, 2020)
- PPP Forgiveness for Loans Under $150k (Sept. 22, 2020)
- PPP Repayment Guidance – Revised and Final Rules (Aug. 4, 2020)
- Loan Extended for PPP (June 10)
- PPP Loan Forgiveness and the Solo 401k (May 29, 2020)
- PPP for Sole Proprietor (May 17, 2020)
- Round 2 Approved of the PPP (April 23, 2020)
- PPP Loans and the Solo 401k (April 9, 2020)