The Debut of the Paycheck Protection Program Round Two: A Summary of Key Elements

The Paycheck Protection Program under the Consolidated Appropriations Act, 2021 (“PPP2”) debuted this week as the Small Business Administration (“SBA”) opened its portal as part of a staggered rollout for businesses negatively impacted by the COVID-19 pandemic.

In December 2020, President Trump enacted a stimulus bill called the Consolidated Appropriations Act, 2021 (“CAA”) which in part revitalized and expanded the Paycheck Protection Program (“PPP1”) established under the Coronavirus Aid, Relief and Economic Security Act enacted March 27th, 2020 (“CARES Act”). The CAA appropriated $284.45 billion for PPP2.

On Monday, January 11th, the SBA’s portal opened to a limited pool of lenders from “community financial institutions” for first-draw loans, and on January 13th, the portal is scheduled to open to community financial institutions with second-draw loan applicants. The portal is expected to open to the broader lenders and applicant pool shortly thereafter, although the exact date has not been announced yet.

The SBA and Treasury released two interim final rules titled the “Business Loan Program Temporary Changes Paycheck Protection Program as Amended by Economic Aid Act” and the “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans,” which set forth instructions and guidance for first and second time loan applicants.  Additionally, the SBA and Treasury issued two high level summaries with an overview of the PPP2 eligibility and the loan process for first-draw and second-draw loan applicants.

This alert will summarize some of the key elements of PPP2 under the CAA. The new legislation and regulations contain intricacies and nuances, and since every business is unique, we urge you to connect with your trusted attorney and tax advisor for information and advice tailored to your business and its operations.

Tax-Deductible Forgivable Expenses

While there are a number of tax-related provisions under the CAA, one of the most important is the change regarding tax deductions as to forgivable expenses. Previously, the Internal Revenue Service’s (“IRS”) stance was that business could not make a tax deduction for expenditures that were paid for with PPP1 loan proceeds. The CAA reversed this IRS guidance so that expenses that would otherwise be treated as ordinary and necessary business expenses that are tax-deductible, even if they were paid for with Paycheck Protection Program loan proceeds. Notably, this change is retroactive to deductibility of PPP1 loan expenses, whether or not such loan was forgiven. Last week, the IRS released a notice and ruling that its position on deductibility is consistent with CAA, and that its previous notices and ruling in opposition are obsolete.

Forgiveness Simplified – PPP loans of $150,000 or less

If you have a PPP1 loan of less than $150,000, you may want to consider withdrawing any forgiveness application you have previously submitted to the extent your lender will allow and that has not submitted it to the SBA.  If you were able to withdraw it and resubmit once new materials become available, you may be able to benefit from the CAA changes discussed below.  Please discuss this with your PPP lender. The CAA implemented a simpler forgiveness process for loans of $150,000 and less. Borrowers with up to $150,000 in PPP loans may submit a one-page certification to the lender, providing a description of the number of employees retained because of the loan; an estimate of the amount spent on payroll; and the total loan amount. The borrower must also attest to compliance with the rules and regulations, including keeping records for a period of four years following the application submission date for employment records and three years following the application submission date for all other records.  The SBA has yet to release the certification form. 

Second-Time PPP Borrowers

A business that received a PPP1 loan may be eligible to receive additional loan funds through PPP2, or a “Second Draw Loan.”

Loan Amount: Second Draw Loans are capped at $2 million regardless of the category of business or NAICS code, compared to PPP1 where the maximum loan amount was capped at $10 million. The principal amount of the Second Draw Loan is calculated at 2.5 x monthly payroll average, which is similar to how the PPP1 loan amount was calculated. Businesses that have a NAICS code beginning with “72”, such as restaurants, hotels and bars, may use 3.5 multiplier rather than a 2.5 multiplier.

Eligibility – Employees: To be eligible to receive a Second Draw Loan, generally, a business must have 300 or less employees and be able to demonstrate at least a 25% reduction in gross receipts for a quarter of 2020 compared with the same quarter of 2019. The business must have received a PPP1 loan and have used or expects that it will use the full amount of PPP1 loan proceeds on forgivable expenses during the covered period.

In comparison, PPP1 loans allowed for 500 or less employees, where PPP2 has reduced the employee count to 300 or fewer.

Affiliation Rules: The affiliation rules and related exceptions that applied to PPP1 also apply to PPP2.  To further highlight that the employee count includes applicable affiliates, and that the affiliation analysis can include control via management agreements in certain circumstances, the application on Form 2483 has been revised to reference affiliates in the Number of Employees box and management agreements in relation to ‘common management’ in Question 3 of the Form.   

Eligibility – Revenues: For calculating the gross-revenue reduction, businesses that do not keep quarterly records may demonstrate the 25% or greater revenue reduction by comparing annual gross receipts for 2020 against 2019, if the business operated during all four quarters. New or seasonal businesses have modified comparison periods for calculating the revenue reduction. Seasonal employers are employers that operate for seven months or less during a calendar year or during a preceding calendar year had gross-receipts that were less than 1/3 of the gross their receipt from the other half year. A seasonal employer can choose their payroll period for this calculation, which can be any period of 12 consecutive weeks between February 15, 2019, and February 15, 2020. The PPP1 forgiveness amount is to be excluded from gross receipts definition for PPP2.

