At the end of 2020, Congress passed, and the President Trump signed, a new law that provides for additional relief related to the COVID-19 pandemic. This law, the Consolidated Appropriations Act, 2021 (CAA 2021), includes a second draw of Paycheck Protection Program loans (PPP Second Draw Loans). It also allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.


Some Background

In March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act authorized the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans (Original PPP Loans) to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.


Paycheck Protection Program Second Draw Loans

The CAA 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million. The Act has set aside $284 billion for the current round of the PPP Second Draw Loans.

The SBA re-opened the program on January 11, 2021 to community-based lenders and community development financial institutions and restricted the first two days first-time borrowers. This restriction follows criticism that businesses with strong banking relationships had easier access from the first round of the PPP than smaller peers with less resources. The program will open up to all participating lenders shortly thereafter. The last day to apply for a first or second round PPP loan is March 31, 2021.


Who Is Eligible for a PPP Second Draw Loan? 

In order to qualify for a PPP Second Draw Loan, a taxpayer must have taken out an Original PPP Loan. A borrower applying for a PPP Second Draw Loan must certify before the loan is disbursed that they will have used the full amount of the Original PPP Loan and only for eligible expenses. In addition, prior PPP borrowers must meet all of the following conditions to be eligible for the PPP Second Draw Loans:

  • Employ no more than 300 employees per physical location.
  • Have used or will use the full amount of their Original PPP Loan.
  • Demonstrate at least a 25% reduction in gross receipts in one quarter of 2020 relative to the same 2019 quarter – or borrowers who were in operation for all of 2019 may compare their calendar year 2019 gross receipts to calendar year 2020 gross receipts in order to determine if they satisfy the 25% reduction test.

The net increase is measured by comparing the taxpayer’s average number of monthly full-time equivalent (FTE) employees for the second quarter of 2020 with the average number of monthly FTE employees for the five-month period beginning July 1, 2020, and ending November 30, 2020.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural cooperatives.


Loan Terms

Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year prior to the loan or in calendar year 2019. However, borrowers in the hospitality or food services industries (NAICS Code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity. The maximum amount of the PPP Second Draw Loan is $2 million per borrower.  (It was a $10 million cap during the first round under the CARES Act.)


Gross Receipts and Simplified Certification of Revenue Test

Taxpayers who borrow PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue (gross receipts) loss requirement.


Loan Forgiveness

PPP Second Draw Loans are eligible for loan forgiveness on the same terms and conditions as the Original PPP Loans. Original PPP Loans were intended to cover expenses within an 8-week “covered period,” and this covered period was eventually expanded to 24 weeks of expenses. CAA 2021 now allows borrowers to choose their own covered period for purposes of loan forgiveness which can be any length between 8 and 24 weeks.


Additional Loan Forgiveness Categories

Like the Original PPP Loans, PPP Second Draw Loans may be forgiven for payroll costs of up to 60% (with some exceptions) and non-payroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.

CAA 2021 has also expanded the list of forgivable expense categories as part of the 40% non-payroll expenses to include the following:

  • Operations Expenditures: Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
  • Property Damage Costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
  • Covered Supplier Costs: Expenditures made by an entity to a supplier of goods for the supply of goods that are: 1) essential to the operations of the entity at the time at which the expenditure is made; and 2) made pursuant to a contract, order or purchase order in effect at any time before the covered period, or with respect to perishable goods in effect before or at anytime during the covered period.
  • Covered Worker Protection Expenditures: Means of operating or a capital expenditure (such as sneeze guard/barriers or outdoor space expansion) to facilitate the adaptation of the business activities of an entity to comply with the requirements or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, the Occupational Safety and Health Administration, or state or local government agencies, starting March 1 2020.

A borrower must use 60% of the loan proceeds on eligible payroll costs in order to get full forgiveness. Previously, eligible payroll costs included: wages, payroll taxes, paid leave, healthcare payments, and retirement plan contributions. The following costs have been added in the definition of 60% forgivable payroll costs: group life insurance, group disability insurance, group vision insurance, and group dental insurance.

CAA 2021 also repealed the provision under the CARES Act requiring the SBA to deduct the Economic Injury Disaster Loan (EIDL) Advance amounts of up to $10,000 received by borrowers from the forgiveness amount. The EIDL Advance amount received by the borrower will not reduce the amount of the PPP loan eligible for forgiveness.  Any EIDL Advance amount previously deducted from a borrower’s forgiven Original PPP Loan amount will be remitted to the borrower.

The portion of the PPP loan that is not forgiven will be payable in five years, with an interest rate of 1%.


Prohibited Entities

CAA 2021 also prohibits certain entities from applying for the PPP Second Draw Loans. Entities that are owned 20% or more by entities or citizens of the People’s Republic of China or the Special Administrative Region of Hong Kong, either directly or indirectly, do not qualify for a new PPP loan. Entities that are primarily engaged in political activities or lobbying are not eligible. Also, if the entity or the owner of the entity is in bankruptcy, it is ineligible to receive a PPP loan.


Deductibility of Expenses Paid by PPP Loans

The CAA 2021 provides that expenses paid both from the proceeds of loans under Original PPP Loans and PPP Second Draw Loans are deductible.



We anticipate and will monitor for additional interpretations and corrections from the SBA in the coming weeks. If you think your business is eligible for a PPP Second Draw Loan, please connect with us for guidance.