The SBA has implemented new procedures for PPP loans to improve the speed of processing loans and resolving data mismatches and to make it easier to validate eligibility for the loans and forgiveness. Besides changes to the program administration, the SBA and Treasury have teamed up to provide detailed instructions for borrowers on how to calculate gross receipts and payroll costs.
Three important administrative changes do the following:
- Enable lenders to directly certify eligibility of borrowers for First Draw and Second Draw PPP loan applications with validation errors to ensure businesses who need funds are eligible receive them as quickly as possible.
- Allow lenders to upload supporting documentation of borrowers with validation errors during the forgiveness process.
- Create additional communication channels with lenders to ensure equity, speed, and integrity of the program and to brief lenders on the PPP platform’s added capabilities.
SBA and Treasury also released guidance to assist businesses in calculating their revenue reduction and payroll costs for purposes of determining eligibility and the amount of both First and Second Draw PPP Loans. The guidance explains calculations by business type and also details the documents needed to support the calculations.
First Draw PPP Loans
Businesses with 500 or fewer employees that did not get PPP loans in 2020 may be eligible to get a First Draw PPP loan in 2021 of up to $10 million, through the end of March 2021. A recent SBA document explains the eligibility criteria and calculations for First Draw PPP loans by entity type. These calculations are similar to the Second Draw rules described in detail below.
Second Draw PPP Loans
Borrowers can get a second-draw PPP loan if they have 300 or fewer employees and they have used their first PPP loan amount before disbursement of the second loan. To qualify, businesses must have sustained a 25% reduction in gross receipts in any quarter of 2020 when compared to a similar quarter in 2019.
The maximum loan amount of a Second Draw PPP Loan is 2.5 times the average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector (NAICS 72), the maximum loan amount is 3.5 times the average monthly 2019 or 2020 payroll costs up to $2 million.
Calculation of Gross Receipts
Loans are available through the end of March 2021. Here is how the agencies explain the calculation of gross receipts for a for-profit business for Second Draw loans:
Gross receipts include all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses.
Gross receipts do not include:
- taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the business or its employees);
- proceeds from transactions between a business and its domestic or foreign
- amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts. Also, the amount of any forgiven First Draw PPP Loan or any EIDL advance is not included in the calculation of “gross receipts.”
Reference Periods for Measuring Eligibility
To qualify for loans, taxpayers must have a revenue shortfall over time measured by quarterly reference periods. New guidance details the reference periods that can be used to determine whether a loan applicant can demonstrate a 25% gross receipts reduction to qualify for a second loan. The reference period used depends on how long the applicant has been in business.
- For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, applicants must demonstrate that gross receipts in any quarter of 2020 were 25% lower than either the third or fourth quarters of 2019.
- For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, applicants must demonstrate that gross receipts in any quarter of 2020 were 25% lower than the fourth quarter of 2019.
- For entities not in business during 2019 but in operation on February 15, 2020, applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were 25% lower than the first quarter of 2020.
To show that a business sustained the 25% reduction in gross receipts, one set of documents from the following categories is needed:
- Quarterly financial statements for the entity.
- Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters.
- Annual IRS income tax filings of the entity. If the entity has not filed a 2020 tax return, the applicant must fill out the return, compute the gross receipts, and sign and date the return.
Payroll Costs and Maximum Loan Amounts
In general, borrowers use calendar year 2019 as the reference period for determining payroll costs used to calculate loan amounts. However, borrowers are permitted to use payroll costs from either calendar year 2019 or 2020 for their Second Draw PPP Loan amount calculation. Documentation, including IRS forms, must be supplied for the selected reference period. If a borrower is using the same lender and same payroll timeframe as it used for its First Draw PPP Loan and already submitted the required payroll documents, no additional documents are required for the Second Draw Loan application.
Partnerships, Corporations, LLCs and Others
The guidance explains how the self-employed, partnerships, S Corporations and LLCs apply for Second Draw PPP Loans and how the maximum loan amounts are calculated for these entities. Below are some special rules for different entities and the items included as payroll costs.
Partners’ self-employment income should be included on the partnership’s PPP loan application. Individual partners may not apply for separate PPP loans. The instructions that apply to an LLC are the ones that apply to the LLC’s filing status in the 2019 or 2020 reference period used to calculate payroll costs based on whether the LLC files as a sole proprietor, a partnership, or a corporation.
Businesses that are part of the same corporate group cannot receive Second Draw PPP Loans in a total amount of more than $4 million. Businesses are considered part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.
Included in the calculation of payroll costs for maximum loan amounts are:
- Schedule C net profit (for self-employed taxpayers with no employees)
- wages and tips up to $100,000 of U.S. employees
- pre-tax employee contributions for health insurance or other fringe benefits
- employer group health, life, disability, vision, and dental insurance contributions
- employer retirement contributions
- employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax
Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer. However, payroll costs do not include the employer’s share of payroll tax.
Example: The wages of an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, count as $4,000 in payroll costs. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs.
Substantiating Payroll Costs
Income tax returns, 1099s, and Forms 941 must be submitted to determine Second Draw PPP Loan amounts based on substantiated payroll costs. Other documents that can be used include IRS Form W-2s and IRS Form W-3 or payroll processor reports, including quarterly and annual tax reports, in lieu of IRS Form 941. An applicant may provide records from a retirement administrator to document employer retirement contributions and from a health insurance company or third-party administrator for a self-insured plan.
Loan Amount Errors Not Forgivable
In a procedural notice, the SBA advised borrowers that there will be no forgiveness of loan amounts in excess of the allowed maximum, even if the lender made the error instead of the borrower and despite the fact that the calculation was made in good faith. Any excess loan amount must be repaid by the borrower.
Example of Lender Error: Borrower applied for and was eligible for a $25,000 PPP loan. Lender inadvertently approved borrower for a $35,000 loan due to a lender employee data input error. As a result, the borrower’s approved loan amount exceeded the borrower’s correct maximum loan amount, and the borrower must pay back the extra $10,000.
Program Improvements Take Patience
As of mid-February 2021, the SBA has approved 1.6 million PPP loans totaling $125 billion. Overall, this indicates that the PPP loan process is working, and difficulties are being addressed in a timely manner. Loans are available through the end of March 2021, so act now to get your application in.