What You Need to Know about the Small Business Administration’s “Second Draw” of Its Paycheck Protection Program

By Robin Bonthrone

Disclaimer: This article does not constitute professional financial, tax, or legal advice, and neither the author nor the American Translators Association (ATA) assumes any warranty, implied or expressed, for the accuracy or applicability of any information contained therein. It should not be relied on to make financial or other decisions affecting your business or personal situation. Before making any financial, tax, or legal decisions, always consult a professional adviser (e.g., your lender or certified public accountant) to establish whether a particular program will suit your particular circumstances.

The Small Business Administration (SBA) has now rolled out the “Second Draw” of its Paycheck Protection Program (aka “PPP2”), so now is a good time to take stock again of the various federal financial support programs that are potentially interesting as sources of emergency funding for freelance translators and interpreters, as well as LLCs and S-Corps owned by translators and interpreters. These include two different types of PPP loans, the Economic Injury Disaster Loan (EIDL) program, and Pandemic Unemployment Assistance (PUA).

PPP

The original “First Draw” of the Paycheck Protection Program in 2020 certainly appears to have been the most popular form of pandemic assistance sought after by ATA translators and interpreters, and nobody can deny that PPP ticks all the boxes, starting with a relatively straightforward application process requiring a modest amount of supporting documentation. The loan amount the SBA pays out is equal to ten weeks’ average net business profit before tax or payroll, which is certainly not to be sniffed at. And, what’s more, the loan turns into an outright grant if the money is spent on eligible expenditures (which is unlikely to be a problem for freelance translators and interpreters, and translator/interpreter LLCs and S-Corps).

Finally—and almost incredibly—the new coronavirus stimulus package sets out in black and white that all the eligible expenditures covered by PPP loans (both First and Second Draw) will be deductible for tax purposes. Apparently this had always been the lawmakers’ intention, but it was omitted in the wording of the 2020 CARES Act. No wonder that a lot of people are talking of “free money” in this context!

Provided that your business has been affected by the pandemic, you can apply to any existing SBA-approved lender, including federally insured credit unions or eligible non-bank lenders (e.g., fintechs). To encourage smaller lenders and their customers to apply for PPP loans, the SBA initially only accepted PPP2 loan applications from community financial institutions, but the program has now been opened up to all eligible lenders. As was the case in 2020, it pays to shop around, and there is nothing preventing you from applying simultaneously to two or more lenders to improve your chances of being approved. But remember that the SBA will only approve you for one loan!

As in 2020, applicants for PPP loans (First and Second Draw) must attest that the current economic uncertainty makes the loan necessary to support their ongoing operations.

This PPP guidance is split into two parts: the first covering the new PPP2 for borrowers who already benefited from the first round of PPP in 2020, and the second covering the new tranche of PPP now being made available to first-time borrowers.

Second Draw PPP (PPP2)

The application process for a second PPP loan will be familiar to you from your original application last year. Apply using either the online form provided by your lender, or using SBA Form 2483-SD, as directed by your lender, on which you will also have to provide the SBA Loan Number for your First Draw PPP loan. Note that there is no requirement to obtain forgiveness for your First Draw PPP loan before you apply for a PPP2 loan.

An eligibility condition for Second Draw PPP is that you suffered a reduction in gross receipts (gross revenue) of at least 25% in any one quarter of 2020 compared with the same period of 2019. Alternatively, you can compare annual gross receipts in 2020 with 2019 gross receipts if you were in business for all of 2019. If your lender only asks you if your full-year 2020 gross receipts were at least 25% lower than full-year 2019, please contact them to point out that the quarterly comparison takes priority.

Please don’t be deterred from applying for a Second Draw PPP loan just because documentation requirements outlined in the following appear to be complex. A key point to note is that, if the PPP loan you are applying for is less than $150k, you do not need to provide documentation as evidence of the minimum 25% reduction in gross receipts until you apply for forgiveness, or if requested by the SBA. You can therefore leave that information blank on the Second Draw application form.

The main thing to do right now is to make a quick comparison of your quarterly revenue in 2020 and 2019 to confirm that your quarterly revenue was down at least 25% year-on-year in at least one quarter of 2020. You can leave the formal documentation till later. However, the relevant information about how to document the minimum 25% reduction is provided in the following for the sake of completeness.

