PPP Second Draw Loan Eligibility: Calculating and Documenting Gross Receipts
January 7, 2021
On January 19, 2021, the U.S. Small Business Administration (SBA) released the guidance, “How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide.” The guidance clarifies the rules around Second Draw Paycheck Protection Program (PPP) Loans. Furthermore, it provides context around the Interim Final Rule on Second Draw Loans (the IFR), which was issued on January 6.
The guidance aforementioned defines “gross receipts” for businesses and their affiliates and addresses documentation requirements, enabling borrowers to proactively prepare for the release of these funds.
Gross receipts, defined
Per the IFR, gross receipts include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source — including from the sales of products or services, interest, dividends, rents, royalties, fees or commissions — reduced by returns and allowances. Generally, receipts are considered “total income” (or “gross income” in the case of a sole proprietorship, independent contractor or self-employed individual) plus the “cost of goods sold,” and exclude net capital gains or losses as these terms are defined 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, and excluding 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 an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization or an eligible destination marketing organization, the meaning of “gross receipts” is stated in Section 6033 of the Internal Revenue Code of 1986 as follows.
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, the cost of goods or assets sold, cost of operations, or expenses of earning, raising or collecting such amounts. Thus, gross receipts include, but are 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; and
- The gross amount received as investment income, such as interest, dividends, rents and royalties.
In addition to further clarifying those items included and excluded from gross receipts for both for-profit and nonprofit borrowers, the SBA confirmed that the revenue reduction analysis must be completed based on calendar quarters in 2020 versus 2019. Borrowers may only use fiscal year tax returns if their fiscal year contains the second, third and fourth quarters of the calendar year (i.e., have a fiscal year start date of February 1, March 1 or April 1).
Lastly, the guidance further clarified that the amount of any forgiven First Draw PPP Loan or Economic Injury Disaster Loan (EIDL) advance — which are not subject to federal income tax — shall not be included toward any borrower’s gross receipts.
Gross receipts for affiliates
Gross receipts for affiliates are calculated as follows:
- Gross receipts of a borrower with affiliates are calculated by adding the gross receipts of the business concern to the gross receipts of each affiliate.
- If a borrower has acquired an affiliate or was acquired as an affiliate during 2020, gross receipts include the receipts of the acquired or acquiring concern. This aggregation applies for the entire period of measurement, not just the period after the affiliation took place. However, if a concern acquired a segregable division of another business concern during 2020, gross receipts do not include the receipts of the acquired division prior to the acquisition.
- The gross receipts of a former affiliate are not included; this exclusion applies during the entire period of measurement, rather than only for the period after which affiliation ceased. However, if a borrower sold a segregable division during 2020, the gross receipts would continue to include the receipts of the division that was sold.
Documenting requirements for gross receipts
For loans with a principal amount greater than $150,000, documentation must be provided at the time of application, sufficient to establish that the applicant experienced a reduction in revenue.
For loans with a principal amount of $150,000 or less, the borrower must submit documentation sufficient to establish that they experienced a reduction in revenue at the time of the application; on or before the date the borrower submitted an application for loan forgiveness; or at the SBA’s request, if the borrower does not apply for loan forgiveness.
Revenue reduction documentation may include quarterly financial statements, quarterly or monthly bank statements, or annual IRS income tax filings. Importantly, the SBA stated that internal financial statements are not required to be audited and the draft 2020 income tax return is allowable. Where unaudited statements or draft forms are provided, borrowers must sign and date the documents in order to attest to their accuracy.
The IFR addressed many of the PPP changes from the Consolidated Appropriations Act, which was signed into law on December 27, 2020. However, Aprio anticipates further instructions for borrowers and lenders to be provided in the form of FAQs and Procedural Notices, as well as the PPP Second Draw Application Form (also known as SBA Form 2483-SD).
In the interim, businesses should consider evaluating their eligibility and proactively gathering the required documentation.
Let Aprio help
Aprio has established a dedicated PPP team that is continuously monitoring new guidance from the SBA — as well as the U.S. Department of the Treasury, Congress and the IRS — to ensure we leverage the latest information when advising our clients.
If you would like to discuss how to determine your eligibility for a Second Draw PPP Loan and accurately calculate your borrowing capacity, contact Aprio’s PPP team for a consultation.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.