In late December 2020, Congress authorized a second round of Paycheck Protection Program (PPP) loans, with funding available to qualified first-time borrowers and borrowers who received a loan during the PPP first round. Nearly all community and institutional lenders have now opened their loan application process, and new PPP loans will be available through March 31, 2021.
The maximum loan amount for the second round of PPP (PPP2) is calculated based on 2.5 times your average monthly payroll costs in the one-year period prior to the loan or during calendar year 2019. Hotels and restaurants may use a multiplier of 3.5 times their average monthly payroll. The loan cannot exceed $2 million.
The government expanded the categories of expenditures eligible for forgiveness for PPP2. In addition to retaining workers, maintaining payroll, and making payments for mortgage interest, rent, and utilities, PPP2 funds may also be used to pay covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
Nevertheless, PPP2 remains primarily an employee-protection endeavor. At least 60 percent of the loan amount should be dedicated to payroll costs: compensation, health (which now expressly includes vision and dental insurance) and retirement benefits, group life and disability insurance payments (new for PPP2), and state and local payroll taxes, during a covered period between 8 and 24 weeks, as the borrower may elect.
Although the government has provided for limited exceptions, the general rules for eligibility for PPP2 applicable to most borrowers include the following:
- Size: Borrower must be an independent contractor or sole proprietor (self-employed) or have no more than 300 employees.
- Decline in Gross Receipts: Borrower must have experienced a 25 percent or greater decline in gross receipts during any fiscal quarter of 2020, compared to the same period in 2019 (be prepared to demonstrate this through financial statements or tax documents).
- Operations: Borrower must have been in operation on February 15, 2020, and must not have permanently closed.
- Use of First PPP Loan: Borrower has used the full amount of the first-round PPP loan for eligible expenses.
- Good Faith: Borrower can certify in good faith that the current economic uncertainty makes the PPP2 loan request necessary to support ongoing business activities.
We encourage all potential borrowers (particularly those who borrowed over $2 million during the first round of PPP or who will be in the top decile of borrowers during round two) to undertake a careful analysis of their business activities and liquidity prior to applying and to document the necessity of the loan and authorize the application therefor through proper corporate governance procedures.
This e-alert is intended only as an informational overview. If you have questions about the implications of recent developments or the suitability of a PPP2 loan for your objectives, MendenFreiman can assist. Our attorneys’ expertise in business law, corporate governance, and tax law will help ensure you can obtain funds for which you are eligible while remaining within the strictures of the law. If you are not yet a client but are interested in information regarding our services, submit a request through our contact form; and someone from our team will reach out to you shortly.