News & Blog

January 25, 2021

Paycheck Protection Program Second Draw Loans  

Consolidated Appropriation Act, 2021 (H.R. 133)- Second Draw Paycheck Protection Program (PPP) and Expanded Employee Retention Tax Credits (ERTC), was signed on December 27, 2020.

The Consolidated Act authorizes the U.S. Small Business Administration (SBA) to guarantee Paycheck Protection Program (PPP) Second Draw Loans. The Paycheck Protection Program has $284 billion in available funds for small businesses to apply for a second loan.  $12 billion is specifically earmarked for minority-owned and very small businesses.  $15 billion is to support live venues, independent movie theaters, cultural institutions, nonprofit organizations, local newspapers, TV, and radio broadcasters.

The program is open to receive applications and runs through March 31, 2021, or when the funding is depleted, whichever comes first. The total funds for both rounds of PPP loans are $806.45 billion. Round 1 of dispersed PPP loans was $525.01 billion as of August 8, 2020.

New PPP Loan Guidance Released by the SBA

A borrower may only apply for a loan amount up to $2 million with the second draw of PPP loan; the original maximum amount was $10 million as designated in the CARES Act.  An eligible business that never obtained a PPP loan during round 1 may apply for the first time during round 2 but are subject to the terms of the initial program. An eligible business that currently has a PPP loan or had a PPP loan previously but needs additional support are allowed to obtain another PPP loan (PPP Second Draw). Eligible businesses that returned their first PPP loan or declined the full amount they qualified for may apply for the difference.

The second round of PPP loans is meant to assist smaller impacted businesses. Qualified applicants must:

  • Not have more than 300 full time, part-time or seasonal employees; (the employed count for businesses with multiple locations may not 300 employees at each location) and
  • Have at least a 25% reduction in gross receipts in at least one quarter in 2020 compared to previous quarters
  • Exhaust Round 1 PPP loan funds, or plan to use the entire Round 1 PPP loan on or before the expected date of the second draw PPP Loan disbursement
  • Have spent the full amount of its first draw PPP Loans per SBA guidelines to be eligible for a second draw PPP Loan
  • Have been in business by February 15, 2020, and remain currently operational.

Eligible Entities for Second Draw PPP Loans

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • Individual stations, newspapers, and public broadcasting organizations
  • Certain non-profits (the new bill has expanded eligible businesses to include certain 501(c)(6) non-profit organizations)
  • Seasonal employers; the new bill has clarified the definition of these to be businesses that operate no more than seven months within a year or earn no more than a third of gross receipts within a six-month period
  • Faith-based organizations that have less than 150 employees
  • Housing cooperatives that employ less than 300 people
  • Specific organizations under bankruptcy proceedings

Loans for new applicants and second draws are available until March 31, 2021, or until the earmarked funds are depleted.

Ineligible Entities for PPP Loans

  • Lobbying organizations
  • Organizations involved in political activities or public policy
  • Lenders or financial services businesses
  • Publicly traded company listed on the exchange as a national securities exchange
  • Cannabis businesses (or any other businesses that deal with products that are illegal at the federal level)
  • Household employers (such as those who employ housekeepers or nannies)
  • Businesses that have defaulted on SBA or federal loans
  • Any business that is at least 20% owned by someone who is currently incarcerated, on probation, on parole, or subject to an indictment
  • Any business that is at least 20% owned by someone who has been convicted of a felony within the last five years
  • Entities affiliated with the People’s Republic of China or Hong Kong or that have a member on their board of directors that is a resident of the People’s Republic of China
  • Registrants under the Foreign Agents Registration Act
  • Entities that have received or will receive a grant under the Shuttered Venue Operator Grant program

How to Calculate 25% Reduction in Gross Receipts

Business owners will qualify if at least a 25% reduction in gross receipts (before expenses) occurs in at least one quarter in 2020 compared to previous quarters. Business must have been in operation by February. 15, 2020, to be eligible. If you were not in business during the first or second quarter of 2019 but were operating in the third and fourth quarter of 2019, you compare any quarter in 2020 with the third or fourth quarter of 2019 to evaluate the 25% reduction in gross receipts.  This applies to any business that was not in business in 2019 but was in business before February 15, 2020.

