As you probably know if you’re reading this, small businesses suffering from 25 percent or bigger revenue reductions may receive a second draw PPP loan.
This blog post describes the mechanics of calculating these revenue reductions. And don’t worry. I’ll make this short as possible.
The General Rule
The general rule about how large a revenue reduction you need to qualify for a second draw PPP loan? You need to have a quarter in 2020 when your revenues fell by at least 25 percent as compared to the same quarter in 2019.
Example: Your business generated $100,000 of revenue each quarter in 2019. If in any quarter in 2020, your revenue equaled $75,000 or less? You qualify.
What Counts as Revenue
The first big question then? What exactly counts as revenue. The new Interim Final Rule provides this definition:
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 and allowances.
The rule further elaborates:
Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
Finally, the rule explains what doesn’t count:
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
The quoted definitions get gritty. But that’s good. You and I can work with gritty. We want the details.
Calculating Quarterly Revenues with QuickBooks Desktop
Your accounting system, assuming you’re using something like QuickBooks Desktop or QuickBooks Online should make it relatively easy to calculate quarterly revenues. Also changes in quarterly revenues.
In QuickBooks Desktop, for example, you first produce a profit and loss statement by choosing the Reports⇒Company & Financial⇒Profit & Loss Standard command. That tells QuickBooks to generate a financial statement that shows income and expenses.
To tell QuickBooks to calculate the quarterly percentage change, click the Customize Report button at the top of the report window to open the Modify Report dialog box, check the Previous Period and % Change boxes, and then click OK to close the Modify Report dialog box.
Finally, to compare quarterly revenues—including calculating the percentage change–use the Dates From and To boxes to look at revenues and percentage changes for each quarter.
Tip: Click the Refresh button to get an updated version of the profit and loss statement.
You need the % Change in total income to show up as -25% or larger than -25%. Note that little hyphen barely visible. You need a minus 25% change or worse.
Calculating Quarterly Revenues with QuickBooks Online
The steps for calculating quarterly revenue amounts and changes in QuickBooks Online work similarly.
First, you want to produce a profit and loss statement by choosing Reports⇒Standard⇒Profit & Loss. That tells QuickBooks to generate a financial statement that shows income and expenses.
Next, indicate you want to compare quarterly revenues by using the Report Period boxes to look at revenues for each quarter.
Finally, to tell QuickBooks to calculate the quarterly percentage change, drop down the Compare Another Period box and check the Previous Year and % Change boxes.
Once you click Run Report, QuickBooks generates a new report. You need the % Change in total income to show up as -25% or larger than -25%.
Accounting Method Options
One final remark. It appears borrowers may use either cash basis accounting or accrual basis accounting to calculate revenues and make calculations. As already quoted once but now quoted again (boldfacing added this time), the interim final rule says this:
gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method)
I think we can read that to say either cash or accrual—whichever the entity uses for its accounting method.
Note: Accounting programs including QuickBooks Desktop and QuickBooks Online let users easily flip between cash and accrual basis accounting. Both versions of QuickBooks, for example, include Cash and Accrual radio buttons you can use to switch accounting methods.
Finally, just because someone will wonder: Surely, you need to make apples to apples comparisons. You compare accrual revenues to accrual revenues. Or compare cash revenues to cash revenues. You don’t mix and match.
The Simple Qualification Formula Based on Annual Revenues
Comparing quarterly revenues requires a decent accounting system. Probably a system based on accounting software. Probably a system the owner or bookkeeper keeps up-to-date. That may be a bridge too far in some small business settings…
Accordingly, the rules also let you look at annual revenues if a firm operates all of 2019 and 2020.
For example, say your business earned $100,000 each quarter in 2019. Quarterly revenues of $100,000 equal annual revenues of $400,000. Because 4 times $100,000 equals $400,000.
If your 2020 revenues equal $300,000? Or less? You qualify.
Note: The reason this simplifying rule works? If your annual revenues fell by 25 percent or more, at least one quarter’s revenues fell by 25 percent.
If you use the simplified annual approach, you can probably just use your tax returns once the 2020 tax return is done.
But this caution: Using the annual approach makes qualifying more difficult. Returning to the example where a firm generates exactly $100,000 each quarter in revenues, a firm qualifies for a second draw if in some quarter, revenues drop by $25,000. To qualify based on annual revenues, the firm needs its annual revenues to drop by $100,000.
Other Resources
The actual 42-page IFR appears here: https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf
Our earlier discussion of how Second Draw Loans work.
The second draw PPP loan application form.
