This week Congress agreed in principle to the Coronavirus Response and Relief Supplemental Appropriations Act which brings much needed relief to small businesses affected by the harsh economic realities associated with the Coronavirus pandemic.
One of the prevailing features of the Act is the fact that it creates the opportunity for “second draw” PPP loans. Many will recall that the Paycheck Protection Program (“PPP”) was first instituted under the CARES Act back in March. Its purpose was to put funds in the hands of businesses who were increasingly being forced to close their doors due to health protocols in the hopes that the money would prevent mass layoffs by funding these businesses’ payrolls. The loans could be fully forgiven if the businesses spent at least 60% of the proceeds on payroll costs.
The first iteration of the PPP was a success with tens of thousands of businesses receiving hundreds of billions of dollars that went toward keeping people in their jobs. It was such a success that business owners and elected officials alike have been clamoring for a second round of the program to be included in any future COVID-19 related stimulus package. Well this week they got their wish.
Below, we will discuss what this means for the average borrower and why there is a little extra good news for food service providers.
Brandon Ketron CPA, J.D. LL.M., and I will be giving a 30 minute webinar outlining these items on Thursday, December 31st at 9:30 AM EST. Email the subject line “Round 2” to email@example.com for an invite.
Requirements for second round borrowers:
The Act imposes a new set of requirements for those seeking a second PPP loan.
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First, the borrower must certify that the loan is “necessary for the continued operation of the business.” This requirement was much easier to satisfy back in March when many borrowers were applying for their first loan and it looked like the economy was teetering on a cliff. Now, however, businesses have had a few months to adapt to new methods of operation. Businesses who have, for the most part, been able to navigate through these last few months and remain operational may have a hard time justifying the loan as “necessary” for the survival of the business. That is, unless, the business is imminently about to close its doors.
Next, a borrower can employ no more than 300 individuals. This is emblematic of Congress’s intent to direct these “second draw” loans into the hands of smaller businesses. The rules are slightly different for businesses with more than one physical location. For those businesses, they can employ up to 500 people before they become ineligible to receive a second loan.
Next, a borrower must certify that if they took a round one PPP loan they have or will expend it all. This does not require a business to expend the entirety of their first loan before they receive a second; only that they certify they WILL eventually expend the full amount of the loan.
Finally, a borrower must show that they suffered a 25% loss in gross receipts for any quarter in 2020, when compared to that same quarter in 2019.
Determining the amount a borrower is eligible to receive:
The amount a borrower can obtain through a second draw PPP loan is determined much the same way it was for first round PPP loans. Borrowers may receive 2.5 times the average total monthly payroll costs incurred or paid during the 1-year period before the date on which the loan is made or, at the election of the borrower, calendar year 2019. This amount is not to exceed $2,000,000 whereas first round loans were capped at $10,000,000.
The applicable time periods are slightly different for businesses that were not in operation for the entirety of 2019, however, the 2.5 times average monthly payroll costs multiplier is a constant for all second draw borrowers…
Except for food service providers!
Determining the amount a NAICS Code 72 borrower is eligible to receive:
Section 311 of the Act provides the following:
“(iv) NAICS 72 ENTITIES.—The maximum amount of a covered loan made to an eligible entity that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal is the lesser of—
(I) the product obtained by multiplying—
(aa) at the election of the eligible entity, the average total monthly payment for payroll costs incurred or paid by the eligible entity during—
(AA) the 1-year period before the date on which the loan is made; or
(BB) calendar year 2019; by
(bb) 3.5; or
The 3.5 times the average total monthly payroll costs multiplier that NAICS Code 72 entities receive as opposed to the standard 2.5 times multiplier that everyone else receives is truly monumental news for all sorts of food service providers – they will be able to receive 40% more as compared to any other PPP second draw borrower!
Here is a list of all entities that fall under the North American Industry Classification System Code 72. It is comprised mostly of food service providers:
It is hard to overstate just how impactful the additional 40% of loan proceeds available to the above listed service providers is. Congress must have been truly compelled by the plight of the food service industry to institute such a favorable rule when compared to these provider’s counterparts in other industries.
If you are taking a second draw PPP loan be sure to check your organization’s NAICS designation before submitting your loan application. You may be eligible for a very favorable loan amount!