In an effort to combat the ongoing economic turmoil brought on by a pandemic that shows no signs of slowing, legislators passed the second stimulus package in late December of 2020. The second stimulus package includes the additional $300 per week in expanded unemployment benefits as well as the one time $600 per person stimulus payment. In addition, it also included several updated provisions to the Paycheck Protection Program, including a second draw loan. Here is what you need to know about the latest PPP updates and if you qualify for a second draw.

Paycheck Protection Program Loan Overview

PPP loans were initially part of the CARES Act that passed last spring. PPP loans were intended to help small businesses maintain their workforce during the first COVID -19 related shutdown. Initially PPP loans were made available to small businesses with fewer than 500 employees and were in business prior to February 2020. PPP borrowers could use proceeds to pay for payroll, rent or mortgage payments, and utilities. PPP loans come with a low 1% interest rate and payments were deferred for six months. Additionally, if 60% of the funds were spent on payroll, borrowers could have the entire loan forgiven. 

Updates to The Paycheck Protection Program

Now almost a year into the pandemic, and many businesses are still feeling the economic fallout from the pandemic. Especially as many parts of the country remain locked down. This signified the need for an expansion of PPP loans. The second stimulus package included  an additional $284 billion in PPP funding, the ability for PPP loan recipients to take a second draw loan, as well as some clarifications on forgiveness and deductibility (described further below). PPP loans are now available for both first time and second time borrowers. 

First Time Applicants For The Paycheck Protection Program

The loan requirements for first time applicants are much the same this time around as last. Businesses with fewer than 500 employees are eligible, and they must have been in business prior to February 15,  2020. In addition, businesses must be able to demonstrate the financial need of the loan as a result of the economic downturn through a revenue decline test. Independent contractors and self-employed are also eligible however they must be able to demonstrate a profit in 2019 or 2020. 

Second Draw Applicants

If you received an initial PPP loan, you may be eligible for a second draw loan. Second draw loans are available to businesses with fewer than 300 employees. Businesses who qualify must demonstrate a 25 percent loss in revenues between comparable quarters in 2019 and 2020. 

How To Establish A Decrease In Revenue

The below provides an example that you may use to establish the 25 percent decrease: 

  1. Step 1: Establish quarterly revenue for year-over-year quarters. For example, you may take revenues from the second quarter: April 1, 2020 through June 30, 2020. Suppose that number is $50,000 for simplicity. Next do the same for the same 2019 period. Suppose that in 2019, over the same period (April 1, 2019 through June 30, 2019), you recorded $75,000 in revenues. 
  2. Step 2: Calculate the percentage change: ([New Revenue] – [Old Revenue]) / [Old Revenue]. In our example, those numbers are ($50,000 – $75,000) / $75,000. Once calculated, the percentage change would be -33.33% (-$25,000/$75,000), satisfying the reduction in revenue condition. 

Borrowers will be required to certify their loss in revenue (subject to fines and potential imprisonment if knowingly false) and will need to submit payroll tax forms for 2019 and/or 2020: 

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), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group 33 health, life, disability, vision and dental insurance contributions, must be provided. A partnership must also include its IRS Form 1065 K-1s.

 Additionally businesses must also demonstrate that all proceeds from the first loan were spent and in allowable ways. 

The maximum loan amount for second draw borrowers is $2 million and will be based on the businesses average monthly payroll for two and a half months. Restaurants are able to base loan amounts on three and a half months of average payroll costs. 

Loan Forgiveness

Loan forgiveness has always been a huge draw to the PPP. However, the process with which to apply for loan forgiveness has been a little complicated. A simplified forgiveness application was created as part of the second stimulus package to help streamline to process. In addition, the forgiveness terms were also clarified. Loan forgiveness recipients must be able to demonstrate that at least 60% of loan proceeds went towards payroll during the 8th and 24th week of the covered period. 

paycheck protection program

PPP Proceeds and Tax Deductions

An oversight of the original PPP loan excluded expenses paid with PPP funds from being considered tax deductible for borrowers. Effectively this increased borrowers taxable income thereby increasing their tax bill. In hindsight, this was never the intent of legislators, so to address this faux paux, the second stimulus bill explicitly states that expenses paid with PPP funds are in fact deductible for both first and second draw loans. 

How To Apply

PPP loans are being facilitated by community banks and specialist lenders. The best place to apply is with a bank you have done business with in the past. Due to the allegations of fraud, turn around times may be a little longer this time around, as additional identity checks and fraud filters have been put in place.

To apply, borrowers may need to submit pertinent business documents such as: tax reuters from 2019 and 2020, and articles of incorporation. Second loan borrowers will need to submit proof that their sales dropped 25% in one quarter in 2020 compared to 2019. However, for loans under $150 K, borrowers planning on applying for loan forgiveness can submit proof of income loss at the time they apply for loan forgiveness. 

Get Help With Your Accounting

Is your business eligible for a second draw loan? Your accountant can help you determine if you meet the requirements by helping you compare your quarterly earnings of 2020 with the quarterly earnings of 2019. This is where accurate bookkeeping is important, as your financial records are vital in establishing eligibility for the loan as well as eligibility for loan forgiveness. 

Staying on top of your accounting can be challenging, especially while running a business, and with it being the beginning of tax season, it is easy to get consumed with your finances. Working with an accounting specialist can help lighten the load for you a bit, not to mention save you time and money. Contact the accounting and tax experts at My Tax Hack today! For more tax tips, subscribe to our newsletter below. 

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