The U.S. Small Business Administration (SBA) has released additional guidance in the form of FAQ’s on how to calculate revenue reduction and maximum loan amounts for second draw loans.  The SBA has also released a procedural notice to lenders related to excess loan amount errors that can have a significant impact on affected borrowers.

Revenue Reduction for Second Draw PPP Loans

For purposes of eligibility for a second draw PPP loan, a business must have a decrease in gross receipts of 25% or more for a calendar quarter in 2020 as compared to the same quarter in 2019.  The question that inevitably arose is what is the definition of gross receipts?

For Profit Business

Gross receipts are all revenue in whatever form received or accrued in accordance with the entity’s accounting method. The accounting method can be cash or accrual and include all sources of income 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.

Sources of documentation applicants can use to substantiate the 25% reduction include:

• 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.
• Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters noting which deposits listed on the bank statement constitute gross receipts and which do not.
• 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, 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. A fiscal year taxpayer may use the annual tax return if it contains all the second, third and fourth quarters of the calendar year.

If the second draw request is for $150,000 or less, this documentation does not have to be included with the loan application but is required to be submitted before or with the application for forgiveness.

Not for Profit

Gross receipts include amounts received from all sources without reduction for any costs or expenses.  This includes receipts from the following sources:

• Amounts received as contributions, gifts and grants
• Dues and assessments received from membership
• Receipts from fundraising events without regard to associated costs.
• Gross amount received frorn the sale of an asset or investment without reduction for cost or basis
• Investment income including interest, dividends, rents and royalties

Maximum Loan Amounts

The maximum loan amount is calculated using 2.5 times average monthly payroll (3.5 times for NAICS 72 businesses).  The initial guidance refers to using payroll costs utilizing 2019 as the reference period.  However, an applicant can choose either 2019 or 2020 calendar year payroll.

Assuming a second draw loan applicant is using the same lender, a benefit of using 2019 payroll costs results in no payroll documentation required to be submitted with the application.   However, if a larger loan amount can be obtained using 2020 payroll, it could make the time required to gather and prepare required documentation worthwhile.

SBA Procedural Notice to Lenders –

Related to Corrections on Excess 1^st Draw PPP loans

The notice informs PPP lenders of the requirement to correct excess PPP1 loan amount errors prior to filing an application for a second draw loan for a borrower.  An excess loan error would be caused by either the borrower or lender requesting, receiving and perhaps already had forgiven a loan in which a good faith mistake occurred.   Examples of such errors could be:

• Borrower mistakenly included 1099 subcontractors in the original payroll calculations for which a loan was received.
• Borrower mistakenly included wages in excess of $100,000 for any one employee in its original loan application.

If it is determined that any amount of the loan was in excess the correct eligible amount, the amount will not be forgiven, and the borrower must begin making payments on the remaining loan amount under the terms of the loan.

Learn More about the SBA Guidance

Additional information about eligibility and gross receipts can be found here:

• SBA Procedural Notice on PPP Excess Loan Amount Errors: Click Here to Read
• How to Calculate Revenue Reduction and Maximize Loan Amounts Including What Documentation to Provide: Click Here to Read

We’re here to help.

For more information on the second round of PPP loans and how you can prepare, please reach out to your MCM relationship contact or email us at covidbank@mcmcpa.com.