If you were not in business in 1Q and 2Q 2019, but you were in business in 3Q and 4Q 2019, you will have to show that your gross receipts in any quarter of 2020 were at least 25% lower than in either 3Q or 4Q 2019. If you only started operating in 4Q 2019, the comparison must relate to the fourth quarters of 2020 and 2019. Finally, if you were not in business in 2019 but you were in business on February 15, 2020, you must prove that your gross receipts in 2Q, 3Q, or 4Q 2020 were at least 25% lower than in 1Q 2020. It may look complicated at first glance, but it’s actually quite straightforward.

According to the new guidance on how to calculate revenue reduction issued by the SBA on January 19, 2021, the following are considered to be adequate documentation of evidence of a 25% reduction in gross receipts:

  • Quarterly financial statements. For cash basis filers, however, who do not prepare “financial statements” as such, extracts from your accounts in e.g. Excel or Word should be sufficient. If your accounts do not specifically identify the line item(s) that constitute gross receipts, you must make a note of the line item(s) that constitute gross receipts.
  • Quarterly or monthly bank statements showing deposits in the relevant quarters. If it is not clear from the bank statements which deposits listed on the bank statement constitute gross receipts (meaning payments for the services you provide) and which do not, you must make appropriate notes on the bank statements.
  • Annual IRS income tax filings. These are required if you use an annual reference period, and your lender may also ask for them even if you are providing other documentation. Schedule C filers who use their annual tax returns to show a reduction in gross receipts must use the sum of lines 4 and 7 on Form 1040 Schedule C, whereas S-Corps must use the sum of lines 2 and 6, minus line 4, on Form 1120-S. If you have not yet filed a tax return for 2020, fill out the relevant form using estimated amounts, based on your 2020 accounts (or ask your CPA to do this), making a note that it is a draft.

Other relevant information for ATA members that is contained in the January 19, 2021, SBA guidance is that PPP loans and EIDL advances are not considered to be “gross receipts” for PPP calculation purposes, so do not include EIDL advances reported as income in your income tax return.

The other main difference compared with the 2020 First Draw relates to the documents you will have to provide (upload). If you file Form 1040 Schedule C (and you have no employees), you will have to have payroll records ready:

  • your 2019 or 2020 Schedule C (whichever you are using to calculate your loan amount), or
  • a 2019 or 2020 Form 1099, if applicable, or
  • a 2019 or 2020 invoice or bank statement showing that you are self-employed, if you don’t provide a 1099, and
  • a 2020 invoice or bank statement showing that you were operating on February 15, 2020.

If you have employees, you will have to provide:

  • the 2019 or 2020 Form 941,
  • state quarterly unemployment insurance tax forms, or
  • payroll statements or similar documents for the pay period that covered February 15, 2020.

If you file Form 1120-S (S-Corp) or 1120 (C-Corp), you must provide:

  • 2019 or 2020 Form 940, W-2, or W-3, or equivalent payment processor records, or Form 941 and state quarterly unemployment insurance tax forms for each quarter,
  • 2019 or 2020 Form 990 or other documentation of retirement and health insurance contributions, if applicable, and
  • 2020 1Q Form 941 or similar documentation relating to the pay period that covered February 15, 2020, as evidence that you were in business and had employees on that date.

Regardless of your business form, you will also have to provide:

  • your 2019 business tax return (in full) or 2019 profit and loss statement (quarterly) or 2019 quarterly 941s, and
  • your 2020 profit and loss statement (quarterly) or 2020 quarterly 941s

The PPP2 application period expires on May 31, 2021.

First Draw PPP Applications

If you didn’t apply for a PPP loan in 2020, or maybe didn’t qualify, now is your chance to benefit from the program. The general requirements are essentially the same as described in ATA’s PPP Guide published in 2020, so please refer to that publication for further information. Note that the 25% quarterly reduction requirement does not apply to First Draw PPP applications.

One specific condition that’s worth mentioning is that you must have been in business on or before February 2, 2020. You will have to complete and submit SBA Form 2483 (just like applicants did in 2020) or an online form provided by your lender. You will also have to provide 2019 or 2020 payroll (e.g., Schedule C) records, as detailed above for Second Draw applicants. As each lender normally has slightly differing requirements for other required documentation (e.g., business registration documents, EIN documentation), please refer to the specific supporting documents requested by your lender.

