What Small Business Owners Need to Know About PPP Round 2

The Coronavirus Relief Act includes a new round of the Paycheck Protection Program (PPP). 

The PPP was established last spring under the CARES Act. Updates to the PPP under the new bill aim to address obstacles faced by first-time loan recipients and enable a second draw for those who have already received a PPP loan. 

PPP Round 2: The basics

The PPP is a loan program managed by the Small Business Administration (SBA) and enables certain lenders (including banks, FinTech companies, and community lenders like CDFIs and MDIs) to distribute PPP loans on behalf of the SBA to small businesses. 

Want a quick look at everything that’s changed under the new bill? Here’s PPP under the Consolidated Appropriations Act, 2021 at-a-glance:

  • $284 billion has been allocated to PPP (including $138 billion of unspent loans from the first round that were reinvested) and the program has been extended to March 31, 2021
  • Second-draw loans are available for businesses with under 300 employees
  • Businesses eligible for PPP loans has been expanded
  • Loan limitations have been expanded for certain businesses
  • Forgiveness for loans under $150K have a new, simplified one-page application
  • Eligible expenses for forgiveness have been expanded (for first-draw loans that have not yet been forgiven and for second-draw loans) 
    • While expenses eligible for forgiveness still require a 60/40 split of payroll costs/other eligible expenses, group health insurance benefits are now included in payroll costs (and these entail life insurance, disability benefits, vision, and dental insurance) 
  • Borrowers are allowed to choose a covered period that is any period of time between eight and 24 weeks
  • PPP funding includes dedicated set-asides for community lenders (CDFIs and MDIs) and business that operate in low-income areas 
  • A clarification has been made indicating that interest rates on PPP loans are non-compounding and non-adjustable 

A clarification has been made indicating that forgiven PPP loans are not taxable and forgiven expenses are tax-deductible

PPP Round 2 loan eligibility

To be eligible for a first-draw PPP loan:

  • Your business has less than 500 full-time, part-time, or seasonal employees.
  • Your business was operational before February 15, 2020 and remains operational.

To be eligible for a second-draw PPP loan:

  • Your business has less than 300 full-time, part-time, or seasonal  employees; if you have multiple locations, you may not have more than 300 employees per location.
  • You are able to demonstrate a revenue reduction of at least 25% in the first, second, or third quarter of 2020 (when compared with the same quarter in 2019). 
  • You have used or will use the full amount of the first-draw PPP.
  • Your business was operational before February 15, 2020 and remains operational.

 Businesses eligible for first- and second-draw PPP loans include: 

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • 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 

The following businesses remain ineligible for PPP loans: 

  • Lobbying organizations 
  • Organizations involved in political activities or public policy 
  • Lenders or financial services businesses 
  • 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

PPP Round 2 loan allocations

To ensure PPP loans are distributed to the businesses that really need capital, amounts of PPP funding has been set aside for specific institutions (these may be adjusted in the future):

  • $15 billion has been set aside for both first- and second-draw PPP loans to be issued by community financial institutions, including CDFIs and MDIs
  • $15 billion has been set aside for both first- and second-draw PPP loans to be issued by certain small depository institutions
  • $25 million has been set aside for both first- and second-draw PPP loans to be issued by the Minority Business Development Centers program under the Minority Business Development Agency (MBDA)
  • $57 million has been set aside for a microloan program
  • $15 billion in grants has been set aside for live venues
  • $20 billion is allocated to the Targeted EIDL Advance program
  • $15 billion is allocated to smaller, first-time borrowers with ten or fewer employees or those who are in low-income areas and borrowing less than $250,000
  • $25 billion is allocated to second-draw borrowers with ten or fewer employees or those who are in low-income areas and are borrowing less than $250,000

PPP loan terms

All PPP loans have a fixed interest rate of 1%. The new bill has clarified that the interest rate is non-compounding and non-adjustable for first- and second-draw loans. 

