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Second Round of Funding: Rules for the Second PPP Loans

Written by Soo Yeon Lee, Esq.

Under new legislation signed into law on December 27, 2020, certain qualifying borrowers will be eligible to obtain a second forgivable Paycheck Protection Program (“PPP”) loans. Below is a quick summary of eligibility, terms, and forgiveness.

1. Eligibility and Terms

  • The borrower must have expended all of the proceeds of a first-round PPP loan. Forgiveness of the first-round loan is not required for the second-round loan application.

  • The borrower had a decline in gross receipts of no less than 25 percent in at least one quarter of 2020 from the corresponding quarter in 2019.

  • The borrower employs not more than 300 employees.

  • The maximum loan for the second round is $2 million.

  • Most borrowers can borrow up to 2.5 times the entity’s average monthly payroll for the prior year up to the $2 million maximum. This amount is comparable to the amount that could be borrowed in the first round.

  • Seasonal employers can use the average payroll for a 12-week period.

  • A simplified application process will be available for loans under $150,000.00.

2. Forgiveness:

  • The loan amount will be forgiven on essentially the same basis as the first-round PPP forgiveness terms.

  • At least 60 percent of the loan proceeds must be spent on qualifying “payroll costs.”

  • The definition of “payroll costs” has been expanded to include group life, disability, dental and vision insurance costs in addition to group health.

  • The remaining 40 percent can be spent on allowable business expenses. As has been the case, rent, utilities and mortgage interest are allowable.

  • The new legislation, however, has added newly allowable non-payroll costs, including certain software and computing costs, supplier obligations, uninsured property damage from civil unrest and expenditures for employee and customer safety due to COVID-19.

  • The “covered period” within which proceeds must be spent must be between eight and 24 weeks, but borrowers can now choose any period within that range.

  • The same potential reductions in forgiveness due to reductions in workforce or compensation will apply as with the first-round PPP loans, but the same “safe harbors” that allow a borrower to avoid the reductions will also be extended to the second round.

  • Borrowers will not be penalized if they could not find qualified employees after a good-faith search; or they were unable to restore business operations to pre-pandemic levels due to COVID-related operating restrictions.

You Can Deduct Expenses Paid with forgiven PPP Loans

Expenses paid with PPP loan will be deductible on federal income tax returns. Earlier in 2020, the IRS issued guidance stating that expenses paid using PPP loan proceeds would not be deductible as business expenses. The COVID-related Tax Relief Act of 2020, adopted as part of “omnibus” legislation passed by Congress on December 21, 2020, reverses the guidance previously adopted by the IRS. The same standards will apply to the newly adopted second round of PPP loans.

New Rule Offers Forgiveness Relief for PPP Loans Under $50,000

The Small Business Administration and the U.S. Department of the Treasury issued a new rule for a simplified application form for PPP loan forgiveness for loans under $50,000. A new form, Form 3508S, can be used for borrowers of loans with a principal amount of less than $50,000. Eligible small-loan borrowers still need to verify that the 60% of the loan were used for payroll costs but will be exempt from the two major limitations on forgiveness, namely full-time equivalent employees and compensation adjustment. Therefore, eligible small borrowers will not need to submit detailed full-time equivalent and salary information.