On January 6, 2021, the Small Business Administration (SBA) published an Interim Final Rule (IFR) announcing the implementation of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Ventures Act’s (Economic Aid Act) temporary loan program, the Paycheck Protection Program (PPP) Second Draw Loans. Key provisions of the PPP Second Draw Loan program are summarized below.

Eligibility for Second Draw PPP Loans

Eligible Borrowers

Eligible borrowers include businesses, nonprofit organizations that are eligible for First Draw PPP Loans under the Economic Aid Act, housing cooperatives, veterans’ organizations, tribal businesses, certain self-employed individuals, sole proprietors, independent contractors, small agricultural cooperatives, certain 501(c)(6) organizations, destination marketing organizations, and certain nonprofit news organizations.

The following entities are ineligible for a Second Draw PPP Loan:

• Entities that are ineligible to receive a First Draw PPP Loan under the Economic Aid Act

• Entities primarily involved in political and lobbying activities engaging in areas such as public policy or national strategy

• Entities affiliated with entities in the People’s Republic of China

• Registrants under the Foreign Agents Registration Act

• Entities that received a grant under the Shuttered Venue Operator Grant Program

• Entities in which the president, the vice president, the head of an executive department, or a member of Congress, or the spouse of such a person, directly or indirectly holds a controlling interest in the entity

• Publicly traded companies

• Entities that have previously received a Second Draw PPP Loan

• Entities that have permanently closed

General Requirements for Second Draw PPP Loan Eligibility

In order to receive a Second Draw PPP Loan eligible borrowers must:

• Employ no more than 300 employees, except that a single business entity that is assigned an NAICS code beginning with 72 (including hotels or restaurants) may employ more than 300 employees in the aggregate as long as each physical location employs no more than 300 employees.

• Have used, or will use, the full amount of their First Draw PPP Loan on eligible expenses on or before the expected date on which the Second Draw PPP Loan will be disbursed.

• Demonstrate at least a 25% reduction in gross receipts (as discussed below) in the first, second, third, or fourth quarter of 2020 relative to the same quarter in 2019.

Although the Economic Aid Act did not define gross receipts for determining a borrower’s revenue reduction, the IFR provides that gross receipts include “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” Importantly, however, forgiveness amounts awarded for borrowers’ initial PPP loans are not included in 2020 gross receipts.

To facilitate the comparison calculations for small borrowers that may not have quarterly revenue information readily available, the IFR provides that a borrower that was in operation for all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.

A borrower with affiliates will calculate its gross receipts by adding the gross receipts of the borrower and the gross receipts of each affiliate. If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, this aggregation applies for the entire period of measurement, not just the period after the affiliation arose. Gross receipts of a former affiliate do not need to be included.

Eligibility Rules for Affiliates

Eligibility for Second Draw PPP Loans is governed by the same SBA affiliation rules that govern First Draw PPP Loans under the Economic Aid Act. However, the IFR clarifies that affiliation rules are waived with respect to Second Draw eligibility for:

• Any business concern with no more than 300 employees that, as of the date on which the covered loan is disbursed, is assigned a NAICS code beginning with 72 (including hotels and restaurants).

• Any business concern that employs no more than 300 employees per physical location of such business concern and is majority owned or controlled by an entity that is assigned a NAICS code beginning with 511110 (includes newspaper publishers) or 5151 (includes radio and television broadcasting).

• Any nonprofit organization that is assigned a NAICS code beginning with 5151.

Terms and Conditions for Second Draw PPP Loans

Second Draw PPP Loans are generally subject to similar terms and conditions as First Draw PPP Loans under the Economic Aid Act. The table below provides a summary of these terms and conditions.

Key Differences between First Draw and Second Draw PPP Loans

Generally, the Second Draw PPP Loans are subject to more restrictions than are First Draw PPP Loans under the Economic Aid Act. The key differences between the First Draw and Second Draw PPP Loans include:

• While First Draw borrowers can have up to 500 employees, Second Draw borrowers are capped at 300 employees.

• Second Draw borrowers must prove a revenue reduction of at least 25% in any quarter between 2019 and 2020, but there is no such requirement for First Draw borrowers who must only certify in good faith that the uncertain economic conditions make the loan request necessary to support ongoing business operations.

• The maximum loan amount is capped at $10 million for First Draw borrowers and $2 million for Second Draw borrowers.

• Unlike First Draw PPP Loans, where borrowers elected either the 2019 or 2020 calendar year, the relevant time period for calculating a borrower’s payroll costs for determining the maximum loan amount for a Second Draw PPP Loan is either (i) the 12-month period prior to when the loan was made or (ii) the calendar year 2019.

Loan Application Process and Documentation

The applicant must submit to the lender SBA Form 2438-SD (the PPP Second Draw Borrower Application) or the lender’s equivalent form, including the required certifications and documentation described in the IFR. At the time an applicant submits an application form, the applicant must also submit documentation required by the IFR, unless that documentation was previously submitted to the lender for the borrower’s initial PPP Loan. Applicants should consult FAQ (g) of the IFR for a more detailed overview of the documentation requirements that accompany applications.

Loan Forgiveness for Second Draw Borrowers 

Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans under the Economic Aid Act, except that Second Draw borrowers with a principal loan amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application. The expanded eligibility for payroll and non-payroll expenses described in the Economic Aid Act, which are discussed here, also apply to Second Draw PPP Loans. Additionally, the new covered period rules outlined in the Economic Aid Act apply to Second Draw borrowers; therefore, Second Draw borrowers may choose any covered period between 8 and 24 weeks from the date of disbursement of the Second Draw PPP Loan. Additional guidance on loan forgiveness will be provided when the SBA issues a subsequent IFR on all aspects of the loan forgiveness process and loan review process later this month.

* All Second Draw PPP Loans are capped at $2 million per borrower. However, as detailed in the IFR, the SBA has provided specific loan amount calculations for various types of business entities, including the three listed in the above table.