Under PPP, lenders may not:

  • Charge a yearly fee
  • Charge a guaranteed fee
  • Charge a prepayment penalty
  • Request collateral or a personal guarantee

Businesses that receive PPP loans may also receive loans from other lenders or programs and may be able to obtain credit from other institutions.

PPP loan maturity and deferral period

The maturity of a PPP loan is five years.

The deferral period lasts until the loan forgiveness amount is determined. This means that until you know how much of your loan will be forgiven, you don’t need to start making payments. Borrowers who fail to apply for loan forgiveness must start making loan payments within ten months of the last day of the covered period. 

PPP Round 2 loan maximums and limitations 

First-draw PPP loan limitations

The maximum amount a business that has not yet received a PPP loan can borrow is the lesser of:

  • 2.5 times the average monthly payroll costs and healthcare costs
  • $10 million
  • There may be exceptions to these limits for restaurants and other hospitality businesses. 

Second-draw PPP loan limitations

Any business that is applying for a second draw will be subject to more stringent limitations. 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). (This is a list of hospitality and entertainment businesses like restaurants, hotels, and casinos; click the link to get the full list.)
  • $2 million

PPP loan forgiveness 

A major benefit of the PPP is streamlined and simplified loan forgiveness. The new legislation expands expenses that are eligible for forgiveness and makes applying for forgiveness even easier.

The covered period

In order for the loan to be eligible for forgiveness, the funds must be used within the covered period. If you have already received a PPP loan from the first round, nothing has changed. Your covered period remains the same. 

If you are applying for a first- or second-draw PPP loan, you may choose a covered period that is anywhere from eight to 24 weeks after receiving the loan. This gives you the flexibility to choose a covered period that works best for you. 

Covered expenses 

In order to get full or partial PPP loan forgiveness, it is critical that you spend the loan money on covered expenses. The new bill has expanded covered expenses for PPP. 

Below is the full list of covered expenses for PPP. Certain items are covered for all PPP recipients, round 1 and round 2, but certain items are only covered for first-draw borrowers of PPP round 2, second-draw borrowers of PPP round 2, and borrowers of PPP round 1 whose loans have not yet been forgiven. We break these down in the tables below. 

At least 60% of the loan must be spent on:

First-draw borrowers of PPP Round 2Second-draw borrowers of PPP Round 2Borrowers of PPP Round 1; loans have not been forgivenBorrowers of PPP Round 1; loans have been forgiven
Employee payroll costs*xxxx
Group health insurance paymentsxxxx
Dental and vision plansxxxx
Disability benefitsxxx
Life insurance xxx
Owner compensation costs**xxxx
* These include salaries, wages, tips and commission, and are capped at a max of  $15,385 within an eight-week covered period or capped at a max of $46,154 within a 24-week covered period for each employee.

**These are capped at eight weeks worth of the net profit earned in 2019—but not more than $15,385; or two and a half months worth of net profit earned in 2019—but not more than $20,833, depending on the covered period.

40% or less of the loan amount may be spent on: 

First-draw borrowers of PPP Round 2Second-draw borrowers of PPP Round 2Borrowers of PPP Round 1 whose loans have not yet been forgivenBorrowers of PPP Round 1 whose loans have been forgiven
Paid time off and leave for employees*xxxx
Pension and retirement plansxxxx
Federal income and FICA taxesxxxx
State unemployment insurance xxxx
Utilities xxxx
Rentxxxx
Interest on mortgage paymentsxxxx
Business software or cloud services that facilitate business operations**xxx
Costs related to property damage, vandalism or looting due to unrest that occurred in 2020xxx
Supplier costs that are essential to the operations of the business xxx
PPE that help businesses comply with federal and state COVID-19 safety guidelines (like face masks) xxx
Measures that help businesses comply with federal and state COVID-19 safety guidelines (like plastic separators)xxx
*Keep in mind that if you use FFCRA tax credits to cover these, then they will not be considered eligible expenses.

**These include software or cloud services that facilitate product or service delivery, processing payments, tracking of payroll expenses, human resources, sales and billing functions, accounting, tracking supplies and/or inventory, tracking records and/or expenses.