Joe Winchell says
Great information. Thank you. One Question please. What if the structure of the business has changed over the periods from 2019 to 2020? A medical partnership where one partner has gone inactive due to health reasons. So the income is reduced almost 50% just by there not being this other doctor seeing patients. Received first round PPP. Can we just use the raw numbers or is there some other adjustment that needs to be made? Thanks for your input.
Stephen Nelson CPA says
Oh gosh, that’s a tricky situation. There’s language in the new set of rules that talk about a business needing to continue. (The precise requirement is, the business can’t have “permanently closed.”) But I wonder if your situation might be viewed as one where basically either it’s a different business–and one that wasn’t operating on 2/15/2020 which is the requirement. Or that essentially the old business has closed to stopped. Sorry. Very murky to me.
Joe Winchell says
Thanks. Murky is a good word. I’m leaning to it being a different business as you suggest and therefore not going to be eligible for this additional loan program.
Stephen Nelson CPA says
I am sorry to have to reply that, yes, I agree. 🙁
Andy Casey says
My consulting business worked in Q3, Q4 2019 and early Q1 2020 (before virus) successfully landing a new client starting March 1, 2020. Coronavirus hits, client business goes south and we lost the contract in 2 months versus the expected year with revenue dropping about 50%.
Although the revenue drop was clearly a pandemic casualty, it would appear we are out of luck since the revenue gain was also in 2020 (pre-virus). Although down slightly, revenue in 2019 was similar to current revenue so that comparison won’t support an application even though we are impacted.
Any hope here?
Stephen Nelson CPA says
Look at the rules for businesses that start mid-way through 2019 here: second draw PPP loans. Specifically example 2…
Adam says
Hey Stephen – wondering about the use of the word ‘during’. Language is such that a business that was not operating DURING q1 and q2 2019 can use Q3 or q4 2019 sales and compare against q1, q2, q3, or q4 2020 sales. I have a business that opened in q2 ’19 but did not operate DURING the ENTIRETY of q2. Do you know if that business, because of this, can then use Q3 or q4 ’19 to compare against any 2020 quarter? Thx.
Stephen Nelson CPA says
I don’t. Sorry. I think we need some examples from SBA. BTW if it were me–and just trying to channel the logic of the statute–I’d think a rule maker ignores ’19 Q2 because you didn’t operate during the entirety of Q2.
Actually a reporter from Boomberg just called me. And she was asking about what people’s common questions are. I said, “oh, none so far…” But obviously there is a pattern appearing. Accounting method questions. And how to handle situations where people were starting mid-2019…
Chad says
Can you point me to wording from SBA that a business operating in only Q4 of 2019 can compare any quarter of 2020 to Q4 2019? My bank says they don’t have clear instruction on how to handle businesses that didn’t operate in all quarters of 2019.
The bank is also saying I can take the prior owner’s P&L for 2019 prior to my acquisition and compare to my 2020? Q2 2019 (old owner) vs Q2 2020 (me). is this true?
Stephen Nelson CPA says
Pages 21-22 of the IFR for second draw loans, which appears here: https://www.sba.gov/sites/default/files/2021-01/PPP%20–%20IFR%20–%20Second%20Draw%20Loans%20%281.6.2021%29-508.pdf
BTW this is what I’m quoting in the first blog post I did on second draw PPP loans.
Adam G says
Hey. Really appreciate the reply. I have asked PPP reps from two different banks I’m working with and neither knows the answer to the Q about my business having begun operations DURING Q2 ’19, but not operating during the entirety of Q2. Do you happen to have any SBA contacts I could reach out to on this? Thx.
-Adam-
Stephen Nelson CPA says
No, sorry, I don’t. Or at least none that I think will be able to provide you with usable guidance.
It sure seems to me like we need to work with full quarters though…
Chris Barr says
Regarding cash basis vs. accrual (re: comparing 2020 vs. 2019 qtrs), do you think the rule implies using the method used on an entities tax return and/or normal financial reporting?
Stephen Nelson CPA says
It sounds like that, doesn’t? Like you need “conformity” with your book accounting method or your tax accounting method. My guess–which I should be wise enough to not share in public–is they’ll end up letting you use either approach. I say that because with the costs plugging into the forgiveness, they basically let you use either cash or accrual accounting.
Chris Barr says
That would be awesome – hope your prediction is correct. Will be watching this closely! Thanks for the great info. CJB.
Robert C Hay says
it looks like the rule you cited is talking about gross income whereas the quickbooks examples you gave would be based on income after expenses……which is it?
Stephen Nelson CPA says
No, sorry, I didn’t mean to say that… I’m just thinking the easiest place to grab the revenues (what QuickBooks labels “total income”) is off the profit and loss statement.
