Second Draw PPP Loan FAQ’s

Information provided here does not represent financial advice from Hickory Point Bank and Trust (“Bank”), or formal guidance from the Small Business Administration (“SBA”) and/or the United States Treasury Department (the “Treasury”).  Rather this information is being shared for informational purposes only and is based on Hickory Point Bank’s review and interpretation of the key provisions of the interim final rules, as amended from time to time, and other guidance previously provided by the SBA and the Treasury.  Interpretation of the interim final rules and guidance may vary, and the Program rules are subject to change and further clarification. 

Please consult your own professional advisors for clarification.  The Bank recommends consultation with a Certified Public Accountant for any technical questions regarding the interpretation of the Program rules and assistance with specific loan calculations for your business.

Borrowers are also encouraged to refer to the interim final rules and FAQs issued by the SBA and the Treasury for additional information. 


Frequently Asked Questions – Second Draw PPP Loans:

On April 2, 2020, the U.S. Small Business Administration (the “SBA”) posted the interim final rules announcing the implementation of the Paycheck Protection Program (“PPP” or the “Program”).  Those interim rules have been amended from time to time.  On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Non Profits, and Venues Act (the “Economic Aid Act”) was enacted.  With the Economic Aid Act, a new round of PPP loans was funded, with multiple changes to Program requirements, including the creation of the Second Draw PPP loan.

Following are some of the frequently asked questions for those that are interested in obtaining a Second Draw PPP loan.


Q1. What are the terms of Second Draw PPP loans?

The terms of the Second Draw PPP loans are essentially the same as the original PPP loans (“First Draw PPP loans”) in that they are unsecured, with no personal guarantees and are 100% guaranteed by the SBA. Loans will have a maturity of five (5) years and the interest rate will be 1.00%.


Q2. Who is eligible to obtain a Second Draw PPP loan?

Generally, a business is eligible for a Second Draw PPP loan if:

  1. it is an eligible business that previously received a First Draw PPP loan and used, or will use, the full amount of the First Draw PPP Loan, on authorized expenses, on or before the Second Draw PPP loan is disbursed.
  2. employs not more than 300 employees
  3. experienced a reduction in revenues/gross receipts in 2020 of 25% or more, when compared to 2019 (as further described below). For the purpose of this FAQ, the terms “revenue” and “gross receipts” may be interchanged.
  4. the business is not permanently closed.

Q3. How is the revenue reduction requirement measured?

 An applicant shall meet the revenue/gross receipts reduction requirement in 2020, as follows.

  1. The applicant had a reduction in gross receipts during the first, second, third or fourth quarter in 2020 of 25% or more, when compared to the same quarter in 2019. As an example, an eligible business had gross receipts of $50,000 in Q3 2019, but only $30,000 in Q3 2020.  In that case, the borrower experienced a 40% revenue reduction, and thus meets the revenue reduction requirement.
  2. If the applicant was in operation during all four quarters of 2019, it shall be deemed to have met the revenue reduction requirement if it experienced a reduction in annual gross receipts of 25% or greater in 2020, when compared to 2019, and the borrower submits copies of its annual tax returns substantiating the revenue decline. As an example, an eligible business had gross receipts of $500,000 in 2019, but only $350,000 in 2020.  In that case, the borrower experienced a 30% revenue reduction, and thus meets the revenue reduction requirement.

Q4. How is the revenue reduction calculation made if the applicant was not in business during all of 2019?

Additional measurement options are available for businesses not in operation during all of 2019, as follows.

  1. If the applicant was not in business during the first or second quarters of 2019 but was in business during the third and fourth quarters of 2019, the applicant shall be deemed to have met the revenue reduction requirement if it had a reduction in gross receipts during the first, second, third or fourth quarter in 2020 of 25% or more, when compared to the third or fourth quarter of 2019.
  2. If the applicant was not in business during the first, second, or third quarter of 2019, but was in business during the fourth quarter of 2019, the applicant shall be deemed to have met the revenue reduction requirement if it had a reduction in gross receipts during the first, second, third or fourth quarter in 2020 of 25% or more, when compared to the fourth quarter of 2019.
  3. If the applicant was not in business in 2019, but was in operation on February 15, 2020, the applicant shall be deemed to have met the revenue reduction requirement if it had a reduction in gross receipts during the second, third or fourth quarter in 2020 of 25% or more, when compared to the first quarter of 2020.

