By Patrick O'Brien, JD, Legal Coordinator, American Med Spa Association

The COVID-19 relief bill passed at the end of 2020 contains a number of relief and stimulus provisions. (We reviewed some of the programs previously in this podcast and article.) In the bill, a number of changes were made to the Paycheck Protection Program (PPP). Under these changes, some borrowers are now able to get a second forgivable loan. Eligibility for these second loans is more limited than for the first round. To provide more guidance on these eligibility requirements, the Small Business Administration (SBA) has released interim rules, which are available here. Let's take a brief look at what they contain.

The original PPP loans were first made available in early 2020 under the Coronavirus Aid, Relief and Economic Security (CARES) Act. They were loans of up to 2.5 months of a business's payroll expenses for business with fewer than 500 employees. The loans did not need to repaid if the money was spent on certain approved categories of business expenses, with at least 60% going to payroll costs. The new COVID-19 relief bill allows PPP borrowers who had used or will soon use all of their loan funds, have fewer than 300 employees and had reduced quarterly revenue of 25% in 2020 to receive a second loan for an additional 2.5 months (up to $2 million) of payroll expenses. Determining if the first loan funds have been used and if your business has fewer than 300 employees is fairly straightforward; most of the uncertainty with the second-draw eligibility involves calculating the appropriate quarterly revenue reduction.

The bill and rules provide for several ways to calculate this 25% revenue reduction. The rules interpret revenue to be the business's gross receipts as defined under SBA 13 CFR 121.104; this includes all revenue—including from the sales of products or services—interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances. Taxes collected to be remitted, such as sales tax, and amounts collected for another, such as by a service provider, are excluded from this amount. Documentation of this 25% reduction must be submitted at the time of loan application for loans greater than $150,000. To make it easier to apply for small businesses requesting loans under $150,000, the revenue reduction documentation can be provided after the loan has been approved.

Each quarter's revenue is then compared with a prior quarter, based on how long the business has been operating. For businesses that were open in all four quarters of 2019, you can compare the same quarter in 2019 with 2020. If a business experienced a 25% or greater drop in any one comparison, it would be eligible. The rules also offer a simplified way for these businesses to calculate this reduction. If there was a 25% or greater reduction in revenue for all of 2020 when compared with 2019, that business will qualify without having to compare each quarter with its prior year counterpart and can provide annual tax statements as verification.

Businesses that were only open for part of 2019 are allowed a little more flexibility to make up for their lack of "pre-pandemic" quarters with which to compare. If a business was not in operation for the first or second quarter of 2019, it can compare any 2020 quarter with either the third or the fourth quarter of 2019. Businesses that were only open in the fourth quarter of 2019 may also compare that with any 2020 quarter. If the business was not open in 2019 but was in operation before February 15, 2020, it will compare its first quarter of 2020 with any of the remaining three quarters to see if there was a 25% reduction.

The pandemic has affected most small businesses in a number of ways. Businesses that were helped by the first round of PPP loans may want to see if they qualify for a second draw. Businesses that missed out on the first round of loans are still able to apply for a first loan if they meet the other requirements. The same lender that borrowers worked with on their first PPP loans will be able to work with them on their second; lenders are the best resources to help you navigate the application process.