SBA and Treasury Department Issues More PPP Guidance
on First and Second Draw PPP Loans and
Revises the Simplified Loan Forgiveness Application

Marty McCarthy, CPA, CCIFP
Focused on You. Dedicated to Your Success.
January 21, 2021

In the first week of the second round of the Paycheck Protection Program (PPP), the SBA approved approximately 60,000 Paycheck Protection Program (PPP) loan applications submitted by nearly 3,000 lenders for over $5 billion.
 
First Draw PPP loans are for those borrowers who have not received a PPP loan before August 8, 2020. Second Draw PPP loans are for eligible small businesses with 300 employees or less and that previously received a First Draw PPP loan. These borrowers will have to use or had used the full amount of their First Draw loan only for authorized uses and demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The maximum amount of a second draw PPP loan is $2 million.
 
The Paycheck Protection Program remains open for First and Second Draw PPP loans until March 31, 2021, as set forth in the Economic Aid Act, or until funding is exhausted. The bill, signed into law on December 27, 2020, included a total of $284.5 billion for PPP loans. Congress designated $137 billion for Second Draw Loans. 
 
Revised Loan Forgiveness Form
On January 19, 2021, the Small Business Administration (SBA) released the revised Form 3508S for First Draw and Second Draw Paycheck Protection Program (PPP) borrowers seeking forgiveness on loans of $150,000 or less. As detailed in the Consolidated Appropriations Act, 2021, this one-page form provides a simplified loan forgiveness process for borrowers meeting this loan balance threshold. 
 
Guidance on First and Second Draw Loans
The SBA and Treasury Department issued guidance on January 17 and 19, 2021 on how to calculate revenue reduction and maximum loan amounts for First Draw and Second Draw paycheck protection program (PPP) loans.
 
The First Draw Guidance describes payroll costs using calendar year 2019 as the reference period for payroll costs used to calculate loan amounts. Borrowers are permitted to use payroll costs from either calendar year 2019 or calendar year 2020 for their First Draw PPP Loan amount calculation. Documentation, including IRS forms, must be supplied for the selected reference period.
 
The First Draw Guidance also addresses Economic Injury Disaster Loans (EIDLs), payroll costs compensation limitations, how different types of entities can calculate the maximum loan amount (up to $10 million), the treatment of employer group health, life, disability, vision and dental insurance contributions and retirement contributions, and various tax considerations.
 
The Second Draw Guidance provides assistance for businesses in calculating their revenue reduction and payroll costs. It also describes the relevant documentation that is required to support each set of calculations) for purposes of determining their eligibility for and amount of a Second Draw PPP Loan.
 
The Second Draw Guidance also address the definition of gross receipts. For a for-profit business, gross receipts are generally all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.
 
Gross receipts do not include the following:
  • Taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees).
  • Proceeds from transactions between a concern and its domestic or foreign affiliates.
  • Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
 
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
 
The guidance also defines gross receipts for a nonprofit 501(c)(3) organization, a 501(c)(19) veterans’ organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or eligible destination marketing organization.
 
The amount of any forgiven First Draw PPP Loan or any EIDL advance, which are not subject to federal income tax, is not included in the calculation of gross receipts.
 
This guidance describes payroll costs using calendar year 2019 as the reference period for determining payroll costs used to calculate loan amounts. However, borrowers are permitted to use payroll costs from either calendar year 2019 or calendar year 2020 for their Second Draw PPP Loan amount calculation.
 
The Second Draw guidance answers many more questions on gross receipts. It also addresses how different types of entities should calculate payroll costs, required documentation, and tax considerations.
 
Businesses that are part of the same corporate group cannot receive First Draw PPP Loans in a total amount of more than $20 million and Second Draw PPP Loans in a total amount of more than $4 million. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.
 
Borrowers and lenders may rely on the guidance provided in these documents as SBA’s interpretation of the CARES Act, the Economic Aid Act, and the PPP Interim Final Rules. The U.S. government will not challenge borrowers and lenders PPP who conform to this guidance and to the PPP Interim Final Rules and any subsequent rulemaking in effect at the time the action is taken.
 
Procedural Notices
In addition, the SBA issued the following procedural notices:
 
Informs PPP borrowers and lenders that the Forgiveness Platform has been updated and, effective immediately, SBA will no longer deduct EIDL Advances from forgiveness payments remitted to PPP lenders. This change will be applied to SBA forgiveness payments with a status of “Payment Confirmed” dated December 29, 2020, or later. For those loans where SBA remitted a forgiveness payment to a PPP lender that was reduced by an EIDL Advance, SBA will automatically remit a reconciliation payment to the PPP lender for the previously deducted EIDL Advance amount, plus interest through the remittance date. PPP lenders are not required to request remittance of the reconciliation payment.
 
Under previous PPP rules, a First Draw PPP Loan could not be increased unless the loan was made to a partnership or seasonal employer and the Lender approved the increase before the lender submitted the initial SBA Form 1502 (1502) report for the loan. The Economic Aid Act provides for additional narrow circumstances under which certain eligible borrowers that received a First Draw PPP Loan may reapply for a First Draw PPP Loan or request an increase in a First Draw PPP Loan that was approved on or before August 8, 2020. The purpose of this Notice is to guide SBA employees and lenders on the procedures for such reapplications or requests for increases for a First Draw PPP Loan that was approved on or before August 8, 2020. This Notice also discusses how lenders can obtain the additional processing fee that is due on the increased loan amount (if not previously paid by SBA), and how lenders can obtain a processing fee on a reapplication.
 
Informs PPP lenders of the effects of “excess loan amount errors” made by the borrower or the lender in completing the PPP Borrower Application Form (SBA Form 2483, SBA Form 2483-SD, or lender’s equivalent form) or the PPP Lender Application Form (SBA Form 2484 or SBA Form 2484-SD) for First Draw PPP Loans and Second Draw PPP Loans. An excess loan amount error is a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act.
 
The purpose of this Notice is to inform Paycheck Protection Program (PPP) lenders of (1) the
process for borrower resubmission of loan forgiveness applications using PPP Loan Forgiveness
Application Form 3508S (SBA Form 3508S); (2) lender responsibilities to notify borrowers of
(a) lender decisions to deny forgiveness in full, (b) SBA loan review decisions and borrower
appeal rights to SBA’s Office of Hearings and Appeals (OHA), and (c) SBA remittance of loan forgiveness payments and (3) lender responsibilities in the event of an offset of PPP remittances to
lenders by the Treasury Offset Program (TOP).
 
We will continue to keep you updated. Please visit our COVID-19 Resource Page for more alerts. Learn about our COVID-19 Recovery Services.

Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@MCC-CPAs.com. I can be reached at Marty.McCarthy@MCC-CPAs.comAs always, we are happy to help.

Stay safe,

Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).