 Q5. How is revenue/gross receipts defined?

Gross receipts, or revenues, include all revenues in whatever form received or accrued (in accordance with the applicant’s accounting method) from whatever source, including from the sale of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of sole-proprietors, independent contractors, or other self-employed individuals, “gross income”) plus “cost of goods sold”.  Gross receipts do not include capital gains or losses, and taxes collected to be remitted to a taxing authority if included in gross or total income.

For eligible nonprofit organizations, gross receipts are generally the total amounts the organization received from all sources during its accounting period.

For all eligible borrowers, the amount of any forgiven First Draw PPP loan shall not be included toward borrower’s gross receipts.


Q6. How are loan amounts calculated for Second Draw PPP loans?

In general, the maximum loan amount for a Second Draw PPP loan is calculated based on two and a half (2.5) months of the borrower’s average monthly payroll costs. For businesses with a NAICS code starting with 72 (primarily hotels and restaurants), a Second Draw PPP loan may be calculated based on three and half (3.5) months of the borrower’s average monthly payroll costs.

At no time can a Second Draw PPP loan exceed $2 million.


Q7. How are payroll costs defined?

Payroll costs for Second Draw PPP loans shall have the same meaning as for First Draw PPP loans.

Generally (with some exceptions), a borrower’s average monthly payroll costs may be based on calendar year 2020 or calendar year 2019 (as elected by the Borrower).  Borrowers that are not self-employed, sole proprietorships or independent contractors, may also use the precise 1-year period before the date on which the First Draw PPP loan is made to calculate payroll costs. In general, payroll costs shall include:

  1. Gross (pre-tax) compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation, but not to exceed $100,000  per individual on an annualized basis. Compensation may include payment for vacation, parental, family, medical or sick leave, and allowance for separation or dismissal (excluding such sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act).
  2. Payment by the employer for the provision of employee benefits consisting of health care, group life, disability, vision, or dental insurance, including insurance premiums.
  3. Retirement benefits paid by the employer
  4. Payments made by the employer for state and local taxes assessed on compensation paid to employees
  5. For independent contractors or sole-proprietors, payroll costs shall include net income or earnings from self-employment

Q8. How are loan amounts calculated for seasonal borrowers?

A seasonal borrower (defined as a borrower that does not operate for more than seven (7) months in the calendar year, or that during the preceding calendar year had gross receipts for any 6 months of the year that were not more than 33% of the gross receipts in the other 6 months) may elect to calculate the loan amount based on payroll costs incurred or paid during any 12-week period between February 15, 2019 and February 15, 2020.I was in business on February 15, 2020 but was not in business for the 1-year period prior to that.


Q9. I was in business on February 15, 2020 but was not in business for the 1-year period prior to that.  How is my loan calculated?

A borrower that did not exist during the 1-year period preceding February 15, 2020, but was in operation on February 15, 2020, may calculate payroll costs by summing the total monthly payroll costs paid or incurred by the borrower and dividing that sum by the number of months in which the payroll costs were incurred.


Q10. How is the Second Draw PPP loan amount calculated for a borrower that files a Schedule C of the IRS Form 1040?

As of March 3, 2021, the SBA issued new rules related to the calculation of loan amounts for self-employed borrowers that file a Schedule C as part of the IRS Form 1040.  With these new rules, a self employed borrower may elect to calculate owner compensation by using either gross income as reported on line 7 of the Schedule C or net income as reported on line 31 of the schedule C. The exact calculation will also depend if the borrower employs other individuals, as summarized below.

Self-employed borrower with no employees:  the loan amount is calculated as follows:

  1. From the 2019 or 2020 IRS Form 1040, Schedule C (at the election of the borrower), select gross income as reported on line 7, or net income as reported on line 31.  The figure calculated in this step must be capped at $100,000.
  2. Calculate the average monthly payroll figure by dividing the figure from (a) by 12.
  3. Calculate the maximum loan amount by multiplying the figure from (b) by 2.5x (for borrowers that are assigned a NAICS code beginning with 72, the figure from (b) may be multiplied by 3.5).

