CARES Act: PPP Second Round
By: H. Len Musgrove, Jr. © 2021
The novel Paycheck Protection Act loans initiated by the CARES Act have been authorized for a second round of funding for specific small businesses by the Interim Final Rule on PPP, as Amended by Economic Aid Act, and the Interim Final Rule on Second Draw Loans. The new Paycheck Protection Program (PPP) begins in earnest on January 13, 2021, but there are key points worthy of discussion. Read on to view these summary points for your consideration for eligible entities to receive a PPP loan under the CARES Act:
- The entity must not employ more than 300 employees (down from 500 in the original PPP Loan Program);
- The entity must have used or will have used the full amount of the first PPP Loan (new requirement);
- The entity must demonstrate at least a 25 percent reduction in gross receipts in the first, second, third, or fourth quarter of 2020 relative to the same 2019 quarter (or by annual receipts comparison) (new requirement);
- In the alternative, the new interim rules provides applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019;
- The entity must be a business, certain non-profit organization, housing cooperative, veterans’ organization, tribal business, self-employed individual, sole proprietor, independent contractor, or small agricultural co-operative;
- Businesses who were not in operation on February 15, 2020 are NOT eligible; and
- Additionally, there are a number of disqualifications based upon the actions of businesses and their owners and principals, including prior defaults on SBA loans, closed or bankrupt businesses, businesses with affiliations with legislators and hedge funds or private equity funds.
Like the first round of PPP funding that assisted many deserving businesses in 2020, the primary focus of the second round of the PPP funding is to continue the active employment of an eligible company’s employees. Below is a brief summary of the metrics of the PPP loan terms as they currently exist under the CARES Act:
Metrics of PPP Loans
- The amount eligible for 2nd Draw PPP loans is equal to (i) the average total monthly payment for payroll costs incurred or paid by the borrower during either 2019 or 2020 (at the election of the borrower), (ii) multiplied by 2.5; up to maximum of $2 Million;
- Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020;
- New entities (but as noted above, ones in operation prior too February 15, 2020) may receive loans of up to 2.5 times the their average monthly payroll costs;
- Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times their average monthly payroll costs;
- Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location;
- Waiver of affiliation rules that applied during initial PPP loans apply to a second loan;
- An eligible entity may only receive one (1) PPP second draw loan; and
- Non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.
Although the initial PPP loans received a bit of bad press for the perception of abuse by a few greedy organizations, this program under the CARES Act has generally been well received. The PPP certainly kept quality employees employed during an unprecedented pandemic by small to mid-sized businesses, which in reality would have had little choice but to lay them off temporarily or perhaps permanently. With the continuation of the numbers adversely affected and impacted by the COVID-19 pandemic’s continuation into Q1 of 2021, an extension of the program does make some sense, and owners and principals of eligible businesses should consider looking into these Second Draw PPP loans.