Greg says
I’m pretty sure the answer to this question is common sense but figure I ask anyway, In case there’s something I’m not aware of. The revenue loss was delayed for my business and really started to see losses in January of 2021 and will continue. I’m guessing I’m out of luck bc I have to compare 2020 to 2019? I would love to be able to compare 2021 (in a few months ) to 2019.
Stephen Nelson CPA says
Right now, I don’t think you qualify. Rules may change in future though if this drags on.
Morgan says
I’m hearing that the proof of the 25% loss will only occur at time of forgiveness (if applied for) in order to speed up disbursement presumably, and maybe to give the SBA more time to get exact details together. It’s being suggested that the form is minimal (your original lender should already have all the information) so applying would be very quick. It was speaking of the SBA being open to recieve loan requests as early as next week.
Does that sound correct to you?
M.
Stephen Nelson CPA says
That’s true for the smaller sized loans. Here’s language from IFR (which you can get to via the link at bottom of post):
Eldon Holl says
Two questions:
For a church, do contributions to the church count as revenue?
The church also operates a pre-school.
Does tuition paid to the church count as revenue?
Stephen Nelson CPA says
I think yes and yes.
Larry Rogers says
great articles
we received a ppp loan for 2.5 x monthly expenses. My accountant uses cash basis for taxes. We should meet forgiveness rules. We do not show 25% reduction
under cash but we do under accrual. Does this mean we can get another ppp loan
and for how much?
thanks
Stephen Nelson CPA says
I don’t know. Sorry. I’d hoped SBA would provide some clarification on this exact issue. But I don’t see they have. Below is the full instruction for gross receipts that appeared on the second draw application form that showed up over the weekend:
In determining whether the Applicant experienced at least a 25% reduction in gross receipts, for loans above $150,000, the Applicant must identify the 2020 quarter meeting this requirement, identify the reference quarter, and state the gross receipts amounts for both quarters, as well as provide supporting documentation. For loans of $150,000 and below, these fields are not required and the Applicant only must certify that the Applicant has met the 25% gross receipts reduction at the time of application; however, upon or before seeking loan forgiveness (or upon SBA request) the Applicant must provide documentation that identifies the 2020 quarter meeting this requirement, identifies the reference quarter, states the gross receipts amounts for both quarters, and supports the amounts provided. For all loans, the appropriate reference quarter depends on how long the Applicant has been in operation:
• For all entities other than those satisfying the conditions set forth below, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019; Applicants choosing to use annual gross receipts must enter “Annual” in the 2020 Quarter and Reference Quarter fields and, as required documentation, must submit copies of annual tax forms substantiating the annual gross receipts reduction.
• 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% lower than 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% 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% lower than the first quarter of 2020.
Gross receipts includes 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 and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” and excludes net capital gains or losses as these terms are defined 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 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. Gross receipts of a borrower must be aggregated with gross receipts of its affiliates. For a nonprofit organization, veterans organization, nonprofit news organization, 501(c)(6) organization, and destination marketing organization, gross receipts has the meaning in section 6033 of the Internal Revenue Code of 1986.
Darren Roberts says
Hi Stephen:
This may be obvious to others, but I’m still scratching my head here. I have a question about if the “cost of the goods” is included in the gross receipts.
As an example, if in my 2019 s ched C I sell books for $100 but paid $20 for them. Assuming no return, is my gross receipts for 2019 $80?
Then in 2020 I sell books for $200 but paid $160 for them. Is my gross receipts $40?
If this is the case (and I can include the cost of the goods) my gross receipts dropped from $80 down to $40 in my example.
But if I CAN’T include the cost of goods sold by gross receipts went from $100 to $200.
I’m very confused 🙂
Stephen Nelson CPA says
I’ve answered this question a bunch of times already, but if you sell a book for $100, the $100 is your gross receipts amount, the $20 is your COGS, and the $80 is what the tax form calls your total income. (Check the form out and you’ll immediately see what I’m talking about.)
So can either just plug in the $100 of gross receipts (hat accountants would call revenue). Or you can add $80 of total income (what accountants would call gross profit) plus $20 of COGS.
Darren Roberts says
Thank you Stephen, so in that example I would not meet the 25% reduction guideline for the 2019 vs 2020 time frame (although I might for an individual quarter). Correct?
