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Financial Planning Insights

PPP Second Draw: What You Need to Know

By The Chandler & Knowles Team | | 0

The Paycheck Protection Program has assisted many small businesses in these difficult paycheck protection program COVID-19 times. The Small Business Administration, together with the Treasury Department, have been able to provide this under the CARES Act. Second Draw PPP Loans are now available. Application acceptance for these loans began on January 13, 2021. Second Draw PPP Loan applications will be accepted through March 31, 2021. But funding for these loans, some $284 billion, may be exhausted much sooner. So, time is very much of the essence in applying. Here are the other essentials you need to know:

Second Draw PPP Eligibility Requirements

The Second Draw is for borrowers that have already received a First Draw PPP Loan and meet the eligibility requirements for the Second Draw. The general requirements are:

  • The borrower must be an eligible business or nonprofit organization
  • The prospective borrower must have 300 employees or fewer
  • Borrower must show gross receipts that are a minimum 25% reduced business in 2020 from at least one comparable same-quarter period of 2019
  • Borrower must have disbursed the proceeds from the PPP First Draw Loan, or be completing that process

Loan Designated Uses and Details

These loan funds can be used for a variety of purposes. Business owners may pay payroll and some benefit costs, COVID-19 worker protection costs, rent, interest on mortgages, utility costs, some operating expenses and supplier costs, and property damage expenses caused by vandalism or looting during 2020. 100% of the Second Draw Loans are guaranteed by the SBA. No collateral or personal guarantees are required.

Generally, the terms are similar to the First Draw Loans. The loan term is five years at a favorable 1% interest. For almost all borrowers, the Second Draw PPP Loan will be a maximum of 2.5 times their average monthly payroll costs in 2019 or 2020, up to $2 million. However, Accommodation and Food Services borrowers will have a maximum PPP Second Draw Loan of up to 3.5 times average monthly payroll costs of 2019 or 2020. It should be noted that a minimum $25 billion of the loans in this program will be designated for borrowers who employ 10 or fewer, or for $250,000 or lesser loans to borrowers with businesses in low or moderate income neighborhoods

PPP second drawApplication and Documentation

There are currently a number of lenders participating in the program. Regardless of which lender you apply to, terms and conditions of the loans are the same. The application itself may be accessed via the Treasury Department site. Supporting documentation also will be required for all pertinent items, such as profit and loss, payroll expense, ownership identification, and employee retirement and health expense. Borrowers must use whatever accounting method, such as cash or accrual, that has been their customary accounting method. Entities who show a reduction of annual receipts of 25% or more for the entire year of 2020 may use the annual period for gross receipt reduction calculation and their annual tax returns for supporting documentation. Other calculations apply for those not in business for the complete periods referenced.

Forgiveness of Loans

Some of these loans may be eligible for forgiveness, which could effectively make them grants. Certain conditions must be met, including keeping employee and other compensation levels at the same level as required by the PPP First Draw Loans. Loans must have been utilized for payroll and other expenses that are eligible, with at least 60% of the loan proceeds utilized for payroll costs.

Further Guidance

These loans can be an invaluable resource for struggling small businesses. As with any loan or government program, care should be taken to ensure that all the details and requirements of the lending and/or forgiveness processes are followed. This brief outline of the PPP Second Draw Loan program gives a general idea who qualifies, designated uses, application process, and also the terms and conditions of the loans, but it is only an overview. Specific situations will be unique to each applicant. It is definitely a smart business decision to consult your CPA for advice. Contact the team at Chandler & Knowles CPAs for guidance in this process today.

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