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The COVID-19 relief bill passed at the end of 2020 provides only the second round of economic stimulus and financial relief to individuals and businesses. The Consolidated Appropriations Act, 2021, includes business tax incentives, Economic Injury Disaster Loan (EIDL) advances, and several changes to the Paycheck Protection Program (PPP), including new first and second draw opportunities. The reopening and expansion provide access to capital many need to combat the persistent pandemic. In fact, since it reopened, there have been over 60,000 loans approved. For those evaluating whether to apply for a second draw loan, the Small Business Administration (SBA) recently released important guidance on revenue reduction and loan calculations. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Gross Receipts (Revenue Reduction)
One of the criteria to qualify for a second draw loan is to experience a 25%, or greater, reduction in gross receipts in 2020 compared to 2019. However, there has been some confusion over what exactly should be included when calculating gross receipts. The SBA has provided the following guidance, including:
- Businesses – For these applicants, gross receipts generally include all types of revenue in whatever form received or accrued, from whatever source, including product/service sales, interest, dividends, rents, royalties, fees, or commissions, reduced by returns excluding net capital gains and losses. It is important to note that taxes collected and remitted to a taxing authority (i.e., sales tax) included in gross income, proceeds from transactions between a company and its foreign affiliates and amounts collected for another by a travel agent, real estate agent, conference management service provider or customs broker should be excluded.
- Nonprofit Organizations – For 501(c)(3), 501(c)(6), and 501(c)(19) organizations gross receipts includes the total amount received during the annual accounting period from all sources without reduction for costs or expenses, including costs of goods sold or operating expenses. Gross receipts include:
- Amounts received as contributions, gifts, grants, or similar amounts.
- The amount received as dues and assessments from members or affiliated organizations.
- Total sales from business activities for which the organization qualifies for exemption.
- The amount received from the sale of assets.
- Total amount received from investment income such as rents, dividends, rents, and royalties.
Note that these items should be included without reduction for the costs related to the sale, transaction, or acquisition of various income sources.
To substantiate the gross receipts test has been satisfied, an applicant must provide the following documentation.
- Quarterly Financial Statements – If the financial statements have not been audited, the applicant must sign the bottom and date each page of the financial statement attesting to accuracy.
- Bank Deposits – Monthly bank statements are needed to show deposits from the relevant quarters. If it is not evident, the applicant will need to provide notes on which deposits are classified as gross receipts and which are not.
- Tax Returns – Tax returns for the reference period. If an applicant has not yet filed a 2020 return, all forms must be completed, relevant gross receipts determined, and attestation given that the gross receipts calculation matches what will be filed on the tax return.
The second draw PPP loan program provides another opportunity for businesses facing persistent challenges from the pandemic to obtain relief. When determining whether a business can meet revenue reduction requirements, it is essential to review SBA guidance. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.