How Do I Calculate the Maximum Loan Amount that My Company Is Eligible for and How Do I Need to Document the Calculation?
For organizations that are eligible to apply for a Second Draw PPP loan, the Economic Aid Act, Section 307 of this interim final rule (IFR), maintains the same maximum as the first round of the Payroll Protection Program (PPP); the lessor of 2.5 months of the borrower’s average monthly payroll costs or $2 million dollars. What does change is the time period that can be used to calculate the “average monthly payroll costs”.
Second Draw PPP loans may be calculated by using one of three base time periods:
- Calendar year 2019
- The twelve-month period prior to when the loan is made. The language of the rule further defines this option to mean the precise 1-year period before the date on which the loan is made to calculate the borrower’s payroll costs. This definition is difficult to execute as the period between the application for a loan and the “precise 1-year-period before the date the loan is made” would need to be factored into the payroll cost estimate.
- In subsection (f), which pertains to tailored methodologies for certain categories of borrowers, the IFR uses “calendar year 2020” to refer to the “twelve-month period prior to when the loan is made.” Allowing borrowers to calculate payroll costs based on calendar year 2020 is also not expected to result in a significant difference in payroll costs compared to the twelve months preceding the date the loan is made because all Second Draw PPP Loans will be made in the first quarter of 2021.
Regardless of the period selected, payroll is calculated as a total for the period and then divided by 12 months to derive the “average monthly payroll cost” for the period.
The choice of period impacts the documents required to substantiate Second Draw PPP loans.
- Calendar year 2019: If the applicant used calendar year 2019 to determine the First Draw PPP loan amount and the lender for the Second Draw PPP loan is the same as for the first draw then no additional documentation is required to be provided. The lender does have the right to request additional documentation if the lender concludes it would be useful in conducting a good-faith review of the borrower’s loan amount calculation.
- Calendar year 2020 or “Precise period” calculations will require new period-specific documentation to be submitted to substantiate the payroll cost calculation. Such documentation will depend on the organizational structure of the borrower and the requests of the lender processing the Second Draw PPP loans. Documentation may include, as applicable, payroll record reports, payroll tax filings, Schedule C or F, income, and expenses from a sole proprietorship or bank records.