New Rules for Eligible Uses of PPP Loan Funds

The classes of eligible expenditures have been expanded compared with the 2020 First Draw loans and include:

  • eligible payroll costs,
  • mortgage interest or rent/lease,
  • utilities,
  • covered operational expenditures,
  • certain covered supplier costs,
  • covered worker protection expenditures and certain other costs.

In a list of eligible operational expenditures, the SBA’s new Interim Final Rule refers on page 49 to “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.”

For translators and interpreters, it appears this could include a translation memory, terminology management, or translation management system, or interpreter support software, as well as resources such as electronic dictionaries and other reference resources needed for the translation and/or interpreting “business operations.” Cloud storage/backup, accounting and payroll software, and CRM software would also be covered.

Note that the description of “covered supplier costs” on page 50 of the new Interim Final Rule only refers to goods, rather than services, so it is unlikely, as things stand today, that outsourced translation, interpreting, terminology, or related services will be covered. However, we can expect more detailed guidance to appear on this issue in the relatively near future. As before, at least 60% of the loan proceeds must be spent on payroll.

PPP Loan Forgiveness

The SBA issued updated PPP loan forgiveness guidance and forms on January 19, 2021, including a new, one-page simplified forgiveness application form. This new Form 3508S can be used by borrowers who received a PPP loan of $150k or less. You will have to provide information about your loan amount, the disbursement date, how many employees you have, the covered period dates, the amount of the loan spent on payroll, and the amount of the loan for which you are applying for forgiveness. You will not have to submit any supporting documentation with the application, but you will be required to keep payroll, nonpayroll, and other documents that could be requested if the SBA reviews or audits your loan.

EIDL Program Loans

It’s probably worthwhile starting this section on EIDL with good news for existing PPP borrowers who also took out an EIDL program loan. Up to now, the rule has been that the $1k “Advance” that all EIDL applicants received had to be offset against the PPP loan amount. Although the final details are still awaited, it appears that this rule may now be reversed, in which case there will be no requirement to repay the $1k EIDL Advance. Sometimes, all the stars just line up!

Most of the information in the most recent 2020 ATA Guide continues to apply to EIDL program loans. However, there are a few differences that you should note before considering whether to apply under the new round of EIDL. The new legislation sets aside $20 billion to reopen the $10k EIDL forgivable grant program. Applicants who meet the following criteria will be first in line for the $10k EIDL grant:

  • suffered a more than 30% reduction in revenue during an eight-week period between February 3, 2020, and December 31, 2020, compared with the same eight-week period in 2019
  • fewer than 300 employees

If you do not meet all of these criteria, you will still be able to apply for the new EIDL grants, but you will not have priority. If you receive the full EIDL grant and a PPP loan, your PPP loan forgiveness will not be reduced. It is still not entirely clear whether this new relief applies retrospectively to 2020 EIDL Advances (see above).

If you are an existing EIDL borrower, remember that the loan amount you received is not taxable, but the Advance you received constitutes taxable income. You must therefore include it in your 2020 income tax return (line 6 if you file a Schedule C).

Pandemic Unemployment Assistance (PUA)

A few words about the extended PUA program to round off this post. PUA is most likely to be attractive to interpreters who are unable to work because of COVID-19, rather than translators, because translators will normally be able to work from home. The basic information about PUA contained in the 2020 ATA Guide still applies. The new program extends PUA by 11 weeks. Progress in rolling out the new program differs from state to state, so please contact your state’s labor department or other relevant authorities if you think you might qualify. But be prepared for a wait.

________________________________________________________________________________

About the Author

Robin Bonthrone, CT, has been a full-time German>English financial-legal translator for more than 30 years, specializing in financial reporting, legislation, regulation, supervision, tax, and financial technology, among other subjects. He is an experienced financial translation trainer at translation conferences and workshops in Europe and the U.S., and also teaches in-house seminars and workshops at corporations and public institutions. He serves as the current president of the Austin Area Translators and Interpreters Association, and is co-chair of the International Organization for Standardization’s Standards Committee at the International Federation of Translators. An ATA-certified German>English translator, he is a member of ATA’s Business Practices Education, Finance and Audit, Professional Development, and Standards Committees. Contact: rb@robinbonthrone.com.

Leave a Comment

Your email address will not be published. Required fields are marked *

The ATA Chronicle © 2021 All rights reserved.