Self-employed borrower with employees: the loan amount is calculated as follows:

  1. From the 2019 or 2020 IRS Form 1040, Schedule C (at the election of the borrower), calculate owner compensation by selecting gross income as reported on line 7 minus employee payroll costs, as reported on lines 14, 19, and 26, or net income as reported on line 31. The figure calculated in this step must be capped at $100,000.
  2. Calculate eligible employee payroll costs.
  3. Determine total payroll costs by adding the figures from (a) and (b).
  4. Calculate the average monthly payroll figure by dividing the figure from (c) by 12.
  5. Calculate the maximum loan amount by multiplying the figure from (d) by 2.5x (for borrowers that are assigned a NAICS code beginning with 72, the figure from (b) may be multiplied by 3.5).

Q11. How is the Second Draw PPP loan amount calculated for a farmer or rancher that operates as a sole-proprietorship or eligible self-employed individual?

If the farmer or rancher reports farm income and expenses on a Schedule F of the IRS Form 1040, was in business as of February 15, 2020 and does not have any other employees, the loan amount is calculated by dividing the gross income of the borrower in 2019 or 2020 (as elected by the borrower), as reported on the Schedule F (capped at $100,000), by 12, and then multiplying that figure by 2.5.

If the farmer or rancher reports farm income and expenses on a Schedule F of the IRS Form 1040, was in business as of February 15, 2020 and has employees, the loan amount is calculated by:

  1. Calculate the difference between gross income and employee payroll costs of the borrower in 2019 or 2020 (at the election of the borrower), as reported on the Schedule F – that figure should not exceed $100,000. Divide that figure by 12.
  2. Calculate the average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year as elected in (a) above.
  3. Add the figures in items (a) and (b)
  4. Multiply the sum calculated in (c) by 2.5

Q12. How is the Second Draw PPP loan amount calculated for a business that files taxes as a partnership.

The amount of a Second Draw PPP loan to borrowers that file taxes as a partnership is calculated by:

  1. Calculate the sum of net earnings of self-employment of individual general partners in 2019 or 2020 (at the election of the borrower), as reported on line 14a of the IRS Form 1065 K-1 (reductions may apply) multiplied by 0.9235 (capped at $100,000 per partner).
  2. Calculate the total employee payroll costs incurred or paid by the borrower during the same year as elected in (a) above.
  3. Add the figures in items (a) and (b)
  4. Divide the figure in (c) by 12.
  5. Multiply the sum calculated in (d) by 2.5 (for borrowers that are assigned a NAICS code beginning with 72, the figure above may be multiplied by 3.5).
  6. The loan amount shall not exceed $2 million

Q13. How do I submit an application for a Second Draw PPP loan?

An applicant must submit to the lender a fully completed application on Form 2483-SD, or the lender’s equivalent, (or Form 2483-SD-C for self employed borrowers utilizing gross income on line 7 to calculate the loan amount_ plus all required supporting documentation (as discussed further in this document).

Hickory Point Bank is utilizing an online portal that borrowers will use to submit a loan application and all required documents.

If you are not a current Hickory Point Bank customer, please click here to submit a virtual meeting request  or call us today at 217-875-3131 to discuss your application.

If you are an existing Hickory Point Bank customer, please click the link below to get started.  Remember, Chrome is the preferred browser.  As always, if you have any questions or need assistance with your application, please call 217.875.3131, contact your Relationship Manager, or request a Virtual Meeting.

Hickory Point Bank PPP Loan Application

If you would like to begin the process for forgiveness of an existing PPP loan, click here to access the forgiveness portal


 Q14. What documentation is required to substantiate payroll costs for a Second Draw PPP loan?

At the time of application, the applicant must provide the following.

Following is a summary of the documentation requirements.  Note – If the borrower is electing to use calendar 2019 figures to determine the loan amount, no additional documentation is required with the application related to payroll if the borrower satisfied the payroll documentation requirements as part of the First Draw PPP loan.  Documentation related to the revenue reduction requirement would still be required, as described below.

Please also be aware, for all borrowers, the Bank may request additional documentation than what is described here if it is deemed necessary to complete a good-faith review of the borrower’s loan amount calculation, or satisfy loan policy requirements.

If the applicant is not self-employed:

  1. The applicant’s Form 941 (or other appropriate tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever is being used to calculate payroll).
  2. Payroll records for the applicable year, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, if those items are included in the payroll costs used to calculate the loan amount.
  3. Partnerships must also provide its IRS Form 1065 K-1s.