Keep in mind that these expenses are still not covered: 

PPP loan forgiveness applications

A number of different PPP forgiveness applications have been released, and the new bill has provided yet another. We’ll break them down for you here:

Forgiveness ApplicationWho is eligible to use this application?Details
Paycheck Protection Program Loan Forgiveness ApplicationAnyone who has applied for a PPPThis was the first PPP forgiveness application released; it was revised on June 16, 2020 and remains in use.
PPP Loan Forgiveness Application Form 3508S (also known as the Simplified Loan Forgiveness Application)  Any PPP borrower who has borrowed less than $50,000This simpler, streamlined forgiveness application was released in October of 2020 under an interim final rule that indicated borrowers of less than $50,000 would be exempt from forgiveness reductions based on reductions in FTE employees and reductions in employee salaries or wages.
PPP Loan Forgiveness Application Form 3508EZ (also known as the EZ Loan Forgiveness Application) Any employer who has not reduced employee wages by more than 25% during the covered period Sole proprietors & Self-employed individualsIndependent contractorsThis is a simpler, more streamlined PPP loan forgiveness application.
Simple Loan Forgiveness ApplicationAny PPP borrower who has borrowed less than $150,000This is a new forgiveness application under the new bill and has not yet been released; it will be a simple-one pager and will make obtaining forgiveness easier for borrowers.The one-pager will require the borrower to sign and certify a description of:the number of employees the borrower was able to retain because of the loanthe estimated total amount of the loan spent on payroll coststhe total loan amount

Remember to retain relevant records related to employment and expenses.  These records may be reviewed and audit these loans to ensure against fraud. 

Taxes and deductibility of forgiven PPP expenses

The new bill has clarified the taxability of PPP loans and the deductibility of expenses paid for with PPP loan proceeds. These are effective as of March 27, 2020 (the date CARES was enacted); and remain effective under the new bill for both first- and second-draw loans: 

  • The gross income a business is required to report will not include any PPP loan amount that is forgiven
  • Any expenses paid for with PPP loan proceeds that are forgiven will be tax-deductible

Common questions about PPP

What does a PPP Round 2 loan application look like? How do I fill it out?

This depends on where you apply; different lenders have different application requirements, but eligibility, loan terms, and forgiveness won’t change from lender to lender. 

Where can I find a list of PPP Round 2 lenders?

Contact banks and lenders in your area to find out if they are supporting the PPP program. Keep in mind that lenders who are offering first-draw loans may be ready to distribute loans before lenders offering second-draw loans (because wading through second-draw legislation and shifting internal practices may take some time for these institutions). 

We will continue to update this list as more information on lenders becomes available.  

I wasn’t able to get a first-round PPP loan; should I try for one in the second round?

Yes, as long as you are eligible and can adhere to the terms of the loan. With the creation of the new bill, Congress has set aside allocations for community lenders and institutions that can help smaller businesses, businesses owned by POC, and those who operate in lower-income areas access capital. 

A portion of funding is being directed to Community Development Financial Institutions (CDFIs) and Minority Depository Institution (MDIs). These are community lenders who have committed to expanding economic opportunity for underserved people. Not only are portions of the PPP allocated for these lenders, but also outside of PPP funds; $12 billion is being routed to CDFIs and MDIs. This means that even if the community lenders in your area aren’t supporting PPP, they may be offering other loans with federal funds under the Consolidated Appropriations Act, 2021.

I returned part or all of my PPP loan; can I apply for another PPP loan? 

Yes. Within 17 days of the enactment of this bill, the SBA is required to release guidance to lenders on allowing borrowers who have returned loans to access PPP capital. 

Is the PPP the only loan or funding option under the new bill?

No. This is very important; both the CARES Act and the new bill offer have allocated money to a number of different loan and grant programs outside of PPP. If you do not qualify for PPP, you have other options to access capital. 

The Consolidated Appropriations Act, 2021 has injected capital into the following programs: