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Small Business Administration Issues Initial Guidance Covering New Rules for First and Second Draw Loans in the Paycheck Protection Program | Miles & Stockbridge P.C.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Appropriations Act”), was signed into law following weeks of negotiations by members of Congress and Executive branch officials. The Appropriations Act combines an omnibus spending bill for the 2021 federal fiscal year with $900 billion in stimulus relief due to the ongoing effects of the COVID-19 pandemic in the United States. Division N, Title III, of the Appropriations Act is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”). This alert highlights the impact of the Economic Aid Act on the Paycheck Protection Program (PPP) and incorporates guidance released by the Small Business Administration (SBA) on January 7, 2021.

Brief Background on the PPP

On March 27, 2020, the federal government enacted the CARES Act to provide immediate assistance to individuals, families and businesses affected by the ongoing COVID-19 pandemic. As part of the CARES Act, the federal government established the PPP. The original funding amount was $349 billion, with all of the money loaned out within two weeks. As a result of this funding shortage, on April 24, 2020, the federal government enacted the Paycheck Protection Program and Health Care Enhancement Act, which added $320 billion to the PPP.

PPP loans are 100% guaranteed by the SBA, and carry a low interest rate of 1%. Of course, the most noteworthy component of the PPP is the loan forgiveness procedure that allows businesses, under certain circumstances, to receive full or partial forgiveness of the loan.1

The Economic Aid Act’s Impact on the PPP

The Economic Aid Act, which is a component of the Appropriations Act, does the following:

  1. It adds $284 billion in funds for PPP loans, as well as an additional $20 billion for businesses in low-income communities and $15 billion for economically endangered and shuttered venue operators.
  2. It extends PPP forgiveness provisions in the CARES Act, while also amending aspects of the forgiveness process. While these amendments are effective as if they had been originally included in the CARES Act, the amendments do not apply to borrowers whose loans have already been forgiven.
  3. It extends the SBA’s authority to make PPP loans through March 31, 2021.

The SBA Administrator was required to issue regulations to carry out the terms of the Economic Aid Act within ten days. On January 7, 2021, the Administrator released three documents:

  1. Interim Final Rule on PPP Changes;
  2. Interim Final Rule on Second Draw Loans under the PPP; and
  3. Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns.

Below, we summarize the content of each of the above documents.

1. Interim Final Rule (IFR) on PPP Changes

This IFR governs new PPP loans made following enactment of the Economic Aid Act, as well as applications for loan forgiveness on existing PPP loans. This IFR incorporates all of the prior IFRs issued by SBA and/or the Department of the Treasury. Here are the critical new points from this IFR:


  • All new borrowers can use 2019 or 2020 for purposes of calculating their maximum loan amount. Under the CARES Act, borrowers calculated their maximum loan amount using payroll costs incurred during the one-year period before the date of loan. Accordingly, for PPP loans made in 2020, borrowers used 2019 payroll costs. For PPP loans made in 2021, borrowers can use either 2019 payroll costs or 2020 payroll costs or payroll costs from the precise one-year period before the date of loan.
  • In addition to other pre-existing requirements, a potential borrower is eligible for a PPP loan only if it was in operation on or before February 15, 2020.
    • An exception applies to seasonal businesses that were in operation for any 12-week period between February 15, 2019, and February 15, 2020. A borrower is a seasonal employer if: (a) it does not operate for more than seven months in any calendar year; or (b) during the preceding calendar year, it had gross receipts for any six months of that year that were not more than 33.33% of the gross receipts for the other six months of that year.
  • Farmers and ranchers have specific methods on calculating their maximum PPP loan amount, with such methods dependent on whether they have employees or not.
  • Housing cooperatives, nonprofit and tax-exempt news organizations, destination marketing organizations, and 501(c)(6) organizations now are eligible for PPP loans, provided they meet all requirements, including size eligibility and affiliate limitations. For example, housing cooperatives, destination marketing organizations and 501(c)(6) organizations must employ no more than 300 employees.
  • A partner in a partnership may not submit a separate PPP loan application as a self-employed individual. Partnerships are eligible for PPP loans, but a partnership and its partners (and an LLC filing taxes as a partnership) are limited to one PPP loan. This is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before March 31, 2021.
  • Businesses that are part of a single corporate group shall not receive more than $20 million of PPP loans in the aggregate. Businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.
    • Businesses are subject to this limitation even if the businesses are eligible for the waiver of affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA affiliation rules.
  • For any PPP loan, regardless of date, payroll costs include the same categories contained in the CARES Act. However, the IFR and the Economic Aid Act make clear that payment for the provision of employee benefits consist of group health care or group life, disability, vision, or dental insurance, including insurance premiums and retirement.
  • The proceeds of a PPP loan, even those made before December 27, 2020, may now be used for the following purposes (in addition to the permitted purposes outlined in the CARES Act):
    • Refinancing an EIDL loan made between January 31, 2020, and April 3, 2020;
    • Covered operations expenditures;
      • Covered operations expenditures are payments for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies inventory, records and expenses.
    • Covered property damage costs;
      • Covered property damage costs are costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
    • Covered supplier costs; and
      • Covered supplier costs are expenditures made by a borrower to a supplier for goods that: (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order or purchase order (i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
    • Covered worker protection expenditures.
      • Covered worker protection expenditures include the following:
        • Expenditures to facilitate compliance with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, and/or the Occupational Safety and Health Administration, or state or local government, related to the maintenance of standards for sanitation, social distancing or any other safety requirement related to COVID-19.
        • Examples include, but are not limited to, creating or expanding: a drive-through window facility, an air or air pressure ventilation or filtration system, a physical barrier such as a sneeze guard, business space, and health screening capabilities.
  • PPP proceeds cannot be used for lobbying activities or expenditures.
  • An eligible borrower that received a loan of $150,000 or is not required to submit any supporting documentation at the time of forgiveness and will be able to proceed with a simplified application. These borrowers, however, must comply with other requirements, such as retaining employment records for at least four years following submission of the application and other records for at least three years following submission of the application.
  • Any EIDL Advance received by the borrower will not reduce the amount of forgiveness to which the borrower is entitled and will not be deducted from the forgiveness payment amount that SBA remits to the lender.


