Business prefemeeting discussion around table
Authored by Michael Wronsky and Pat Balthazor

The Small Business Administration (SBA) and Department of the Treasury (Treasury) announced that the Paycheck Protection Program (PPP) will reopen for certain borrowers on Jan. 11, 2021, and released the applications for first- and second-draw loans. Additionally, two interim final rules were recently issued on the program. The first interim final rule (IFR) is intended to cover new first-draw PPP loans authorized by the Consolidated Appropriations Act, 2021 (CAA) as well as the forgiveness applications of existing PPP loans for which the forgiveness proceeds have not yet been remitted. The second IFR applies to second-draw PPP loans authorized by the CAA, highlighting key differences between first- and second-draw loans and providing that, unless stated otherwise, the guidance under the first IFR also applies to second-draw loans.

 As part of the reopening announcement, SBA and Treasury said that at least the first two days of the loan application period will be open solely to submissions from community financial institutions to ensure underserved businesses have access to the program. These windows open for first-draw loans today, Monday, Jan. 11, and for second-draw loans, Wednesday, Jan. 13. The program will reopen for all other eligible applicants “shortly thereafter.”

 Listed below are key takeaways from both sets of IFRs; we continue to analyze this guidance and will issue additional communications as needed.

IFR 1 - PPP as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act)

  • Consolidates previously issued IFRs and guidance into one IFR, and incorporates amendments made by the CAA (i.e., expanded costs eligible for loan use/forgiveness, a borrower can now choose the end of their covered period from any date on or between the dates that are eight and 24 weeks after the loan was disbursed)
  • Allows borrowers to use 2019 or 2020 information to calculate their first-draw loan amount
  • Allows certain borrowers to re-apply or request an increase in their first-draw PPP loan amount, including:
    – Partnerships whose original loans did not include amounts for partner compensation
    – Borrowers who returned all or part of a PPP loan, or did not accept the full amount for which they were approved

IFR 2 - PPP second-draw loans

  • Eligibility requirements for a second-draw loan generally differ from the initial round as follows (though the same affiliation rules largely apply); a business must:
    – Have 300 or fewer employees, though businesses in the accommodation and food service industries and eligible news organizations can have 300 or fewer employees per location;
    – Be able to demonstrate a 25% reduction in gross receipts during a calendar quarter in 2020, relative to the same quarter in 2019, or experienced a reduction in annual gross receipts of 25% or more in 2020 when compared to 2019 (if the business was in operation in all four quarters in 2019); and
    – Have used or will use their entire first-draw PPP loan for eligible purposes.
  • Appears to provide that the alternative size standard based on tangible net worth and average income after federal income taxes available to determine eligibility for a first-draw loan does not apply; a borrower must pass the 300 or fewer employee test referenced above.
  • Generally includes “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source” in the definition of gross receipts for the purpose of assessing the 25% reduction test, though forgiven first-draw loan proceeds are specifically excluded.
  • Provides the maximum loan amount is the lesser of (special rules apply for seasonal employers and “new entities”):
    – 2 ½ months of the borrower’s 2019 or 2020 average monthly payroll costs (3 ½ months for businesses in the accommodation and food service industries), or
    – $2 million ($4 million in the case of businesses that are part of a single corporate group).

Please reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.

Contact us.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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