Defining Revenue Reduction

The Economic Aid Act does not provide a general definition for gross receipts to determine a borrower’s revenue reduction.  The Interim Final Rule (IFR) specifies any forgiveness amount of a First Draw PPP Loan the borrower received in the calendar year 2020 is excluded from the borrower’s gross receipts.  It assures the borrower they are not disqualified from receiving a Second Draw PPP Loan because the borrower received the First Draw PPP Loan’s forgiveness.

Revenue Reduction Requirement

The Trump Administration determined it is necessary to improve the Second Draw PPP loans by providing an “additional verifiable method” to prove a 25% revenue reduction.  If a business did not experience a 25% annual decline in revenues or was not in operations for all four quarters of 2019, applicants may still meet the revenue reduction requirement under one of the quarterly measurements.

Defining Gross Receipts

Include all revenues received or accrued from every source:

  • Sales of products and services
  • Interest, dividends, rents, and royalties
  • Fees or commissions reduced by returns and allowances

Sole proprietors, independent contractors, or self-employed individuals, gross receipts are determined by total income (Gross Income MINUS Costs of Goods Sold) and excludes capital gains or losses defined on IRS tax return.

Exclusion of Gross Receipts DOES NOT INCLUDE:

  • Taxes collected from customers and remitted to taxing authorities
  • Taxes levied for employees
  • Proceeds from a transaction between domestic or foreign affiliates
  • Amounts collected by third-party agents (i.e.. Travel or real estate agent, etc.)
  • Reimbursements
  • Amount of any forgiven First Draw PPP Loans


Illustration 1:
An architectural firm has gross receipts of $100,000 in the second quarter of 2019 and gross receipts of $60,000 in the second quarter of 2020. Since this company’s revenue reduction is 40%, they are eligible for a Second Draw PPP Loan.

Illustration 2:
A law firm was not in business until October of 2019.  The applicant shows gross receipts of $100,000 in the fourth quarter of 2019 and gross receipts of $60,000 in the first quarter of 2020, reflecting a 40 percent reduction of gross receipts during the first quarter of 2020.  The applicant would still qualify for the Second Draw PPP Loan since there was a 25 percent gross receipts reduction from gross receipts of the entity during any of the quarters of 2020.

Limitations of Second Draw PPP Loans

The maximum second PPP loan amount is the lesser of:

  • 2.5 times the average monthly payroll costs and healthcare costs in the year prior to when the loan was received or within the calendar year
  • 3.5 times the average monthly payroll costs and healthcare costs in the year prior to when the loan was received or within the calendar year for any business that is classified under Code 72 by the North American Industry Classification System (NAICS) – hospitality and entertainment businesses like restaurants, hotels, and casinos
  • For affiliations, the waiver applies for Second Draw PPP Loans for organizations with NAICS Code of 511110 or 5151

Calculating Payroll Costs

To calculate payroll costs, base the calculation on the calendar year 2020 as opposed to the twelve months preceding the date the loan is made.  This will not result in a significant difference in payroll costs because all Second Draw PPP Loans will be made in the first quarter of 2021.

Second Draw PPP Loan Documentation Requirements

Documentation for the Second Draw PPP loan is the same as documentation required for First Draw PPP Loan. If the applicant used the calendar year 2019 figures to determine the first round of PPP funds, no additional documentation is necessary to support payroll costs if they use the same lender.  However, the lender must confirm the borrower’s average monthly payroll costs based on that prior documentation.

Important Tax Changes

According to the Consolidated Act, borrowers can deduct PPP expenses from the first round and second round of PPP loans that are forgiven.  Additional guidance in this relief package allows for the deduction of expenses and loan forgiveness to be excluded from income. ALL borrowers, including those who have already applied for forgiveness, may exclude PPP expenses. This rule makes expenses paid with PPP funds completely deductible for First Draw and Second Draw PPP Loans.  Since PPP forgiveness increases the borrower’s basis, losses may be deductible due to an increase in the PPP Forgiveness basis.