If the applicant is self-employed:

  1. The applicant’s 2019 or 2020 (whichever is being used to calculate payroll) IRS Form 1040, Schedule C. If using 2020 to calculate the loan amount, the Schedule C is required regardless of whether you have a filed the 2020 tax return with the IRS.
  2. A 2019 or 2020 (whichever is being used to calculate payroll) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement or book of record that establishes you are self-employed.
  3. If the applicant has other employees, the applicant’s Form 941 (or other appropriate tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever is being used to calculate payroll).
  4. If the applicant has other employees, payroll records for the applicable year, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, if those items are included in the payroll costs used to calculate the loan amount.
  5. A payroll statement or similar documentation must also be provided to establish the applicant was in operation on February 15, 2020.

If the applicant is a self-employed farmer or rancher:

  1. The applicant’s 2019 or 2020 (whichever is being used to calculate payroll) IRS Form 1040, Schedule F. If using 2020 to calculate the loan amount, the Schedule F is required regardless of whether you have a filed the 2020 tax return with the IRS.
  2. A 2019 or 2020 (whichever is being used to calculate payroll) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement or book of record that establishes you are self-employed.
  3. If the applicant has other employees, the applicant’s Form 941 (or other appropriate tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever is being used to calculate payroll).
  4. If the applicant has other employees, payroll records for the applicable year, along with evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, if those items are included in the payroll costs used to calculate the loan amount.
  5. A payroll statement or similar documentation must also be provided to establish the applicant was in operation on February 15, 2020.

 

Q15. What documentation is required to substantiate the gross receipts reduction requirement for a Second Draw PPP loan?

For loans with a principal amount greater than $150,000, the applicant must submit documentation adequate to establish that the applicant experienced a reduction in revenues/gross receipts to be eligible for the program. Such documentation may include, but not be limited to, relevant tax forms, including annual tax forms, and/or quarterly financial statements or bank statements.

If the applicant chooses to substantiate the revenue reduction based on a comparison of revenues for all of 2020 as compared to all of 2019, the annual tax return forms shall be required.

For loans with a principal amount of $150,000 or less, per the interim final rules established by the SBA, such documentation to substantiate the reduction in revenues necessary to be eligible for the program is not required at the time the borrower submits the application for a loan, but must be submitted on or before the date the borrower applies for loan forgiveness.  If the borrower does not apply for loan forgiveness, such documentation must be provided upon request by the SBA.  While borrowers with loan amounts of $150,000 or less may not be required, per SBA guidelines, to provide documentation supporting eligibility based on the revenue reduction at the time of loan application, the Bank may request such information.  Such documentation would assist the Bank in its good faith review of the Borrower’s eligibility and will help ensure the greater likelihood of a successful request for forgiveness.


 Q16. How must I use Second Draw PPP loan funds?

The proceeds of Second Draw PPP loans must be used for eligible purposes within the covered period, generally including:

  1. Payroll costs, as defined in the CARES Act and as amended per the Economic Aid Act
  2. Costs associated with group health care, life, disability, vision, or dental benefits, including insurance premiums
  3. Mortgage interest payments (but not mortgage prepayments or principal payments)
  4. Interest payments on any other debt obligations that were incurred before February 15, 2020
  5. Rent payments (conditions apply if the owner of the property is a related entity)
  6. Utility payments
  7. Eligible 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)
  8. Covered supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that are (i) essential to operations at the time the expenditure was made and (ii) is made pursuant to a contract or purchase order in effect at any time before the covered period, or with respect to perishable goods, in effect before or at any time during the covered period.
  9. Covered personal protection expenditures to facilitate or adapt business activities to comply with requirements established or guidance issued by various governmental agencies.

For individuals with self-employment income who file a Schedule C as part of the IRS Form 1040, proceeds can also be used for owner compensation replacement, calculated based on 2019 or 2020 (using the same year that was used to calculate the loan amount) net profit.   Other nonpayroll uses are generally eligible to the extent they are deductible on the Schedule C.

At no time can Second Draw PPP loan proceeds be used for lobbying activities or expenditures.

At least 60% of the Second Draw PPP loan proceeds must be used for payroll costs.


Q17. Are Second Draw PPP loans eligible for forgiveness?

Second Draw PP loans are eligible for forgiveness on the same terms and conditions as First Draw PPP loans. Additional information on the forgiveness process for Second Draw PPP loans will be provided later.