Deeper Dive – “Gross Receipts”Defined
The 25% revenue reduction requirement
Eligibility for a second PPP draw – PPP Round 2
One of the eligibility requirements to qualify for a Second Draw PPP Loan is that you experienced a revenue reduction of 25% or greater in 2020 relative to 2019 (with modified tests for businesses that were not operating in the particular comparable quarter of 2019). The Economic Aid Act does not include a general definition of gross receipts for purposes of determining a borrower’s revenue reduction. However, the recent Interim Final Rule issued on January 6, 2021 does (see below “Gross Receipts Defined”).
Revenue Reduction Calculation Methods
Per the Interim Final Rule, you can calculate the 25% revenue reduction in one of the following ways based on your situation:
1. Annual method – If you were in operation in all four quarters of 2019, you can qualify if the annual gross receipts show a 25% or greater reduction in 2020 compared to 2019. This provision will allow a borrower to provide annual tax return forms to substantiate its revenue reduction.
2. Quarterly method – You can compare your quarterly gross receipts for one quarter in 2020 with gross receipts for the corresponding quarter of 2019. Here’s the example they use in the IFR: a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters and is therefore eligible for a Second Draw PPP loan.
3. For businesses that were not operating during the first, second or third quarter of 2019 but were operating in the fourth quarter, you had gross receipts in the first, second, third or fourth quarter of 2020 that demonstrate at least a 25 percent reduction from the fourth quarter of 2019, then you can still qualify.
4. Finally, if you weren’t operating at all in 2019, but were in operation between before February 15, 2020 (anytime in the period from January 1, 2020 through February 14, 2020) and had gross receipts during the second, third, or fourth quarter of 2020 that demonstrate a 25 percent reduction from the first quarter, you can also still qualify.
Gross Receipts Defined
The SBA defines gross receipts as “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns or allowances.” Our view: Although not specifically addressed as of yet in the rules, it appears that an “entity’s accounting method” is that which is used on its income tax returns. There may be further guidance from the SBA regarding this.
For sole proprietorships, independent contractors or self-employed individuals use “gross income” as shown on your Form 1040, Schedule C.
Other businesses can sum up the tax return lines labeled “total income” and “costs of goods sold”, excluding net capital gains or losses, as these are terms defined and reported on your tax return.
Gross receipts do not include the following: 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 and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
Borrowers with Affiliates
The SBA laid out separate rules for gross receipts for affiliates and businesses with more than one physical location. Gross receipts of affiliates are calculated as follows:
a. Gross receipts of a borrower with affiliates is calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.
b. If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, gross receipts includes the receipts of the acquired or acquiring concern. This aggregation applies for the entire period of measurement, not just the period after the affiliation arose. However, if a concern acquired a segregable division of another business concern during 2020, gross receipts do not include the receipts of the acquired division prior to the acquisition.
c. The gross receipts of a former affiliate are not included. This exclusion of gross receipts of such former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased. However, if a borrower sold a segregable division during 2020, the gross receipts will continue to include the receipts of the division that was sold.
d. All terms in this subsection shall have the meaning attributed to them by the IRS.
For an eligible nonprofit organization, a veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization or eligible destination marketing organization, gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986.
It’s also worth noting that you don’t need to include any forgiveness amount of the FirstDraw PPP Loan received in calendar year 2020 in your gross receipts.
For loans with a principal amount greater than $150,000, the applicant must submit documentation to support the 25% or more revenue reduction. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan, but must be submitted on or before the date the borrower applies for loan forgiveness, as required under the Economic Aid Act.
Ambiguity remains in the gross receipts definition, and if you are planning to seek a PPP2 loan, we recommend working with your accountants and legal counsel, as applicable, regarding your specific approach to the calculations, and any associated risks.
Refer to https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf for actual text of the interim final rule discussing the above.
Also, on January 6, 2021 the SBA issued another Interim Final Rule which consolidated all prior PPP rulemaking.
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