The most-recently passed COVID-19 stimulus package authorized a second round of Paycheck Protection Program Loans. Read on for a memo from FCA Legal Counsel on what contractors need to know about the process and eligibility.


In late December, Congress approved a $900 billion COVID-19 relief package (“Economic Aid Act”) that included $284 billion in funding for a second round of “forgivable” loans under the Paycheck Protection Program (PPP). Under new guidelines from the Small Business Administration (SBA), the PPP program has separate rules for:

  1. First-draw PPP borrowers,
  2. Second-draw PPP borrowers.

On Friday, Jan. 15, 2021, the SBA re-opened the loan portal to PPP-eligible lenders with $1 billion or less in assets for first- and second-draw applications. The portal opened to all participating PPP lenders on Jan. 19 to submit first- and second-draw applications to the SBA.

The Economic Aid Act provides that first- and second-draw PPP loans can be used to help fund payroll costs, including benefits (with some restrictions). Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for certain operating costs like cloud computing services.

The PPP program for both new first- and second-draw loans will remain open until March 31, 2021.

First-Draw PPP Loans

If a business did not receive funds before the PPP program expired on Aug. 8, 2020, the business will again have the chance to apply for an initial PPP loan.

PPP loans for new applicants will be subject to the same program rules and eligibility criteria that were in place in the two initial rounds of funding. Eligible small entities, that together with their affiliates (if applicable), have 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors—can apply. Entities with more than 500 employees in certain industries that meet SBA’s alternative size standard or SBA’s size standards for those particular industries can also apply.

Also eligible to apply for first-draw PPP Loans are businesses with a NAICS Code that begins with 72 (Accommodation and Food Services sector) or eligible news organizations with no more than 500 employees per physical location, as well as housing cooperatives, 501(c)(6) organizations or destination marketing organizations with no more than 300 employees.

Similar to first round of PPP loans, the maximum amount a small business may borrow for a first-draw PPP loan is the lesser of 2.5 multiplied by the borrower’s average monthly payroll costs (excluding compensation above $100,000 annualized) or $10 million. For the purposes of this calculation, a borrower may choose to use average monthly payroll from the one-year period before the date on which the loan is made, calendar year 2019 or calendar year 2020.

First-draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the eight to 24 week covered period following loan disbursement:

  • Employee and compensation levels are maintained;
  • The loan proceeds are spent on payroll costs and other eligible expenses; and
  • At least 60 percent of the proceeds are spent on payroll costs.

Second-Draw PPP Loans

Small businesses that previously received a PPP loan may be eligible for a second PPP loan if the business has used the full amount of its first round of PPP funds on eligible expenses. A borrower is generally eligible for a second-draw PPP Loan if the borrower:

  • Previously received a first-draw PPP Loan and will or has used the full amount only for authorized uses;
  • Has no more than 300 employees; and
  • Can demonstrate at least a 25 percent reduction in “gross receipts” between comparable quarters in 2019 and 2020.

For most borrowers, the maximum loan amount of a second-draw PPP Loan is 2.5 times their average monthly 2019 or 2020 payroll costs, up to $2 million (3.5 times for borrowers in the Accommodation and Food Services sector).

As noted above, an applicant for a second-draw PPP loan must demonstrate that “gross receipts” in any calendar quarter of 2020 were at least 25 percent lower than the same quarter of 2019. Guidance from the SBA provides that a borrower can meet the 25 percent reduction threshold comparing annual gross receipts in 2020 with annual gross receipts in 2019 (provided that they were in business in 2019).

Thus, calculating a business’s “gross receipts” in 2019 and 2020 is critical to determining whether a business is eligible for a second-draw PPP loan. According to the SBA, the definition of “gross receipts” depends on whether the business is a for-profit or a non-profit business:

For a for-profit business, gross receipts generally are all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.

Gross receipts do not include the following:

  • Taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees);
  • Proceeds from transactions between a concern and its domestic or foreign affiliates; and
  • Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.

For a nonprofit 501(c)(3) organization, a 501(c)(19) veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or an eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising or collecting such amounts.

Thus “gross receipts” includes, but is not limited to:

  • The gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts.
  • The gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts.
  • Gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T).
  • The gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale.
  • The gross amount received as investment income, such as interest, dividends, rents, and royalties.

Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.

In addition to the 25 percent loss of gross receipts requirement, there are additional eligibility restrictions on receiving a second-draw PPP, including:

  • Entities that are normally ineligible for SBA 7(a) loans (excluding nonprofits and religious organizations, which have been exempted).
  • Any entity the primary business of which is lobbying activities, including entities organized for research or advocacy in public policy or political strategy, or think tanks.
  • Any business concern for which an entity created in or organized under laws of China or Hong Kong, or that has significant operations in China or Hong Kong, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the entity.
  • Any business concern that retains a resident of China as a member of the board of directors.
  • Entities required to register under FARA.

Second-draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the eight to 24 week covered period following loan disbursement:

  • Employee and compensation levels are maintained in the same manner as required for the first-draw PPP loan;
  • The loan proceeds are spent on payroll costs and other eligible expenses; and
  • At least 60 percent of the proceeds are spent on payroll costs.

Expansion of Eligible and Forgivable Expenses

As noted above, in addition to payroll, rent, utilities and interest on mortgages that are permitted expenses under the CARES Act, the Economic Aid Act allows for small businesses to use PPP proceeds for additional expenses, such as: cloud computing, PPE for employees, certain property damage resulting from public disturbances that occurred during 2020 and other adaptive investments to help the borrower comply with federal, state, and local health and safety guidelines.

Bottom Line

First- and second-draw PPP loans are now available to eligible businesses. If your business is eligible, contact your lender as soon as possible in order to have your best chance to receive first- or second-draw PPP loan.