Eligibility – Foreign and other Restrictions: The CAA prohibits Second Draw Loans for any business or entity formed or organized under the laws of the PRC or Special Administrative Region of Hong Kong, or that has significant operations in either of the foregoing locations or holds greater than 20% interest (direct or indirect) in the entity or that has a director on the Board that is a resident of the PRC. Additionally, businesses that are generally ineligible for other SBA lending (except for non-profits) and business primarily engaged in political or lobbying activities are not eligible as Paycheck Protection Program borrowers. 

Application and Timing: The SBA has released Form 2483 SD-Second Draw Borrower Application Form, and applicants may apply until March 31st, 2021, through participating lenders.

First-Time Borrowers and Newly-Eligible Borrowers

If your business did not qualify as an eligible borrower for PPP1 loans, the good news is that the SBA has broadened the eligibility requirements for the PPP2 loans.

Eligibility – Employees: First-draw loans may be made to businesses that have 500 or less employees, subject to the affiliation rules. Businesses in certain industries may use the SBA’s alternative size standard for eligibility with more than 500 employees.

Eligibility – Organizations: PPP2 eligible borrowers now include 506(c) organizations such as trade associations, Chambers of Commerce and business leagues, if there are fewer than 300 employees and the satisfaction of prescribed lobbying limitations on receipts, activities and costs.  Additionally, certain news organizations may also be eligible for a loan if there are fewer than 500 employees per physical location and loan proceeds will be used to support expenses of “locally focused or emergency information.”

Application and Timing: The SBA released a revised version of Form 2483-Paycheck Protection Program Borrower Application Form, and applicants may apply until March 31st, 2021, through participating lenders.

Forgivable Expenses Expanded

In addition, for expenses deemed forgivable under PPP1, the CAA added four additional categories of forgivable expenses referenced below in (8) – (11). This expansion is retroactive to PPP1 loans but does not apply to forgiven PPP1 loans.

The eleven forgiveness categories for PPP loan proceeds are as follows: (1) payroll costs; (2) health insurance costs; (3) mortgage interest payments; (4) rent payments; (5) utility payments; (6) interest payments or other debt obligations incurred before February 15, 2020; (7) refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020; (8) certain types of operating expenditures such as for software or cloud services and human resources; (9) property damage costs related to the vandalism or looting during 2020, that was not covered by insurance or otherwise compensated; (10) supplier costs that are essential to the business operations at the time of the expenditure and that are made pursuant to a contract, order, or purchase order; and (11) the broad category of  work protection expenditures, including operating or capital costs used to adapt the business for COVD-19 safety such as installing ventilation or filtration systems.

Although the categories of forgivable expenses has expanded, at least 60% of the forgiveness amount must be used towards payroll costs, while the remaining 40% of the forgiveness amount can be used towards the other ten forgivable expense categories.

 “Covered Period” Flexibility

The CAA provided clarity that Borrowers may now choose any period of time between eight weeks and 24 weeks, starting from the loan disbursement date. For example, if a borrower spends the proceeds in 13 weeks, then it can move forward with the forgiveness application after the proceeds are spent.   While this is technically a change from PPP1, which had a program for a period of either 8 or 24 weeks, even under PPP1 the SBA was permitting Borrowers to submit forgiveness applications prior to the end of the applicable period if the proceeds had been spent. 

Other PPP1 and PPP2 Features

  • A PPP1 borrower may still apply for a first draw loan if it has returned some or all of its PPP1 loan proceeds or did not accept the full amount of a PPP1 loan it was eligible to receive.
  • The safe harbor rules for re-hiring under the CARES Act, which are exceptions to forgiveness reductions, are extended from December 31st, 2020, to the end of a covered period.
  • Within 45 days from the enactment of the CAA, the SBA must publish its audit plan that includes criteria for determining which loans will be audited and the procedures and policies for reviewing and auditing the loans.

It is expected that the SBA will continue to publish applications, FAQs, and additional guidance on PPP2 in the coming days and weeks.

Prepared by Chad Porter, Partner and Vice-Chairman of Finance, Mark Manning, Partner, and Amanda Adam, Associate.

Chad Porter is a partner in Burns & Levinson’s Finance, Middle-Market M&A and Private Equity, Securities Law, and Business & Transactions groups. He specializes in mergers and acquisitions, commercial financing arrangements, private equity investments and transactions, securities transactions and compliance, general business affairs, and business disputes. He can be reached at or 617.345.3686.

Mark Manning is a partner in Burns & Levinson’s Corporate, Venture Capital & Private Equity, and Intellectual Property Groups. Clients look to Mark Manning to achieve the best results in their most complex commercial transactions and internal business and legal issues. He regularly leads merger and acquisition transactions on behalf of both buyers and sellers, providing him with deep insight into what drives both sides of a deal – a perspective that helps him efficiently facilitate practical solutions to issues that keep deals from getting done. He can be reached at or 617.345.3468.

Amanda J. Adam is an associate in the firm’s Corporate Group. Amanda’s practice focuses primarily on SEC compliance, mergers, acquisitions, private equity and venture capital investments, and other general corporate matters in a broad range of industries, including cannabis, life sciences, energy, and wellness companies. She can be reached at or 617.345.3556.

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