  • Lenders that comply with applicable obligations will be held harmless for borrowers’ failure to comply with the program criteria and will not be subject to any enforcement action or penalty relating to loan origination or forgiveness, provided that the lender acts in good faith and satisfies all other applicable statutory or regulatory requirements.
  • All PPP lenders must complete registration and provide SBA with the lender’s unique entity identifier within 30 days from the date of the first PPP loan disbursement made by them after December 27, 2020.
  • For PPP loans made on or after December 27, 2020, SBA will pay lenders fees, based on the balance of the financing outstanding at the time of disbursement of the loan, for processing PPP loans in the following amounts:
    • For loans of not more than $50,000 – an amount equal to the lesser of 50% of the loan amount or $2,500;
    • For loans of more than $50,000 and not more than $350,000 – 5% of the loan amount;
    • For loans of more than $350,000 and less than $2,000,000 – 3% of the loan amount; and
    • For loans of at least $2,000,000 – 1% of the loan amount.
  • SBA will not require the lender to repay any of the above fees unless the lender is found guilty of an act of fraud in connection with the PPP loan.
  • Lenders must submit the SBA Form 1502 information within 20 calendar days after any PPP loan increase is approved following the SBA Form 1502 reporting process.

For Borrowers and Lenders

  • For loans made on or after December 27, 2020, the interest rate of PPP loans will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis.
    • This provision may apply with respect to a PPP loan made before December 27, 2020, upon the mutual agreement of the lender and the borrower.
  • Agent fees may not be paid out of the proceeds of a PPP loan. A lender is only responsible for paying fees to an agent for services for which the lender directly contracts with the agent. The total amount that an agency may collect from the lender for assistance in preparing an application for a PPP loan may not exceed:
    • For loans of not more than $350,000 – 1%;
    • For loans of more than $350,000 and less than $2,000,000 – 0.5%; and
    • For loans of at least $2,000,000 – 0.25%.
  • If a partnership received a PPP loan that did not include any amount for partner compensation, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation.
    • This may be done even if the loan has been fully disbursed and even if the lender’s first SBA Form 1502 report to SBA has already been submitted.
    • The borrower must provide the lender with required documentation to support the increase.
    • Any request for an increase must be submitted electronically on or before March 31, 2021, and is subject to the availability of funds.
    • However, the maximum loan amount cannot exceed $10 million for an individual borrower or $20 million for a corporate group.
  • A seasonal employer may also be eligible for a higher loan amount pursuant to Section 336 of the Economic Aid Act. If so, the same process outlined above should be followed.
  • If a borrower returned all of a PPP loan, the borrower may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules.
  • If a borrower returned part of a PPP loan, the borrower may reapply for an amount equal to the difference between the amount retained and the amount previously approved.
  • If a borrower did not accept the full amount of a PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approved.
  • Lenders are permitted to make a single additional disbursement of the increased loan proceeds and such additional disbursement shall not be deemed to be a violation of any rules that require lenders to make disbursement of PPP funds in one transaction.

2. IFR on Second Draw Loans

This IFR focuses on Section 311 of the Economic Aid Act, which authorizes the SBA to guarantee a second PPP loan to the same borrower (“Second Draw Loans”). Second Draw Loans may be distributed to borrowers that have used or will use the full amount of the initial PPP loan (“First Draw Loan”) for authorized purposes on or before the expected date of disbursement of the Second Draw Loan.

SBA generally guarantees Second Draw Loans under the same terms, conditions and processes as First Draw Loans. These terms and conditions include: a 100% SBA guarantee; a zero-collateral requirement; a no personal guarantee requirement; interest at 100 basis points or one percent calculated on a non-compounding, non-adjustable basis; a five-year maturity term; and, for lenders, a hold harmless provision that allows them to rely on certifications of their borrowers. Additionally, the same affiliation rules that apply to First Draw Loans generally apply to Second Draw Loans.

