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

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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