Second Draw PPP Loans: How to Calculate Revenue and Maximum Loan Amounts Including What Documentation to Provide
On January 19th, 2021 the SBA and Treasury released some additional guidance for Second Draw Paycheck Protection Program (“PPP”) loans that discusses the gross receipts reduction in some more detail, along with support to provide to substantiate the decline. The guidance also discusses how to calculate your maximum loan amount and clarifies that it may be slightly different than your first draw loan depending on how you did that calculation since it wasn’t as clearly defined at the time companies were applying. The guidance is 18 pages long and is in the format of a FAQ document that the SBA has issued in the past for PPP loans. Some of the highlights are below and I would encourage you to read through it just in case something applies to you beyond the major points we are covering below. Here is a link to a breakdown of past guidance, which we would suggest you read through so this update makes some more sense.
Here are some highlights concerning gross receipts and supporting documentation:
- This guidance essentially repeats the definition of gross receipts from previous guidance for for-profit businesses.
- For gross receipts for nonprofits, it provides a definition. Past guidance just referred to IRS section 6033 but never spelled out what was in that section so you would have go find it. Now it is stated in this document.
- This clearly states that if an affiliation waiver applies to your business (waiver applies to entities with NAICS Code starting with 72, 511110 or 5151) that waiver also applies to the rule that requires you to include the gross receipts of affiliates in your comparison between quarters.
- Question 4 on page 3 discusses in more detail the support you need to submit for the gross receipts decline.
- If you use quarterly statements and they are not audited, you must sign and date the first page of the financials and initial all the other pages attesting to their accuracy. If it isn’t clear what line items make up gross receipts, the applicant must note which line items are included in their calculation. This is the option we assume most borrowers will use.
- There is guidance if you use bank statements starting on page 3.
- Page 3 also discusses if you plan on using your 2020 income tax return and it isn’t finished yet. If this will be your support and it isn’t filed, the guidance discusses how you can use it before it gets filed if you choose too. I would imagine most will not use this, but it is an option.
- Of note is that those are the only types of documentation mentioned and the guidance uses the terminology “primary sets”, so this doesn’t mean this is the only support you can use, however I would expect that most banks will focus on these items as the SBA has mentioned them specifically in this latest guidance and is expecting that most applicants will use one of these options.
- If you decide to use your 2020 tax return, Question 5 on page 4 states which lines you use to calculate gross receipts.
- Question 8 on page 5 discusses fiscal year taxpayers if you decide to use your tax return as support. Your fiscal year must start in 2020 so that Q2, Q3, and Q4 2020 are part of that return, so February 1, March 1, or April 1. It does not state that fiscal years are different if using other support, like quarterly financials, however if your fiscal quarters follow these same guidelines then you could make the case that you may just be able to use fiscal quarters for your quarterly financials (keeping in mind your fiscal year would have to start on one of those dates above). However, since it isn’t clear, we would recommend doing the comparison on calendar quarters also.
Here are some highlights concerning the maximum amount of the loan and how to calculate it:
- Starting on page 6, the guidance discusses different entity types and how to calculate the loan and what to base that calculation on. In most cases it is either your 941 filings or if self-employed your Schedule C in your tax return. What’s new is that there is more of a focus on the 2019 income tax return in some cases
- To support health, disability, life, vision, dental insurance and retirement benefits this guidance references specific lines on the 2019 income tax return in some cases for C-Corps and S-Corps. It also mentions that those benefits may not be the only items in those specific lines, so you’ll likely need support beyond the tax return for the benefit amounts you’re including. This is different than the first round when applicants submitted invoices, payroll reports, etc. to support those totals and did not submit their tax return. Keep this in mind as this is the required method now according to this guidance and the bank will want this information this time and it may take some reconciliation on your part to support your amounts. This may also result in a different amount depending on how the calculation was done for your first PPP loan.
- Another item to keep in mind that in some cases those benefits may not show up on the lines referenced in the guidance, and the guidance says you can use “other documentation” of any retirement or insurance benefits. If you will need to provide other documentation be ready to explain that to the bank, where the benefit costs are shown on the 2019 return, and how what you’re providing supports the amounts you’re using (if needed).
- Nonprofits have similar guidance concerning their 941s and 990 return. Same thoughts as above would apply concerning supporting the benefit amounts.
- Question 12 on page 16 states that if you used the exact 12-month period before you applied for your first PPP loan, so not calendar year 2019, you cannot use that again. You will need to use the 2019 or 2020 calendar year (or in some cases the precise 1-year period before you apply, so 2020 and part of 2021) payroll costs. If you used calendar year 2019 for your first PPP loan, you can use that again.
- The examples are based on the 2019 calendar year being used, but the guidance states you can use the other periods (calendar year 2020 or the precise 1 year period in some cases), and then goes on to state the same information is required. This poses a problem in that the 2020 tax return and Q4 2020 941 may not be available by the time you apply if you choose those time frames.
Some substantial guidance at the last minute (since applications have already started in some cases this info is helpful but also comes a little late) that also creates some more questions, which is typical for the way PPP guidance usually goes. We will keep checking for guidance and sending out updates as we see them, so please sign up for our blog to get the articles as quickly as possible. If you have questions or concerns after going through this latest guidance, please contact us to discuss.