However, there are some key differences:

  • A borrower is eligible for a Second Draw Loan only if it has 300 or fewer employees (down from 500 or fewer employees for First Draw Loans).
    • A single business entity assigned a NAICS code beginning with 72 (Accommodation and Food Services) is eligible to receive a Second Draw Loan if it employs no more than 300 employees per physical location and meets revenue reduction requirements described below.
    • A news organization (NAICS code beginning with 511110 or 5151) is also eligible to receive a Second Draw Loan if it employs no more than 300 employees per physical location and meets the revenue reduction requirements described below.
  • A borrower is eligible for a Second Draw Loan only if it experienced a revenue reduction in 2020 relative to 2019. This revenue reduction must be 25% or greater when comparing quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019.
    • If the borrower was in operation in all four quarters of 2019, then it experienced the required revenue reduction if there was a reduction in annual receipts of 25% or more in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.
      • This additional verifiable method for substantiating revenue reduction aims to assist small borrowers that may not have quarterly revenue information readily available.
    • For borrowers that were not in business for all or a portion of 2019, there are alternative ways to calculate this revenue reduction.
    • Gross receipts include all revenue in whatever form received or accrued from whatever source, reduced by returns and allowances. However, for these purposes, gross receipts exclude net capital gains or losses; taxes collected for and remitted to a taxing authority; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. A complete definition can be found at 13 C.F.R 121.104.
    • Gross receipts of a borrower with affiliates must include the gross receipts of each affiliate, but do not include gross receipts of a former affiliate where the affiliation ceased prior to the date of certification of loan eligibility.
  • The amount of any forgiven First Draw Loan is not included in gross receipts.
  • The following categories of borrowers are not eligible for Second Draw Loans:
    • A business concern or entity primarily engaged in political activities or lobbying activities, including any entity organized for research or engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents.
    • Certain entities organized under the laws of China or Hong Kong, or with other specified ties to China or Hong Kong.
    • Any person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612).
    • A person or entity that receives a grant for shuttered venue operators (Section 324 of the Economic Aid Act).
    • Entities in which the President, Vice President, head of an Executive department or a Member of Congress, or the spouse of any such person, owns, controls or holds at least 20% of any class of equity.
    • A publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f).
    • Entities that have already received a Second Draw Loan.
    • Entities that are permanently closed.
  • For most entities, Second Draw Loans are capped at the lesser of $2,000,000 or two-and-a-half months of the borrower’s average monthly payroll.
    • The relevant time period for calculating a borrower’s payroll costs for a Second Draw Loan is either the 12month period prior to when the loan is made or calendar year 2019. However, the SBA indicates that the 12-month period prior to when the loan is made means calendar year 2020, as it will simplify calculation and documentation requirements.
    • Seasonal employers look at the average total monthly payment for payroll costs incurred or paid by the borrower for any 12-week period between February 15, 2019, and February 15, 2020.
    • For new employers (borrowers who were in operation on February 15, 2020, but not for the one-year period immediately preceding), borrowers look to the sum of total monthly payments divided by the number of months in which those payroll costs were paid or incurred.
    • For borrowers assigned a NAICS code beginning with 72 (Accommodation and Food Services), the maximum Second Draw Loan amount is capped at the lesser of $2,000,000 or three-and-a-half months of the borrower’s average monthly payroll.
  • Businesses that are part of a single corporate group may not receive more than $4,000,000 of Second Draw Loans in the aggregate.
  • For Second Draw Loans greater than $150,000, lenders must confirm the dollar amount and percentage of the borrower’s revenue reduction by performing a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents. Lenders should work with the borrower to remedy the issue if the lender discovers errors or lack of substantiation in the documents.

3. Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns

As part of the Economic Aid Act, Congress created specific pools of funding and set those aside for the above types of businesses. These funding pools include:

  • $15 billion for lending by community financial institutions (across First and Second Draw Loans).
  • $15 billion for lending by Insured Depository Institutions, Credit Unions and Farm Credit System Institutions with consolidated assets of less than $10 billion (across First and Second Draw Loans).
  • $35 billion for new First Draw Loan borrowers.
  • $15 billion for First Draw Loan borrowers with a maximum of ten employees or for loans less than $250,000 to borrowers in low-or-moderate-income neighborhoods.
  • $25 billion for Second Draw Loan borrowers with a maximum of ten employees or for loans less than $250,000 to borrowers in low-or-moderate-income neighborhoods.

The SBA claims to be undertaking steps to ensure increased access to PPP loans for minority, underserved, veteran and women-owned business concerns. Lenders are encouraged to redouble their efforts to assist eligible borrowers in underserved and disadvantaged communities in order to expand economic opportunity across the United States.

1 For more information on PPP loan forgiveness, including requirements borrowers must meet in order to obtain loan forgiveness, please see our previous alerts from April 6, 2020 and June 8, 2020.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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