Paycheck Protection Program... Round Two

Few would suggest that the adage that holds that gratification delayed is all the sweeter when realized applies to the Paycheck Protection Program Second Draw Loan (PPP2).  In fact, some small businesses have been forced to shutter – temporarily or permanently – while awaiting additional relief first discussed in Congress in July. Congress succumbed to many distractions and political motivations, resulting in a nine-month delay between the CARES Act and the Economic Aid to Hard-Hit Small Businesses Act signed into law by President Trump on December 27, 2020.

The implementing rules were published by the SBA and Treasury Department on January 7, 2021 and now businesses and their lenders are scrambling to quickly analyze and make application for the new relief funds. 

The Economic Aid Act contains several categories of relief beyond the “general” PPP2, including reversal of the IRS position that made COVID 19 relief-paid expenses non-deductible, and a carve out for the smallest businesses and lenders and a significantly expanded Employee Retention Tax Credit (ERTC). 

Regarding the core PPP2 program, a quick summary includes:

1. Only significantly impacted businesses may apply. Specifically, a 25% decline in revenues must be shown (2020 compared to 2019) for at least one quarter to be eligible for PPP2. The quarter that this decline occurred must be identified, and support must be provided for loans over $150,000.
2. Applicants must have spent all first draw PPP loan funds. In most cases, this will not be a concern. Also, the first draw PPP loan need not have been forgiven by the time a PPP2 application is made.
3. Loan sizes are limited to $2 million, and most borrowers can have no more than 300 employees per physical location, so the largest businesses will not absorb most of the funding, a concern back in April.
4. The loan size in most cases will be the same as the first draw PPP loan. This is because the borrower can use 2019 as the base year to determine average payroll, then multiply by 2 ½ to determine loan amount just as in the first PPP loan. Borrowers that have increased their payroll may be able to increase loan size by calculating their loans based upon average payroll in 2020.
5. PPP2 loan sizes for restaurants and lodging companies is increased to 3 ½ times average monthly payroll in recognition of COVID-19’s devastating impact on those specific businesses.
6. Forgiveness of the PPP2 loan will be determined based upon the existing rules. Specifically, 60% of funds must be used for payroll, with the rest available to pay essential operating expenses. The borrower can choose between 8 and 24 weeks to document use of PPP funds on eligible expenses.

The ERTC is another relief measure that was expanded and extended in the Economic Aid Act. The ERTC provides up to $7,000 per qualified employee paid by a significantly impacted employer. The new law both amends past rules, which had made PPP beneficiaries ineligible, and continues this benefit through June 30, 2021. Careful planning is needed to maximize company benefits from both programs because payroll dollars cannot be used to both obtain PPP loan forgiveness and the ERTC funds (i.e., there can be no “double dipping”).

The amount of funding under the Economic Aid Act of $284 billion is less than the $523 billion lent to 5.2 million small businesses under the PPP first draw. Along with the 25% revenue decline test, the lesser loan sizes and smaller company maximum size for applicants will reduce demand for PPP2.  However, a repeat of the first draw scenario – when funding ran out before most applications were processed – cannot be ruled out. Still, more funding and extensions are also possible.

Applicants for PPP2 should strongly consider working with the same lender that obtained their first draw loan, as much of the documentation can be re-used for PPP2, which will accelerate the approval process.

Any companies needing help with the application process are welcome to contact the Florida CFO Group.