New PPP Regulations and Forgiveness Applications from the SBA

New PPP Regulations and Forgiveness Applications from the SBA

January 28, 2021

In the past several weeks, the SBA has been busy putting out additional information related to various aspects of the Paycheck Protection Program (PPP), including the new rounds of loan applications and loan forgiveness. In addition, the SBA and IRS are working to release additional guidance on other COVID-19 relief and tax credit provisions.

As you work to determine the best course of action for your business, we would like to highlight some of the new guidance and key details for the following items:

  • Guidance on Calculating PPP Loan Amounts – First and Second Round Loans
  • Guidance on Calculating Gross Receipts for the Revenue Decline – Second Round Loans
  • Impacts of Affiliated Entities on Second Round PPP Loan Qualifications
  • First Draw PPP Loans
  • Increasing Initial PPP Loans
  • Interplay with the Employee Retention Credit (ERC)

Please click on each of the topics below for additional information and details.

There are still many items that require guidance from either the SBA or the IRS. Our team will continue to monitor and analyze the information that is released and provide additional updates as they develop.

Guidance on Calculating PPP Loan Amounts – First & Second Round Loans

The SBA has clarified rules on calculating loan amounts for both First and Second Round PPP loans. While, in many cases, the guidance is similar to the PPP loan guidance from 2020, there are now some additional items to consider.

First, businesses are able to use 2020 payroll information, instead of 2019 payroll information, if doing so would result in a more preferential loan. (However, using 2019 payroll information is still an option.) In addition, farmers are able to calculate their owner compensation based on their gross income reported on Schedule F instead of net income. These changes apply to both rounds of PPP loans.

For both First and Second Round applications, the calculations generally stay the same. One key difference is that restaurant and accommodation entities are eligible for 3.5 times their average monthly payroll for computing their loan amount for a Second Round loan (note that this only applies to the Second Round loans), rather than the normal 2.5 times for most businesses. Another difference is in eligibility, which is narrower for Second Round Loans. In general, any business with 500 or fewer employees was eligible for a First Round PPP loan. However, to be eligible for a Second Round PPP loan, businesses must generally have 300 or fewer employees and must show a 25% revenue decline in any 2020 quarter compared to 2019.

As a reminder, only businesses that received a First Round loan can apply for a Second Round loan. If your business hasn’t yet received a loan when you go to apply, you will be applying for a First Round loan. In this scenario, it’s important to note that you do not need to show the 25% revenue decline to qualify. There are some additional details to know before applying for a Second Round loan. Whether you are applying for a First Round loan or a Second Round loan, the deadline to apply under the current guidance is March 31, 2021.

Guidance on Calculating Gross Receipts for the Revenue Decline – Second Round Loans

The biggest difference between First and Second Round PPP loans is that, in order to qualify for a Second Round loan, a business must show at least a 25% drop in revenue in any quarter in 2020 compared to that same quarter in 2019. The SBA recently came out with guidance on how to calculate and determine gross receipts.

Generally, gross receipts are determined the same way that they are determined for tax purposes. However, certain items, including capital gains and losses and PPP forgiveness, are not included in gross receipts. You can support the decline with quarterly financials or accounting records, bank statements, or your annual tax return if the return shows a greater than 25% revenue decline for the entire year. QuickBooks or other accounting software data should work. If you have a different book method than tax method, it is worth reviewing to see what is the best method for supporting a revenue decline.

There are some slightly differing rules for businesses that were not in operation for all of 2019 or not in operation until early 2020. If this applies to your business, work with your accountant and bank to determine if you may qualify for a Second Draw loan.

Impacts of Affiliated Entities on Second Round PPP Loan Qualifications

Affiliation rules create new complications under the Second Round PPP Loans in regards to the gross receipts decline. Under the initial PPP Loan rules, the affiliation rules generally only applied in determining whether the borrower fell under the 500-employee count to be eligible for the loan. Under the new Second Round Loan guidance, the affiliation rules also impact the calculation of gross receipts.

When an affiliation exists, a borrower cannot just look at their receipts to see if they meet the revenue drop. Instead, they have to combine the receipts of all affiliated entities to determine if they meet the qualifications. Per the instructions for the Second Round Loan Application Form, SBA Form 2483-SD, entities that meet the affiliation rules must affiliate their gross receipts for the revenue decline test, rather than reviewing revenue on an entity by entity basis.

