Manufacturers May Seek a Second Round of Forgivable Loans

Covid-19 made 2020 a mess for many businesses – especially in aviation. The PPP loan was a useful tool for helping to make sure that businesses could pay their employees. It featured a forgivable loan intended to be spent on payroll and other necessities.

The latest Covid-19 relief legislation includes a second draw PPP – this is an opportunity for businesses to seek a second forgivable loan under the Paycheck Protection Program (PPP).

Some things will remain the same with this second iteration of the PPP. The maximum amount of the loan will be equal to 2 and a half months of payroll (this can be based on 2019 payroll OR the one-year period prior to the loan). If you spend the loan on certain authorized expenses during the covered period then the loan can be forgiven (so you do not have to repay it).

But there will be some key differences in the second PPP. The most important of these is that the second draw PPP will be limited to businesses that can show an adverse effect from Covid-19. Many MARPA members have faced Covid-19-related uncertainty during 2020. The second draw PPP eligibility formula allows companies to demonstrate need using a set formula.

The manner in which you must show adverse effect is by comparing your 2020 quarterly gross receipts with those of the corollary 2019 quarter. If you can demonstrate that your quarterly gross receipts dropped by 25 percent or more from the corollary 2109 gross receipts for the same quarter, then you meet this prong of the eligibility test. There are also special rules if you were not in business for all of 2019.

Other minor change include a tighter focus on smaller businesses: second draw PPP eligibility will be limited to businesses with fewer than 300 employees. The first round of PPP had a limits of 500 employees.

Payroll, rent and utilities remain allowable expenses for purposes of earning loan forgiveness, and the new law expands the scope of allowable expenditures to include (i) certain operations expenditures, like software that is necessary to facilitate business operation, (ii) uninsured property damage caused by vandalism or looting, (iii) payments to supplier providing essential goods, and (iv) certain worker protection expenses.

The new law also clarifies certain payroll costs. It establishes that group life, disability, vision, or dental insurance are included as part of payroll costs.

The maximum loan for the second draw PPP will be $2,000,000.

If the business is 20% or more owned by a Chinese entity or if you have a China resident on your Board of Directors then your business is excluded from the second draw PPP. This is a shame because the U.S. had been seeking foreign investment in the manufacturing sector, and this sort of exclusion disincentivizes Chinese investment in American businesses.

The deadline for second draw PPP application is March 31. The regulations for these new second draw PPP Loans ought to be out soon, and businesses should wait for the new regulations before applying (banks likely will not accept new applications until those regulations have been released).