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Tax Bill, Supreme Court of the US, Washington DC

January 22, 2021

The SBA’s Paycheck Protection Program—Revenue Reduction Calculations Guidance Released

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THE SBA’S PAYCHECK PROTECTION PROGRAM—REVENUE REDUCTION CALCULATIONS GUIDANCE RELEASED

On January 19, 2021 the Small Business Administration (SBA) issued frequently asked questions that address how to calculate revenue reduction and maximum loan amounts for second-draw Paycheck Protection Program (PPP) loans.

Revenue Reduction Calculation

To be eligible for a second-draw PPP loan, a business must have experienced a 25 percent reduction in gross receipts during one quarter in 2020 (not all, just one of them) compared with the same quarter in 2019. For a for-profit business, the SBA defines “gross receipts” as generally all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances, but excluding net capital gains and losses, as these terms are used and reported on IRS tax return forms. Gross receipts do not include (i) 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 (this does not include taxes levied on the business or its employees), (ii) proceeds from transactions between a business and its domestic or foreign affiliates, (iii) amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker and (iv) the amount of any forgiven first-draw PPP Loan.

For a nonprofit 501(c)(3) organization, a 501(c)(19) veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization or an eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is 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, cost of goods or assets sold, cost of operations or expenses of earning, raising or collecting such amounts. Therefore, “gross receipts” includes, but is not limited to (i) the gross amount received as contributions, gifts, grants and similar amounts without reduction for the expenses of raising and collecting such amounts, (ii) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, (iii) 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), (iv) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale and (v) the gross amount received as investment income, such as interest, dividends, rents and royalties. Additionally, gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate. The amount of any forgiven first-draw PPP Loan is not included in gross receipts.

The SBA also offers the following list of documentation an applicant can provide to substantiate its certification of a 25 percent reduction in gross receipts (only one set is required):

  • Quarterly financial statements for the entity. If the financial statements are not audited, the applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the applicant must annotate which line item(s) constitute gross receipts;
  • Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions); or
  • Annual IRS income tax filings of the entity (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the applicant must fill out the return forms, compute the relevant gross receipts value (see Question 5), and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.

Maximum Second Draw PPP Loan Amounts

Second-time PPP borrowers are eligible to receive a maximum of $2 million. Calculation information for maximum loan amounts, as well as additional information on the revenue reduction calculation, can be found in the SBA’s How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide.

Authors and Contributors

Alan Bickerstaff

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J. Russel Denton

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Carmelo Gordian

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Daniel Mitz

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Ashley Smith

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