Second Draw PPP Loans: How to Qualify and What to Prove

Even with widespread distribution of a COVID-19 vaccine on the horizon, the pandemic is still not over and neither is the financial strain many businesses are feeling due to sustained lock-down orders. To aid these struggling businesses, the federal government has opened up applications for a second draw of PPP loans.

The application period for second draws of PPP loans runs from January 13, 2021, until March 31, 2021. A company is eligible for a second draw loan if the business:

• (1) Received a first draw PPP loan;
• (2) Has used or will use the full amount of the first draw loan only for authorized uses;
• (3) Has no more than 300 employees; and
• (4) Can demonstrate at least a 25 percent reduction in "gross receipts" between one fiscal quarter in 2019 and the same fiscal quarter in 2020 (e.g., a business received 25 percent less gross receipts in Q3 2020 than they did in Q3 2019). It is not necessary to demonstrate a 25 percent reduction in gross receipts for the entire fiscal year.

Proving Revenue Reduction to Qualify for a Second PPP Loan

The reduction in revenue element is the most ambiguous of the four and also the most difficult for a business to prove. The first challenge is to determine how to calculate "gross receipts." The Small Business Administration (SBA) has released guidance stating that for a for-profit business, gross receipts are:

[A]ll revenue in whatever form received or accrued (in accordance with the entity's accounting method, accrual or cash) from whatever source including from the sales of products or services, interest, dividends, rent, royalties, fees, or commissions …

While this is a rather inclusive definition, there are various enumerated exceptions. A non-exhaustive list of items that do not count as gross receipts includes taxes collected for and remitted to a taxing authority, proceeds from transactions between a company and its affiliates, and proceeds from a first draw PPP loan that have been forgiven.

Companies have a number of options available to them to prove that they have in fact suffered a 25 percent revenue reduction. One is through the provision of audited quarterly financial statements. Another method is to use unaudited financial statements; however, the company must sign and date the first page of such a statement and initial all other pages to attest to their accuracy.

Companies may prove the requisite reduction using monthly or quarterly bank statements. If the bank statement is ambiguous as to which deposits can be counted as gross receipts, the company must annotate the statement to make it clear. Businesses may also provide annual IRS tax filings for the entity.

In addition, the list of allowable and forgivable expenses has expanded to include the following covered items:

• Operations expenditures;
• Property damage costs;
• Supplier costs; and
• Worker protection expenditure

These additional expense categories are further defined on the SBA's website.

Alternative Funding to Second Draw PPP Loans

There are two other sources of funding for businesses affected by COVID-19. Businesses that did not receive a PPP loan during the first draw may apply for one during the application period for the second draw (January 13, 2021, and March 31, 2021).

If your business did not need additional funding before but has continued to suffer as lockdown orders persist, this is a good option. Unlike the second draw PPP loans, first draw PPP loans are generally still available for businesses with up to 500 employees.

Alternatively, select businesses may qualify for a Shuttered Venue Operator Grant (SVOG). Only businesses such as live venue operators, theatrical producers, non-profit museum operators, and movie theaters can secure these loans.

Importantly, companies that received a PPP loan on or after December 27, 2020, are not eligible for an SVOG. This means that companies that qualify for both must choose between an SVOG and a second draw PPP loan (or second round of first draw loans described in the paragraph above). For more information on SVOGs, review this article.

Work With an Attorney and Take Advantage

Navigating the PPP loan application process may be cumbersome but could well end up saving your business. To that end, consulting qualified legal counsel can make the process simple and drastically reduce the chance that your company's application is denied.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.