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Under the Economic Aid Act, PPP loan recipients may be eligible for a second draw PPP loan. The Small Business Administration recently answered key questions and provided clarity around maximum loan amounts.

Financial Management and Disaster Relief

PPP Second Draw Loans: How Much Are You Eligible For? It Depends!

  • Matt Gaieski
  • 2/2/2021

Key insights

  • For most borrowers, the loan amount is determined by the average monthly payroll for either 2019 or 2020, multiplied by 2.5, with a maximum loan size of $2 million.
  • Self-employed individuals, seasonal employers, farmers and ranchers, partnerships, and certain hospitality and food services organizations must use specific calculations when determining loan sizing.
  • Businesses that are part of a single corporate group cannot receive more than $4 million of second draw loans in the aggregate.

Is a second draw PPP loan right for you?

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The Economic Aid Act, signed
December 27, 2020, authorizes certain borrowers that received a Paycheck Protection Program (PPP) loan to be eligible for a second draw PPP loan.

Generally speaking, the loan amount is determined by your average monthly payroll for either 2019 or 2020, multiplied by 2.5, with a maximum loan size of $2 million. However, there are exceptions. Consider loan sizing requirements for the categories listed below before submitting a second draw PPP loan application.

Payroll costs

To calculate the maximum loan amount, you can use the average monthly payroll costs based on calendar year 2019 or 2020. Payroll costs used are gross payroll amounts, which include:

  • Salary
  • Wages
  • Commissions or similar compensation
  • Cash tips or equivalent
  • Vacation
  • Parental, family, medical or sick leave
  • An allowance for separation or dismissal

For all calculations detailed below, consider important exclusions from payroll costs, such as:

  • Compensation paid to any employee in excess of $100,000 annually, as prorated for the period during which the payments are made or the obligation to make the payments is incurred
  • Compensation of any employees whose principal place of residence is outside the United States
  • Qualified sick leave or family leave wages for which a credit is allowed under Section 7001 or 7003 of Families First Coronavirus Response Act (FFCRA)

Eligible benefits and taxes include the employer cost of group health, vision, or dental insurance, group life insurance, group disability insurance, retirement benefits and state and local taxes.

Loan size calculations for specific categories

Seasonal employers

Seasonal employers have new guidance regarding average monthly payroll calculation, and they are defined as:

  • Those that do not operate for more than seven months in any calendar year or during the preceding calendar year
  • Had gross receipts for any six months of that year that were not more than 33.33% of the gross receipts of the employer for the other six months of that year

Seasonal employers will use the average total monthly payroll costs incurred or paid for any 12-week period between February 15, 2019 and February 15, 2020, multiplied by 2.5, with a maximum loan size of $2 million. Borrowers with an NAICS code beginning with 72 will multiply by 3.5.

New entities

A “new entity” is one that did not exist during the one-year period preceding February 15, 2020 but was in operation on February 15, 2020. When determining the maximum second draw PPP loan amount for new entities, use the lesser of $2 million or the quotient of:

  1. The sum of the total monthly payroll costs paid or incurred as of the date on which you apply for the second draw PPP loan, divided by
  2. The number of months in which those payroll costs were paid or incurred, multiplied by 2.5 (borrowers with an NAICS beginning with 72 will multiply by 3.5)

NAICS code 72

Borrowers assigned an NAICS code beginning with 72 (accommodation and food services) — that are not a seasonal employer or a new entity as defined above, have self-employment income, or are a partnership — will use 3.5 times the average total monthly payroll costs incurred or paid during either 2019 or 2020, with a maximum loan size of $2 million.

Farmers and ranchers

Eligible farmers and ranchers operating as sole proprietorships, independent contractors, or self-employed individuals that do not have employees and that were in business as of February 15, 2020, will use gross income (Schedule F, Line 9) in 2019 or 2020, that is not more than $100,000, divided by 12, multiplied by 2.5.

Farmers and ranchers that have employees will use the lesser of $2 million or the product obtained by multiplying 2.5 times the sum of:

  1. The difference between gross income and employee payroll costs (Schedule F, Lines 15, 22 and 23) in 2019 or 2020, as reported on a Schedule F (IRS Form 1040), that is not more than $100,000, divided by 12, and
  2. The average total monthly employee payroll costs incurred or paid during the same year.

Self-employment

Self-employed individuals who do not have employees are eligible for a maximum loan amount that is obtained by multiplying the net profit in 2019 or 2020 (as reported on IRS Form 1040 Schedule C), limited to a maximum of $100,000, divided by 12 times 2.5. Self-employed individuals making $100,000 or more will be eligible for a loan of $20,833.

Self-employed individuals who have employees are eligible for a maximum loan amount that is the lesser of $2 million or the product obtained by multiplying 2.5 times the sum of:

  1. The net profit in 2019 or 2020, capped at $100,000 (if less than $0, use $0), divided by 12, and
  2. The average total monthly payroll costs incurred or paid during the same year

Partnerships

Partnerships will use the lesser of $2 million or the product obtained by multiplying 2.5 (or 3.5 for NAICS code 72 borrowers) times the sum of:

  1. Net earnings from self-employment of individual general partners in 2019 or 2020 (as reported on IRS Form 1065 K-1), reduced by Section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.9235, that is not more than $100,000, divided by 12;
  2. The average total monthly employee payroll costs incurred or paid during the same year elected.

Partners’ self-employment income should be included on the partnership’s PPP loan application; individual partners may not apply for separate PPP loans.

Corporate group limitation

Businesses that are part of a single corporate group cannot receive more than $4 million of second draw loans in the aggregate. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.

How we can help

Sifting through PPP loan eligibility and requirements and loan sizing calculations can be complex. CLA has a team of professionals who stay on top of the latest PPP guidance and can help you navigate these changes.

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