Dale says
Hi Stephen,
Great Article
I’m a little confused by the wording of what is considered “receipts” for the PPP is it just the actual sales for the quarter or is the sales less the cost of goods? ie.. payroll cost, raw materials cost, etc …
Subsection (c)(2) of the IFR
Generally, receipts are considered “total income” plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
from: PPP-IFR-Second-Draw-Loans.pdf
The Economic Aid Act does not include a general definition of gross receipts for purposes of determining a borrower’s revenue reduction.8 Subsection (c)(2) of the IFR defines gross receipts consistent with the definition of receipts in 13 C.F.R. 121.104 of SBA’s size regulations because this definition appropriately captures the type of income that is typically included in a small business’s gross receipts.9 Moreover, this definition will enhance the administrability of Second Draw PPP Loans because it is a definition already used by the Administration and many small businesses.
In the footnotes: I removed the comment about a sole proprietorship.
9 Subsection (c)(2) of the IFR generally defines gross receipts to include 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 and allowances.
Generally, receipts are considered “total income” plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
Thanks.
Dale
Stephen Nelson CPA says
It’s total revenue. That reference to “total income” plus “cost of goods sold” reflects the tax accounting definitions where total income is NOT the same thing as total revenue. Here’s the way the tax forms calculate things:
Gross Receipts or sales: $1,000,000
Less: Cost of goods sold: $400,000
Equals Total income (loss): $600,000.
Mo K says
Does the PPP loan it self count as revenue?
Stephen Nelson CPA says
No, thankfully not! 🙂
N K says
What dates are used to calculate Quarterly revenue for this calculation? Jan-March, April-June, July-Sept, Oct-Dec. Or the dates we use for each quarter to determine IRS estimated payments, which is Jan-March, April-May, June-Aug, Sept-Dec, which as a sole proprietor I have come to think of as ‘Quarters,’ since they are the only quarters I pay attention to annually? Thanks!
Stephen Nelson CPA says
I think you use calendar quarters. So, for example, Jan, Feb, Mar is Q1.
Ian Sugar says
Hi and thanks for the great info.
If I made contributions to my LLC from my personal checking account, does that count under “gross revenue” for the second draw?
Many thanks in advance.
Ian
Stephen Nelson CPA says
No those aren’t gross receipts. Those are capital contributions from the owner.
John says
Is there any chance we can use three consecutive months, i.e. a quarter, like May, June and July instead of April, May and June? My worst months were the summer but August picked up so I have two months in one period and one in another. I read the bill and final rule and although there is a large amount of verbiage dedicated to “quarters” for businesses that were not in existence for the entire year, it technically does not emphatically say 1st Quarter is January, February and March, for example. It sounds unique but I can not imagine we are the only company that is struggling with the specific Quarter rule where any three months would have been better to prove.
Any chance this would work?
Also, if not, what are the chances we could submit later for forgiveness on an accrual basis if our tax return shows a cash basis under the $150K. Are lenders going to be asking for additional documentation to confirm that are application for forgiveness is aligned with our returns?
Thanks.
Stephen Nelson CPA says
See my answer to Ken Zeng.
Ken Zeng says
Great information. With regard to the 25% decrease in any quarter in 2020 vs 2019. Do you think any 3 consecutive month determines a quarter or strictly Calendar Quarters. Some of our business were down 25% Feb, March and April or March April May but not Q1 or Q2 on a calendar basis?
Stephen Nelson CPA says
I think calendar quarters. But we should all pay attention to additional guidance that comes out from SBA. Maybe they will change this?
Sharon J Birdsong says
Hi Stephen,
This round will also offer a 24 week payroll period, correct? Can it be the same period used in the 1st loan app? Considering I had $3M plus in PR cost alone, and the loan was only $1.3M , can I use the same payroll period to recoup some of the $2M loss?
Stephen Nelson CPA says
I think the second draw loans in effect work like first draw loans. So it should be 24 weeks starting the date you get the second draw loan. These are literally second PPP loans for a new round of spending.
Jen says
Can you tell me if contractors are supposed to use actual billed as in amount reported on Sales and Use tax reports… or income as adjusted by WIP (Work in Progress) accounting for over/under billings? Seems like if you are supposed to use adjusted revenue there could be some cheating going on. And also not all small businesses adjust revenue by WIP quarterly – it can be done yearly. However, the adjusted revenue is what is reported to the IRS at the end of the year. I’m just not sure which way to go.
Stephen Nelson CPA says
I think you use either your cash basis accounting gross receipts… or your “true” accrual basis accounting gross receipts. And that you want to be good about how you do your accounting. I.e., fudging the gross receipts number to get a (say) $100K loan would be like understating your tax liabilities by $100K by adding $400K of fake deductions or hiding $300K of income.
