The SBA has issued guidance on the Second Draw Payroll Protection Program dealing with:

• Calculation of the required revenue reduction and

• Maximum loan amounts for Second Draw Loans including what documentation to supply.[1]

The SBA describes the guidance as follows:

The Small Business Administration (SBA), in consultation with the Department of the Treasury, is providing this guidance to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation that is required to support each set of calculations) for purposes of determining their eligibility for and amount of a Second Draw PPP Loan.

Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the CARES Act, the Economic Aid Act, and the Paycheck Protection Program Interim Final Rules. The U.S. government will not challenge lender PPP actions that conform to this guidance and to the PPP Interim Final Rules and any subsequent rulemaking in effect at the time the action is taken.[2]

Gross Receipts of a For-Profit Entity

The document provides the following guidance for the calculation of gross receipts in the case of a for-profit entity:

For a for-profit business, gross receipts generally are all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, 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. These terms carry the definitions used and reported on IRS tax return forms.

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 (this does not include 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.[3]

The guidance is generally consistent with that released in the January 6, 2021 IFR on the Second Draw PPP loan program.

Gross Receipts for Not-for-Profit and Related Organizations

The guidance gives additional details beyond that discussed in the IFR for the gross receipts of not-for-profit and related organizations beyond simply referencing IRC §6033.  The gross receipts for a nonprofit 501(c)(3) organization, a 501(c)(19) veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization, or an eligible destination marketing organization are discussed in the document, noting that:

…gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, but is not limited to:

(i) the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts,

(ii) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,

(iii) gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T),

(iv) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and

(v) the gross amount received as investment income, such as interest, dividends, rents, and royalties.[4]

Reference Periods Used by Applicants to Demonstrate a 25% Reduction in Gross Receipts

The following reference periods are to be used by Applicants to demonstrate a 25% reduction in gross receipts.  The appropriate period depends on how long the Applicant has been in business.

• For all Applicants, except those satisfying the conditions set forth below, the Applicant must demonstrate that gross receipts in any calendar quarter of 2020 were at least 25 percent lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019 if they were in business in 2019.

• For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25 percent lower than during either the third or fourth quarters of 2019.

• For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25 percent lower than the fourth quarter of 2019.

• For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25 percent lower than the first quarter of 2020.[5]

Documentation Needed to Show Reduction in Gross Receipts

The SBA document provides that the following documentation can be provided to document the reduction in gross receipts:

• 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. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.

• Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).

• 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 (see Question 5), 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.[6]

For taxpayers using annual income tax returns to document a reduction in gross receipts, the document provides the following instructions by entity type:

• For self-employed individuals other than farmers and ranchers (IRS Form 1040 Schedule C): sum of line 4 and line 75

• For self-employed farmers and ranchers (IRS Form 1040 Schedule F): sum of lines 1b and 9

• For partnerships (IRS Form 1065): sum of lines 2 and 8, minus line 6

• For S-Corporations (IRS Form 1120-S): sum of lines 2 and 6, minus line 4

• For C-Corporations (IRS Form 1120): sum of lines 2 and 11, minus the sum of lines 8 and 9

• For nonprofit organizations (IRS Form 990): the sum of lines 6b(i), 6b(ii), 7b(i), 7b(ii), 8b, 9b, 10b, and 12 (column (A)) of Part VIII

• For nonprofit organizations (IRS Form 990-EZ): sum of lines 5b, 6c, 7b, and 9 of Part I.

• LLCs should follow the instructions that apply to their tax filing status in the reference periods.[7]

The document also notes a key limitation on the use of a tax return to document gross receipts for a taxpayer that files on a fiscal year:

Entities that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns only if their fiscal year contains all of the second, third, and fourth quarters of the calendar year (i.e., have a fiscal year start date of February 1, March 1, or April 1).[8]

Maximum Second Draw PPP Loan Calculation by Entity Type

The SBA document provides detailed information on the calculation of the maximum PPP Second Draw loan amount and supporting documentation required by entity type in Maximum Second Draw PPP Loan Amounts questions 1 to 7 for entities in business in 2019, and questions 10 to 11 for those not in operation for the full one-year period preceding February 15, 2020.[9]

Questions 10 and 11 do clarify that rule applies to those not in existence for the full one-year period preceding February 15, 2020—thus, a business that began on March 1, 2019 would qualify to use the calculation for such a business.[10]

The documentation to be provided to substantiate payroll costs used to calculate the applied-for Second Draw PPP loan amount are detailed in question 9:

An applicant may provide IRS Form W-2s and IRS Form W-3 or payroll processor reports, including quarterly and annual tax reports, in lieu of IRS Form 941. Additionally, very small businesses that file an annual IRS Form 944 or agricultural employers that file an annual IRS Form 943 should rely on and provide IRS Form 944 or IRS Form 943 in lieu of IRS Form 941.

An applicant may provide records from a retirement administrator to document employer retirement contributions. An applicant may also provide records from a health insurance company or third-party administrator for a self-insured plan to document employer health insurance contributions.[11]

Prior 12 Months Payroll Costs on Original PPP Loan

The document notes that while calendar year 2019 information submitted to a lender to support a First Draw PPP loan can be used to also justify a Second Draw PPP loan, this will not be true if the First Draw loan was based on the prior 12 months when the loan was issued:

…[P]ayroll costs from the precise 12-month period prior to the First Draw PPP Loan cannot be used to compute the Second Draw PPP Loan amount. Any borrower that used payroll costs from the prior 12 months when computing its First Draw PPP Loan amount can calculate the amount for its Second Draw PPP Loan amount using calendar year 2019 or calendar year 2020 payroll costs.  A borrower that used calendar year 2019 for its First Draw PPP Loan amount may continue to do so.[12]

NAICS Code Left Blank on Tax Return

The January 6, 2021 IFR indicated that a business looking to use the special maximum PPP loan calculation for NAICS Code 72 businesses could not make use of that provision unless their last filed income tax return had a business code that began with 72.  However, the statement makes an exception if the return did not contain any code in that block:

If an entry for this line is missing from your tax return, you should report the industry code that is most applicable to your business’ primary business activity. If your business is in the Accommodation and Food Services sector (e.g., a hotel, restaurant, bar), you can only report a NAICS Code beginning with 72 if you can substantiate this with alternative documentation, such as permits or licenses issued by local governments that are unique to this sector.[13]

[1] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, https://www.sba.gov/sites/default/files/2021-01/Second%20Draw%20PPP%20Loans%20--%20How%20to%20Calculate%20Revenue%20Reduction%20and%20Maximum%20Loan%20Amounts%20Including%20What%20Documentation%20to%20Provide%20%281.19.2021%29.pdf (retrieved January 19, 2021)

[2] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 1

[3] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 1

[4] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, pp. 1-2

[5] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 3

[6] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 3

[7] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 4

[8] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 5

[9] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021

[10] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, pp. 14-15

[11] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, pp. 13-14

[12] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 16

[13] “Second Draw Paycheck Protection Program (PPP) Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide,” Small Business Administration, January 19, 2021, p. 17