PPP2 Loans

Small business are eligible for PPP2 loans if they employ under 300 people, have or will use the full amount of the original PPP loan and has suffered a 25% gross revenue decline in any 2020 quarter relative to the same quarter in 2019.

Earlier this year, as part of the CARES Act, a qualifying small business could apply for a PPP loan, backed by the federal government, which would be fully forgiven if certain conditions were met.  Most notably, to receive complete forgiveness, borrowers were required to spend a certain percentage of the proceeds on payroll costs.

Under the new bill, a business that already received a PPP loan under the original program (“PPP1”) can receive a second loan, under similar conditions but with certain important differences, described below (“PPP2”).

Who is eligible?

A small business is eligible for a PPP2 loan if it:

1)         Employs 300 or fewer employees;

2)         Has used or will use the full amount of its PPP1 loan; and

3)         Has suffered a 25% gross revenue decline in any 2020 quarter relative to the same quarter in 2019.

Businesses that never applied for a PPP1 and are applying for the first time will be subject to the original eligibility rules.

How much can you borrow?

An eligible business may receive a loan equal to 2.5 multiplied by its monthly payroll costs.

An eligible business in the hotel or restaurant industries, however, may receive a loan equal to 3.5 multiplied by its monthly payroll costs.

The maximum loan amount for either category under PPP2 is $2 million.

What are the permitted uses?

The permitted uses for loan proceeds under PPP2 include all of the same categories as under PPP1, plus four additional categories.  As a reminder, the permitted uses under PPP1 are:

1)         Payroll;

2)         Interest payments on a mortgage;

3)         Rent; and

4)         Utilities.

Under PPP2, loan proceeds can be used for the above purposes, and also for:

5)         Costs of COVID-19 safety measures for employees, including personal protective equipment and facility modifications, such as installing plexiglass barriers;

6)         Covered supplier costs, meaning costs related the supply of the goods that are essential to the operations of the business, made pursuant to a contract or purchase order in effect before the covered period (for perishable goods, any time before or during the covered period);

7)         Covered operations expenditure, meaning costs related to business software or cloud computing services; and

8)         Property damage costs, meaning costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020, so long as such costs were not covered by insurance or other compensation.

What is the covered period?

The covered period is the time period in which you are required to use the loan proceeds, for the purposes of calculating the forgiveness amount.  It begins upon disbursement of the loan.

Under PPP2, borrowers may elect a covered period of either 8 weeks or 24 weeks.

How much will be forgiven?

PPP2 loans will be forgiven to the extent that at least 60% of the loan proceeds are spent on payroll costs.  In other words, to receive full forgiveness, a borrower must spend at least 60% of the proceeds on payroll costs.  This does not mean that if a business spends less than 60% on payroll costs, it will receive no forgiveness at all, but rather that the amount forgiven will be reduced in proportion.

What are the tax consequences?

The new bill has clarified that business expenses paid with the proceeds of a forgiven PPP loan are tax deductible.  This is a significant clarification, because it contradicts the stance that the IRS had previously taken on the issue.  This tax treatment applies to both PPP1 and PPP2 loans.

How do you apply?

As with PPP1, PPP2 loans are backed by the federal government and administered by the Small Business Administration (SBA).  However, the loans themselves are actually issued by independent financial institutions.  You should contact your bank for information on how to apply.

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