Keep in mind that entities that might need to be affiliated for the purpose of this test are not necessarily all entities that would be qualified for a PPP loan. For example, a rental entity with no employees may still need to pull in its receipts for the purposes of this test, even though it could not qualify for a PPP loan itself.

The affiliated company rules can be a bit broad and confusing. However, in general, businesses with common ownership (greater than 50% ownership) and/or management fall under these rules. If you are unsure how this applies to your business, it is best to work with your accountant and bank to make sure that you are completing your application correctly.

First Draw PPP Loans

If you did not receive a First Draw PPP loan, either because you did not apply or because you were not eligible, you can now apply for a loan. Keep in mind that you need to have a First Draw loan before you apply for a Second Draw loan. As a reminder, if you are applying for the first time, your business does not need to show a revenue decline to qualify for First Draw loan.

If you qualify for both a First Draw and Second Draw PPP loan and haven’t previously applied for a loan, you should apply for a First Draw loan. Depending on the timing and if funding remains available, you may also qualify for a Second Draw loan. However, there are some important qualifiers to keep in mind.

First, you must have spent all the money from the First Draw on eligible expenses.

Second, the Covered Periods of the two loans cannot overlap. Because the minimum Covered Period on a loan is eight weeks, there has to be at least eight weeks in between the two loans, based on the guidance from the SBA. For self-employed individuals, like farmers, this may mean it’s possible to get a First Round loan now AND get a Second Round loan before the March 31, 2021 closing date of the PPP loan program, but there are still some unknowns. We anticipate receiving additional guidance and clarification soon.

Increasing Initial PPP Loans

In certain circumstances, businesses that received a partial PPP loan during the first round of funding (which ended on August 8, 2020) can work with their bank to get additional funding up to the maximum that they were allowed. However, there are some exceptions. Any business that has already applied for loan forgiveness cannot go back for additional funding. Not all businesses can go back, even if they computed the wrong amount. Only the following businesses can go back for additional funding on an initial PPP Loan:

  • Farmers now eligible to increase their owner compensation piece of the loan due to the change from net income to gross income for basing the loan amount. For example, if they had a loss and were not eligible, they now would be eligible based on gross receipts.
  • Partnerships that didn’t originally apply for their partners’ compensation as a part of their loan draw.
  • Businesses that paid their loan back or did not accept the full amount of the loan initially approved by the SBA.

If your business falls into one of the categories noted, contact your bank to determine the steps necessary to take advantage of additional PPP funding. They will be able to work with you to get the documentation that they need in order to increase the loan amount.

Interplay with the Employee Retention Credit (ERC)

In some of our previous updates, we have discussed the interplay with PPP loans and the ERC for 2020. Unfortunately, we are still missing key guidance in a few key areas, particularly for businesses who have already applied for PPP forgiveness.

At this point, it is still not completely clear whether businesses that applied for PPP forgiveness can use any of the excess payroll costs from the PPP application for the ERC or not, as the rules now generally say that qualifying wages must first be used for the ERC, then for the PPP loan. However, businesses that received a PPP loan, but have NOT yet applied for PPP forgiveness should be able to plan to go back and amend prior quarters’ 941s to take advantage of the ERC for their eligible quarters.

Note that it was previously understood that most businesses could use their fourth-quarter 941 (due on February 1, 2021) to catch up the ERC for prior quarters in 2020. However, guidance issued by the IRS on January 23 explains that this is not the case. This limited opportunity is only available to catch up the credit for either healthcare payments or for entities who had their PPP Forgiveness denied by the SBA. Based on what we have seen, there are not many businesses that would were denied PPP forgiveness, yet have wages that are qualified for the ERC.

There are two specific eligibility requirements in place for businesses to actually qualify for the ERC. A business must either have been impacted by a business shutdown, either full or partial, due to a governmental order related to COVID-19, OR must have had a quarter with at least a 50% revenue decline compared to the same quarter in 2019. Keep in mind that the partial shutdown could impact many different businesses that were impacted by orders, including restaurants that had to suspend part of their service or reduce capacity, dental offices, bars, hair salons, and many other businesses.

If you are unsure if your business might be eligible or what time periods are eligible, please reach out to HBE and we would be happy work through the mechanics of these rules with you.

This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.