Calculating Revenue Reduction for PPP2 Loans

The recently introduced second draw Paycheck Protection Program (PPP) loan provides certain businesses and organizations with access to much-needed working capital. Extended as part of the Consolidated Appropriations Act, 2021, the Small Business Administration (SBA) now offers an additional dimension of support to those that previously received a PPP loan. While many of the broad program details have been covered in previous blogs, the Small Business Administration (SBA) recently released additional guidance that provides further insight. The Second Draw PPP Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts, offers new details potential applicants need to consider. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

There has been some confusion about the reference periods a second draw borrower can use when determining whether a 25% gross receipts reduction has occurred. The answer depends on the amount of time an applicant has been in operation. For most applicants, it is required to demonstrate that gross receipts in any calendar quarter of 2020 were, at least, 25% lower than the same period in 2019. Another option would be to compare annual gross receipts in 2020 with annual gross receipts in 2019. However, there are a few exceptions which include:

• For those not in business during the first half of 2019, but in business for the second half, applicants must then demonstrate gross receipts in any quarter of 2020 were at least 25% lower than during the third or fourth quarter of 2019.
• For those not in operation for the first, second, or third quarter of 2019, but commencing operations during the fourth quarter, applicants must demonstrate gross receipts in any quarter of 2020 were less than the fourth quarter of 2019.
• For those not in business at all during 2019, but prior to February 15, 2020, applicants must demonstrate that gross receipts in the second, third or fourth quarter of 2020 were at least 25% lower than the first quarter.

As part of the process, an applicant is required to provide documentation that substantiates the claim an eligible revenue reduction occurred. The following documentation is required by the SBA, including:

• Quarterly Financial Statements – Copies of the entity’s financial statements for the affected period should be provided. In the event they are not audited, the first page of the financial statement must be signed, and all other pages should be initialed at the bottom. It is important to ensure that gross receipts are explicitly identified otherwise an annotation must be made to identify which items were included in the gross receipts’ calculation.
• Bank Statements – Copies of quarterly or monthly bank statement should be included that show deposits from the relevant quarters. If it is not clear the applicant will be required to identify the specific deposits listed which constitute gross receipts.
• Tax Returns – Finally, copies of the annual IRS tax return should be submitted. If the 2020 tax return has not yet been filed, then a separate form must be completed, and the determination of the gross receipts made therein. The applicant must sign the Pro-forma return and attest that the values entered for gross receipts will be the same when the return is filed.

Documentation Submission Rules

The timing of when documentation is required to be submitted varies based on the size of the loan. For applicants of loans greater than $150,000 must provide the above-mentioned documentation at the time of application. However, those seeking loans less than $150,000 have the option to wait until applying for forgiveness (or upon SBA request).

Second draw Paycheck Protection Program loans provide an important opportunity for businesses and organizations to receive an additional round of funding. Prior to applying it is essential to carefully review loan application requirements to ensure eligibility. If you have questions about the information outlined above or need assistance with a PPP issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.