Clarifying PPP Loan Forgiveness Taxability

Specific language regarding PPP loans in the Consolidation Act clearly states “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been predesignated as Section 7A of the Small Business Act).  This also applies to Economic Injury Disaster Loan advances (EIDL), which are also not taxable, along with any expenses paid with the advance are deductible.

One other major change in the bill concerns how PPP loans interact with the Employee Retention Tax Credit (ERTC). Originally, businesses that took out PPP loans were prohibited from using the ERTC to reduce their tax burden and vice versa. This has been changed so businesses can take advantage of both PPP and the ERTC in 2020 and 2021.

Streamlined Forgiveness for Borrowers under $150,000

The bill has outlined a streamlined forgiveness process for loans of less than $150,000. The borrower will only need to submit a one-page online or paper form. The borrower easily verifies their revenue loss when they apply along with the 1-page application that asks for the number of employees, the estimated amount of the covered loan amount spent, and total loan value.

The lender confirms the dollar amount and revenue reduction through a good faith review of the borrower’s calculations and supporting documents concerning the borrower’s revenue reduction.  Should the review uncover errors, the lender will work with the borrower to remedy the issue.

It is required that you retain all records of the loan forgiveness for up to 4 years.

Second-Draw PPP Loan-New Allowances and Additional Expenses

For unforgiven PPP loans, a list of forgivable expenses has been expanded.  Under the renewed program, the list of eligible non-payroll expenses has been expanded to include four new categories, including:

Covered worker protection:
Costs for personal protective equipment and adaptive investments that help a PPP loan recipient comply with federal and/or health and safety guidelines related to COVID-19.

Covered operations expenditures:
Payments for the processing, payment, or tracking of payroll expenses, human resources, business software or cloud computing service that facilitates business operations, product or service delivery, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

Covered property damage costs:
Any spending not covered by insurance related to property damage due to vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.

Covered supplier costs:
Spending to suppliers that covered costs essential to the business operations at the time the outlay occurred—for instance, restaurants’ purchases of perishable goods.

Additionally, now included in health care costs are forgivable costs, which have been expanded to include group life, disability, vision, and dental insurance.  The effective date of these expanded costs is the CARES Act signed, March 27, 2020. These costs are used to determine the borrower’s maximum loan amount.

Changes to Covered Periods

The bill gives a borrower the right to choose ANY covered period beginning on the date of the disbursement and ending between 8 and 24 weeks later. A borrower is no longer locked into an 8 or 24-week period; instead, they can choose any period lasting between 8 and 24 weeks as well.  PPP borrowers may now also claim the Employee Retention Credit; however, any wages for which a credit is computed will not be treated as forgivable payroll costs for PPP purposes.

Extension of the Employee Retention Tax Credit

The credit was only available for 2020 and offset a taxpayer’s payroll tax liability. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee during an “eligible quarter.”

An eligible quarter is either a quarter in which:

  1. The business had its operations fully or partially suspended by appropriate government order, or
  2. The business had a precipitous drop in gross receipts quarter-over-quarter when comparing 2020 to 2019.

The credit was computed differently if the business had more than 100 employees above that threshold; the employer could only claim the credit on wages paid to employees, not to work.

The bill extends the ERC through July 1, 2021, and greatly expands several aspects of the credit for amounts paid in the first two quarters of 2021. First, the credit percentage is increased from 50% to 70% of qualified wages. In turn, qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee. In contrast, the change in the treatment of qualified wages that once occurred above 100 employees now does not kick in until employees exceed 500. A 20% drop in quarter-over-quarter receipts are now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.


Year 2021 gross receipts in the first-quarter decrease by 30% compared to the first quarter of 2020 and decrease by 25% in the second quarter of 2021 compared to second quarter 2020; then there are two eligible quarters, and maximum credit per employee is 14,000 per employee for both quarters. However, the wages paid by PPP loans are not eligible for the credit.

We will continue to provide additional updates regarding this legislation. There is a lot of available information available to assist taxpayers experiencing COVID-19 related financial difficulties to be aware of these options and get assistance. Contact us today to review your options.

Maria D. Stromple, CPA, MST

Maria is a Partner at Wilke & Associates, servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.

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