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PPP2 Loans: What to Know About Round 2 of the Paycheck Protection Program

PPP2 Loans: What to Know About Round 2 of the Paycheck Protection Program

Service Businesses  |  Healthcare  |  Nonprofit  |  Manufacturing & Distribution  |  Government Contractors  |  Construction & Real Estate

At the end of 2020, Congress passed and President Trump signed a new law that provides for additional relief related to the COVID-19 pandemic. The Consolidated Appropriations Act, 2021 (CAA, 2021) includes a second draw of Paycheck Protection Program loans (PPP2 loans) and it also finally overruled the IRS and allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.

Let’s take a look at who’s eligible for a PPP2 loan, the terms of the loans and when to apply.

Who’s Eligible for PPP2 Loans?

PPP2 loans allow certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP2 loan of up to $2 million. Prior PPP borrowers must meet the following conditions to be eligible for PPP2 loans:

  • Employ no more than 300 employees per physical location;
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses, certain nonprofit organizations, housing cooperatives, veterans' organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural co-operatives. Included in “nonprofit organizations" this time are 501(c)6 organizations, as long as lobbying activities do not make up more than 15% of the organization’s activities and costs are no more than $1 million.

What Are the Terms of PPP2 Loans?

The terms of the PPP2 loans are similar to the original PPP loans. Borrowers may receive a PPP2 loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. In most situations borrowers have the option of calendar year 2019 or 2020. Borrowers in the hospitality or food services industries (NAICS codes beginning with 72) may receive PPP2 loans of up to 3.5 times average monthly payroll costs.

PPP2 loans of no more than $150,000 may submit a certification on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Like the first PPP loan, the PPP2 loan may be forgiven for payroll costs of up to 60% (with some exceptions) and non-payroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income for income tax purposes as cancellation of indebtedness income.

CAA, 2021 extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower with regard to reducing the number of employees retained and reducing employees' salaries in excess of 25%.

Loan Forgiveness Rules Expanded for Eligible Costs

Costs eligible for forgiveness have also been expanded to cover:

  • Worker protection (PPE) and facility modifications
  • Property damaged due to vandalism or looting in 2020
  • Life, dental and vision insurance in addition to health insurance
  • Essential purchases from suppliers and operating expenses for certain software and cloud services for business operation

Expansion of eligible costs is a positive addition, but most businesses should still qualify for full loan forgiveness with just straight payroll costs unless they had a substantial reduction in full-time equivalent employees, or a greater than 25% reduction to employee salary or hourly pay rates.

On January 6, 2021 the SBA issued two sets of interim final rules (IFR) outlining the details and regulations for the CAA, 2021 and PPP provisions. One was an 82-page IFR on certain amendments to the business loan program and the original PPP loan program. The second was a 42-page IFR on the PPP2 loan program.

When Can You Apply for a PPP2 Loan?

Even though the PPP2 loan program is supposed to open on January 13, 2021, many lenders still need time to get their loan application and forgiveness systems updated. Borrowers will need to be patient. The loan applications period is expected to remain open through March 31, 2021.

Need Help?

This summary only touches on the major items in the bill and rules, so if you have questions we haven’t addressed, contact us here or call 800.899.4623.

You might also want to read 8 Key Highlights of the New Stimulus Bill.


COVID-19 updates

Published on January 11, 2021