PPP Second Draw Loan Eligibility: Calculating and Documenting Gross Receipts
This week, the U.S Small Business Administration (SBA) released the Interim Final Rule on Second Draw Loans (the IFR), discussed here, providing clarity for borrowers considering the Second Draw of Paycheck Protection Program (PPP) loans.
The IFR 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 received or accrued (in accordance with the entity’s accounting method regardless of form or source). This includes revenue 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 in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “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 veteran’s organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or an eligible destination marketing organization, gross receipts are defined according to section 6033 of the Internal Revenue Code of 1986.
The IFR further clarified that the amount of any forgiven First Draw PPP Loan shall not be included toward any borrower’s gross receipts.
Gross Receipts for Affiliates
Gross receipts of affiliates are calculated as follows:
- Gross receipts of a borrower with affiliates are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.
- If a borrower has acquired an affiliate or been 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. 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 of gross receipts of such former affiliate apply 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 will 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, sufficient documentation establishing that the applicant experienced a reduction in revenue must be provided at the time of application, which may include relevant tax forms, such as annual tax forms. If relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements will suffice.
For loans with a principal amount of $150,000 or less, the applicant must submit sufficient documentation establishing that the applicant experienced a reduction in revenue at the time of application or on or before the date the borrower submits an application for loan forgiveness. If the borrower does not apply for loan forgiveness, the applicant must provide documentation at the SBA’s request. The form of documentation required is the same as that for loans greater than $150,000 as described above.
Aprio anticipates further instructions for borrowers and lenders to be provided in the form of FAQs and Procedural Notices as well as the Paycheck Protection Program Second Draw Application Form (SBA Form 2483-SD). In the interim, businesses should proactively evaluate eligibility and gather 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 Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.
To discuss how to determine your eligibility for a Second Draw PPP Loan and accurately calculate your borrowing capacity, contact Aprio’s dedicated PPP team.
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.