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Same Song, Different Verse: Updates to the Paycheck Protection Program

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What does the new Paycheck Protection Program (“PPP”) legislation hold in store? Last month, Congress passed the 2021 Consolidated Appropriations Act (“CAA” or “the Act”), and President signed it into law on December 27, 2020. The CAA contains important PPP changes that may affect current borrowers and provides additional relief for small businesses and nonprofits needing a “second draw,” but with a new income reduction requirement. Here’s the nuts and bolts.

Changes to the Paycheck Protection Program

Title III of the Act, the “Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act,” makes a number of changes to the PPP enacted under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. As explained in an earlier blog article, the CARES Act authorized the Small Business Administration (“SBA”) to make forgivable loans to qualified businesses and nonprofits to maintain payroll during the COVID-19 pandemic and to cover other costs. Title III expands upon that relief by broadening the class of loan uses eligible for forgiveness, providing a more flexible covered period, and simplifying the forgiveness application process.

Expanded Uses

The Act expands PPP-forgivable expenses to include:

  • Operation expenditures, defined as payments for business software and cloud computing services and other human resources and accounting needs that facilitate business operations;
  • Property damage, defined as costs relating to vandalism or looting due to public disturbances in 2020 that are not covered by insurance or other compensation;
  • Supplier costs, meaning payments to a supplier for goods that are essential to the operations of the borrower pursuant to a contract or purchase order in effect before the PPP loan is disbursed or with respect to perishable goods, in effect at any time; and
  • Worker protection expenditures, such as those incurred in order to comply with governmental COVID-19 requirements or guidance after March 1, 2020 and continuing until the date on which the national emergency declared by the president related to COVID-19 safety measures expires.

Also notable, the $10,000 Economic Injury Disaster Loans (EIDL) advances provided by the SBA will no longer reduce the amount of PPP loan forgiveness.

Covered Period Flexibility

The covered period for a second draw PPP loan is flexible. While the CARES Act originally allowed for an 8-week covered period (i.e., the time in which the borrower must use loan proceeds to qualify for forgiveness), second draw PPP loan borrowers may select any covered period beginning on the date of the loan origination and ending on any date between 8 and 24 weeks after origination.

Simplified Loan Forgiveness Application

Title III of the Act simplifies the loan forgiveness application and documentation process for many borrowers as follows:

Loans up to $150,000 will be forgiven in full if the borrower signs and submits a one-page certification including the following: a description of the number of employees the borrower was able to retain because of the loan; the estimated total amount of the loan spent on payroll costs; and the total loan amount. The borrower must also agree to retain relevant records for a period of four years (employment records) or three years (all other records).

Loans over $150,000 will be subject to the Small Business Administration’s current loan forgiveness procedures and will remain subject to SBA audit.

As before, borrowers must certify necessity for loans over $2 million.

Tax Treatment of Forgiven PPP Loans

The Act also clarifies the tax treatment of forgiven PPP loans (past and future). Effective as of March 27, 2020 (the CARES Act enactment date):

  • Forgiven PPP loans are not includable in a taxpayer’s gross income; and
  • Business expenses paid for with forgiven PPP loan funds remain tax-deductible for federal income tax purposes, which represents a material change from previously issued guidance from the IRS (Revenue Ruling 2020-32 and Revenue Ruling 2020-27) disallowing such deductions.

Second Draw PPP Loans

Title III of the CAA also authorizes a second round of PPP loans in 2021 or a “second draw” for eligible small businesses and nonprofits.


To qualify for a second PPP loan, a prospective PPP borrower must:

  • Have 300 or fewer employees;
  • Have used or will use the full amount of their first PPP loan before the expected distribution of the second draw PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter.[1]

Special rules apply for the determination of whether entities that did not exist for some or all of 2019 meet this revenue loss requirement.

Second Draw PPP Loan Terms

A second draw loan will generally be calculated on the same basis as the original PPP loans. Specifically, a borrower may calculate the maximum loan amount by multiplying average month payroll in (1) the trailing 12-month period as of the date the loan is made; or (2) calendar year 2019, by 2.5 times. The maximum for a second draw loan is capped at $2 million, while the cap for first-time borrowers remains $10 million.[2] Additional loan terms include: 

  • 1% non-compounding interest rate
  • 5 year loan maturity
  • SBA guarantees 100% of the loan
  • No collateral or personal guarantee required

Loan Forgiveness

Borrowers are eligible for loan forgiveness equal to the sum of their payroll costs, covered mortgage, rent, utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred before the end of the covered period (as modified by the CAA). Second draw PPP loans may be forgiven for payroll costs up to 60% (with some exceptions) and nonpayroll costs of 40%. Moreover, forgiveness of the loan is not included in income as cancellation of indebtedness income.

Applications for Second Draw PPP Loans

Borrowers may apply for a second draw PPP loan until March 31, 2021 or until new funding is exhausted (whichever is sooner). Applicants for a second draw PPP loan should submit to their lender a completed SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Form), available here.

In support of the application, applicants should provide the following documentation (unless submitted to the same lender in support of a first-draw PPP loan):

  • If the applicant is not self-employed, the applicant’s Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll) or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions must be provided. A partnership must also include its IRS Form 1065 K-1s.
  • For loans greater than $150,000, the Applicant should provide documentation to support the 25% or greater reduction in revenue (i.e., gross receipts) such as tax forms, quarterly or annual income statements or bank statements.
  • For loans of $150,000 or less, the Applicant does not have to submit above-mentioned documentation supporting the 25% or greater reduction in revenue (i.e., gross receipts) until it files an application for loan forgiveness.


Like first draw PPO loans, second draw PPP loans provide welcome and timely relief to small businesses and nonprofits across the country. Given the narrow application window and high demand for economic relief, nonprofits and other eligible entities are encouraged to give immediate and careful attention to the program, which promises another infusion of resources to meet payroll and other business expenses. 

[1] By way of example, a borrower with gross receipts of $60,000 in the third quarter of 2019 and gross receipts of $38,000 in the third quarter of 2020 experienced a revenue reduction of 36% between the quarters, and is therefore eligible for a second draw PPP loan (assuming other eligibility criteria are met).

[2] Special rules apply to second-time borrowers with an NAICS Code 72 (hotels and restaurants); these entities can borrow up to 3.5 times their average monthly payroll costs, but the loan amount is still capped at $2 million.

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