The new Economic Aid Law passed by Congress authorizes new PPP loans for first-time borrowers, but also additional PPP loans for those who already received a loan last year. This addresses the requirements and concerns of self-employed and individual homeowners, who do not have employees, and who wish to apply for a second PPP loan under the new law (“Second Draw PPP Loan”).
If you are a self-employed / sole proprietor, with no W-2 employees, and you report your business income on your personal income tax return, Form 1040 / Schedule C, if you are eligible for a Prime PPP loan drawdown and continue to qualify, here are the other requirements for a second draw PPP loan:
- You must have already used / spent the money you received from your previous PPP loan last year (“First Draw PPP Loan”); and
- You must have experienced a 25% or more reduction in income in 2020 compared to 2019. For this purpose, you must compare your quarterly gross revenue / sales for any quarter in 2020 with the gross revenue for the same quarter in 2019. You may also qualify if your total gross receipts for 2020 are less than your total gross receipts for 2019. For example, if you had gross receipts of $ 50,000 in the second quarter of 2019 and gross receipts of $ 30,000 in second quarter of 2020, you would have experienced a 40% reduction in income between quarters and therefore are eligible for a second draw. PPP loan (assuming all other eligibility criteria are met). Also, and as another example, if your gross receipts were $ 250,000 for 2019 but only $ 150,000 for 2020, you also suffered a 40% drop here and you might qualify. The term “gross receipts” includes all of your business income, including sales of products or services, interest, dividends, rents, royalties, fees or commissions, less any returns and allowances. Typically, revenue is considered “total revenue” or “total sales” (or in the case of a sole proprietorship or self-employed person “gross income”). If your first draw PPP loan has been or will be canceled, this is not included in your “gross receipts”.
- For most new P3 loans, which will be less than $ 150,000, you won’t need to submit documents showing a 25% reduction in income in 2020 compared to 2019 – at least when you apply for a loan. However, if you are requesting forgiveness of your new loan, you must provide information indicating a 25% income reduction on or before the date of your forgiveness request.
Amount of the second drawdown of the PPP loan:
Your new PPP loan amount is generally calculated the same way as your First Draw PPP loan, with a few important differences.
For your new PPP loan and your second drawdown, you need to calculate the new loan amount as follows:
Step 1: Find your 2019 or 2020 net income amount from IRS Form 1040 in Schedule C, line 31. If you are using 2020 and you have not yet filed a tax return for 2020, complete a draft Schedule C of Form 2020 using your business income and expense statements and calculate net income. If you started a new business that was operating on February 20, 2020, but were not in business for 12 months in 2020 (for example, if you started your business on February 1, 2020), you should use net profit of the business during the operating period in 2020. You can get a draft of Schedule C of Form 2020 from the IRS website – www.irs.gov. If the net profit amount is more than $ 100,000, reduce it to $ 100,000. If this amount is zero or less, you are not eligible for a second PPP loan.
2nd step: Calculate the average monthly net profit amount (divide the amount in step 1 by 12, or the number of months you were in business in 2020 if you were not in business all year – see below -above).
Step 3: Multiply the average monthly net profit amount from step 2 by 2.5.
Step 4: If you have an Economic Disaster Loan (EIDL) and want to refinance that EIDL through a second-draw PPP loan, add the outstanding amount of any EIDL made between January 31, 2020 and April 3 2020 you are looking to refinance. Do not include the amount of an advance for an “EIDL COVID-19 loan” (as it does not have to be repaid).
Documents and information to be provided with the second draw PPP loan application:
Second-draw PPP loans of $ 150,000 or more require specific documentation with the loan application. If you are applying for a PPP Second Draw Loan of less than $ 150,000, and especially from the same bank, your bank may not require you to submit documents and information to support your application, but you must make ” attestations ”regarding your business and loan in the Second Drawdown PPP Loan Application (new SBA 2483-SD form). However, you may need to provide a copy of your Form 1040 2019 or 2020, Schedule C (whichever one you used to calculate the loan amount above), and another document showing you were in business on the 15th. February 2020 (for example, a customer / customer invoice or bank statement).
Uses of your new PPP Second Draw loan:
The SBA has expanded the uses of a second-draw PPP loan, and beyond just paying your monthly “owner’s profit”; However, at least 60% of the New Second Draw P3 Loan must be used to pay off your landlord’s profits each month, which cannot exceed $ 8,333 / month – $ 100,000 / 12. You can now use your new PPP loan to pay for the following:
- Monthly owner’s profit (again, no more than $ 8,333 / month);
- Mortgage interest payments on commercial real estate (but not mortgage prepayments or principal payments);
- Payment of commercial rents;
- Commercial utility payments;
- Interest payments on other commercial loans taken out before February 15, 2020;
- Refinancing of an SBA EIDL loan made between January 31, 2020 and April 3, 2020;
- Property damage costs (costs related to property damage and vandalism or looting due to public unrest in 2020 that were not covered by insurance or other compensation);
- Supplier costs (expenses you make to a supplier of goods for the supply of goods which – (A) are essential to the borrower’s operations at the time the expenditure is made; and (B) are made under a contract, order or purchase order— (i) in effect at any time before the period covered for the loan; or (ii) for perishable goods, in force before or at any time during the period covered for the loan); and
- Worker protection expenses (typically, expenses to buy things used to protect you in your business from COVID-19).
For expenses other than your monthly “owner’s profit” payment, these other expenses cannot exceed a total of 40% of the amount of your new P3 loan.
New second-draw PPP loans can be canceled just like first-draw PPP loans. Provided that you use the new loan for the above purposes, you can request and receive the remission of the new loan.