On January 8, 2021 the SBA released the PPP Second Draw Borrower Application (the Application). We will be reviewing the Application during our upcoming webinar on January 14, 2021. Please click here to register for the webinar. Also, please check out my previous blog detailing the changes to PPP1 and reviewing the new PPP2 loan program introduced in the recent stimulus bill: COVID Stimulus Package Brings New Round of PPP Funding.

In the meantime, here are some FAQs applicants have been asking about PPP2 –

• Does my PPP1 loan (or other loans such as EIDL) count as a gross receipt? – Generally speaking, loans are not considered gross receipts based on the definition of a gross receipt provided by the SBA. So PPP1 and EIDL loans obtained during 2020 would not count as a gross receipt when applying.
• Does PPP Loan Forgiveness count as a gross receipt? – The SBA released an interim rule last week that states that any PPP1 loan that a borrower received forgiveness on in 2020 is excluded when calculating a borrower’s gross receipts. The reason for this is that it would be counterproductive to disqualify a PPP2 applicant simply because they received a PPP1 loan. Applicants should note that if they received other types of loan forgiveness during 2020, that forgiveness may be required to be included as a gross receipt.
• What about related party revenue? – The application states that “proceeds from transactions between the concern and its domestic or foreign affiliates” would not be included in determining gross receipts. Generally speaking, the SBA defines an affiliate as an entity or person that can “control” the concern (in this case the applicant) whether by ownership (50% or more owner) or management. Applicants should review all related party transactions to determine whether or not they should be excluded from the gross receipts’ calculation.
• How do I support the 25% decline in gross receipts? – Unfortunately, the Application only states to provide information supporting the decline. It does not clarify what support is acceptable to the SBA. This will undoubtably be a pain point in the application process. Hopefully internally generated financial statements will be enough, but at this point we will just have to wait for further clarification. One important note is that if gross receipts declined by 25% on annual basis when comparing 2020 to 2019, an applicant may submit copies of its tax returns as support.
• Do I calculate Accrual vs Cash? – Based on the instructions it says to calculate gross receipts in accordance with the entity’s accounting method. Many applicants are questioning this as they use one method for book purposes (typically accrual basis) and one method for tax purposes (typically cash basis). Unless we receive further clarification from the SBA, we are advising applicants to calculate using the accounting method they use for tax purposes. This is based on the fact that as noted above annual tax returns may be used to support the applicants gross receipts decline on an annual basis and the definition of gross receipts in the application states “gross receipts are considered “total income” plus “costs of goods sold” and excludes net capital gains or losses as these terms are defined and reported on the IRS tax return forms”.

As you can see, while the Application does answer some of our questions about PPP2, it does not answer all of them. We expect further interim rules to be issued by the SBA to further clarify PPP2 within the coming weeks.

Click here to see a copy of the Application.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward.

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