Finances and Taxes

New Updates to the PPP: The Small Business Owner’s Complete Guide to PPP Round 2

Gusto Editors  

Update on January 13, 2020: Applications for PPP loans are open.

Currently, the SBA portal is open only to CDFI lenders for both first- and second-draw loans.

The portal will open to all other lenders shortly after.

Other lenders may be accepting applications, but those applications won’t be processed until the SBA portal opens to all lenders.

After months of stalling, weeks of fierce negotiations, and too many false starts to count, a new bill was passed to help businesses and individuals across the country find relief from the economic devastation created by the COVID-19 pandemic. The Consolidated Appropriations Act, 2021 includes funding earmarked for small business loans, including a new round of the Paycheck Protection Program (PPP). It’s a sequel, y’all.

The PPP was established last spring under the CARES Act. While many small businesses were able to take advantage of the program to access capital, flaws in the program prevented many businesses that truly needed funding from getting it. Updates to the PPP under the new bill aim to address these issues for first-time loan recipients and enable a second draw for those who have already received a PPP loan. 

Here’s everything you need to know about PPP Round 2. 

When and how to apply for a PPP round 2 loan

Applications for PPP opened on January 11, 2021. Note: there are restrictions on applications that will be processed first.

From January 11 – January 13: The SBA will be processing first-draw applications from community lenders that serve minority- and women-owned businesses first (like CDFIs and MDIs).

On January 13: The SBA will begin processing second-draw applications from community lenders

The SBA has not yet announced when they will begin processing applications from all lenders, but in the meantime, many lenders are still accepting applications. Find a list of lenders here.

Here is the SBA application form for first-draw borrowers.

Here is the SBA application form for second-draw borrowers.

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

Ready to get into it? For all the details about PPP Round 2, read on. 

PPP round 2 loan eligibility

Only certain businesses are eligible to receive a PPP loan, and these specifications are different for first-time loan recipients and second-draw recipients.

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.
  • The SBA has released the application form for first-draw loans.

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).  Tax filings can be used to demonstrate this.
  • 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 a seasonal business to be one that operates for at least a 12-week period, but no more than seven months within a year or earns 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. 

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PPP round 2 loan maximums and limitations 

There are limits to what borrowers can receive; these vary depending on the specifics of the business and whether a borrower has already received a PPP loan. 

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.

In order to qualify for forgiveness, you must keep records and documentation (including purchase orders and invoices) for these 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 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 (or alternative covered period)
  • Sole proprietors
  • Self-employed individuals
  • Independent contractors
This is a simpler, more streamlined PPP loan forgiveness application.
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.
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 loan
  • the estimated total amount of the loan spent on payroll costs
  • the 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). 

Here is a list of popular lenders; this list indicates whether these lenders are participating in this round of PPP. 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: 

Use the COVID small business relief finder to find loans and grants.

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Updated: January 13, 2021

Comments

  • Nic Simmerman

    There is a section for “New Entities” [Title III, Sec 311 (a)(37)(c)(iii)] in the PPP portion of the appropriations act which appears to allow for companies that were not in existence before February 15, 2020. Does this mean a new company can apply and qualify?

    Reply
    • Gusto Editors

      Hi Nic, thanks for your question. Unfortunately, no, this does not mean a new company can apply and qualify. This section is describing how to calculate the maximum loan if the entity wasn’t in existence for a full year before February 15, 2020. However, the requirement that the business was in existence before February 15, 2020, has not changed.

      Reply
  • Samir

    What guidance is available to determine eligibility for businesses that weren’t operational during periods of 2019?

    Reply
    • Gusto Editors

      Hi Samir — one of the stipulations of eligibility for both first- and second-draw loans is that a business must have been operational before February 15, 2020 and is currently still operational. If your business meets that requirement, you’ll want to take a look at the rest of the eligibility requirements listed in this blog post: https://gusto.com/blog/business-finance/ppp-round-2#PPP_round_2_loan_eligibility

      Reply
  • Nancy Nguyen

    My business new is opened in July 1st 2020. Am I qualified for the 2nd-round PPP loan?

    Reply
    • Gusto Editors

      Hi Nancy — for both first-draw and second-draw PPP loans, small businesses need to have been operational before February 15, 2020. Small businesses that were not operational before then are not eligible for 2nd-round PPP loans. You still have other options beyond PPP to look into, such as SBA 7(a) loans. You can learn more about the options here.

      Reply
  • David Bard

    I am interested in obtaining a PPP loan as my company did not take part in the first round. We obtained a SBA loan which has to be returned in its entirety

    Reply
  • Lori Kobaitri

    Do I have to go through the same lender for a 2nd ppp loan? I would prefer to use a different one.

    Reply
    • Gusto Editors

      Hi Lori — you should be able to use a new lender for the second round. You can take a look at our list of current PPP lenders here. However, since your current lender already has your information on file, applying through them (should they choose to partake) would be your best route.

      Reply
  • Clarke Mazza

    My Company had 7 employees for the first PPP. we used 100% of it for covered expenses; we were forgiven 100% of the loan. After the first PPP ran out I had to reduce reduced my employees down to 3. We have had way more than a 25% reduction in revenues/profit. My question is; Will I be ineligible or have the PPP amount forgiven amount reduced because of the reduction in employees from the first PPP?

    Reply
    • Gusto Editors

      Hi Clarke, thanks for reaching out. You’re not necessarily ineligible due to the reasons you mentioned. If you are taking a loan of less than $150,000, a simplified forgiveness application is coming out that will only require you to certify that you used the loan proceeds on eligible expenses, met the 60% spent on payroll costs requirement, and represent the number of employees you were able to retain as a result of the loan. Additionally, if you are worried that the amount you should take should be lower this time in order to get full forgiveness, you can always take less than the maximum loan that you may be eligible for.

      Reply
  • Nick

    How are software costs calculated for forgiveness? For instance, if we pay an annual fee for software during the applicable period, is that entire amount eligible for forgiveness or would we need to prorate cost?

    Reply
    • Gusto Editors

      Hi Nick, since everything else seems to be paid or incurred during the covered period, you may want to go ahead with the strategy you suggested. We do recommend you please keep an eye out for updated guidance and check in with your lender.

      Reply
  • Paul J France

    When applying for loan forgiveness (round one) form 3508S one page application, is the borrower required to also turn in supporting documents to the lender that is forwarding the 3508S form to the SBA for loan forgiveness?

    Reply
    • Gusto Editors

      Hi Paul, in the fourth certification you make on the form, you’ll certify that you have turned over all require documentation verifying payroll costs to your lender. The lender may require this in different ways but Gusto’s report will help you meet that requirement. You’ll want to discuss with your lender to understand what you need to apply but remember that you also should have this documentation available for review upon request from the SBA.

      Reply
  • Rich Savko

    If your small business has been a tax loss during the past two years can you apply for a PPP First Loan?

    Reply
    • Gusto Editors

      Hi Rich, you are eligible for a first-draw PPP loan if: • Your business has less than 500 full-time, part-time, or seasonal employees.
      • Your business was operational before February 15, 2020 and remains operational.

      Reply
  • Anne Allen

    What documentation will be required to show a quarterly difference between 2019 and 2020? Will Quickbooks reports be sufficient?

    Reply
    • Gusto Editors

      Hi Anne, there are several examples offered as documentation that can be used to show a 25% decrease in gross receipts to show that you qualify for a second draw loan. This includes relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.

      Reply
  • Janet

    Is Gusto able to handle this process for its customers? This would be a round 2 application. Thank you

    Reply
    • Gusto Editors

      Hi Janet! If you are a customer, you should be able to log in and see our recommended lending partners in-app. One of our lending partners is ACAP/The Lending Source. You can check out their application here: https://www.theloansource.com/partners/gusto/

      Reply

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