L A says
Hi Stephen,
I had the same question as Jen, and even a little more muddy because the books are on a percent complete method but on completed contracts method for tax purposes (safe harbor). The completed contracts calculation happens on an annual basis.
Maybe this will be helpful in helping us interpret? The IFR on 1/6/21 page 7-8 states:
Subsection (c)(2) of the IFR defines gross receipts consistent with the definition of receipts in 13 C.F.R. 121.104 of SBA’s size
regulations because this definition appropriately captures the type of income that is typically included in a small business’s gross receipts.
So I found 13 C.F.R. 121.104 for the SBA size regulations (see below):
§121.104 How does SBA calculate annual receipts?
(a) Receipts means all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms (such as Form 1120 for corporations; Form 1120S for S corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 for partnerships; Form 1040, Schedule F for farms; Form 1040, Schedule C for other sole proprietorships). Receipts do not include net capital gains or losses; 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. For size determination purposes, the only exclusions from receipts are those specifically provided for in this paragraph. 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 receipts.
(1) The Federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern. SBA will not use tax returns or amendments filed with the IRS after the initiation of a size determination.
(2) When a concern has not filed a Federal income tax return with the IRS for a fiscal year which must be included in the period of measurement, SBA will calculate the concern’s annual receipts for that year using any other available information, such as the concern’s regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts.
So based on the above, I conclude that the method used on the tax return is the first choice but if the return hasn’t been filed (which doubtful anyone will have filed a 2020 return by the time they apply) then the books\financial statements can be used. So to be safe I have calculated it strictly on a cash received without adjustment for WIP, again with the adjustment for WIP, and then annually for CC adjustment since I know that number readily (I don’t need to wait for bills to come in, its straight cash receipts on completed projects and I know what projects are completed), I figure if meet the 25 % on all three calculations I would meet the requirement.
Thought? Thank you so much for putting this information together
Ginny Deisler says
Hi Stephen.
I am wondering if a restricted donation would be included in gross receipts for qualifying for the PPP 2nd draws?
Thanks,
Ginny
Stephen Nelson CPA says
I think so. See that language in the blog post. It says revenue from whatever sources. The language also identifies some items that don’t count as revenue. But unless you get additional guidance from the SBA that says otherwise, I think you assume that everything else is included except what SBA explicitly, explicitly says you exclude.
JJ says
I have a question about the means with which we will be reporting this for forgiveness. On Quickbooks we were 24.7 and 24.5% down in Q2 and Q3. However in my clinic software we were down over 30% and over 27%.
The Quickbooks don’t match up perfectly and I don’t know the reason for the discrepancy. (we did have a lot of issues scanning checks into the bank account during the past year so we often sat on checks from insurance companies for a long time. That and we have made that repayments were put in bank but wouldn’t be in the clinic software. That’s likely the places where/why we look less than 25% in Quickbooks.
Thoughts. Can I just submit my clinic software numbers?
jj says
“That and we have made that repayments were put in bank but wouldn’t be in the clinic software.”
What a terrible sentence! Sorry I was distracted.
There were loan payments (to me) on loans (very low interest) I made to an associate to start her own business. If we took those payments out we would be very close to the 25% if not there.
Stephen Nelson CPA says
Returns “Adjust down” your gross receipts. E.g., find this language above, “reduced by returns and allowances.”
JA says
Is it permissible to round up? 24.7 to 25%?
Stephen Nelson CPA says
I don’t know. Sorry. But I wouldn’t unless SBA says you can.
Joe W says
If I use the quarterly method – more favorable for my success in obtaining the loan – what would I use for supporting docs for forgiveness? I have no docs that list total sales for just 1 quarter. It’s bunched into the entire year for both 2019 and 2020. I could submit invoice reports for the 4th Q of 2019 and 2020 showing the 25% reduction. But would they accept that? Thanks for your help!
Stephen Nelson CPA says
You don’t need docs for the second draw loan application. If your loan falls below $150,000, you don’t even need to show the quarterly revenues that create the 25% reduction.
I would assumem that later on, when you apply for forgiveness, you will need to supply this detail.
J. George says
The definition of gross receipts seems to *add* COGS to total revenue, but you are *subtracting* COGS. Which is correct to calculate the 25% reduction?
Stephen Nelson CPA says
So here’s the formula the tax forms use: Gross receipts minus COGS equals total income.
So you can use gross receipts. Or you can algebraically calculate gross receipts by adding COGS to total income.
Tip: look at the tax return you file. Find the line labeled “Total Income.” This will all make more sense.
Jimmy says
I really hope they change date range from Quarter to 3 consecutive months. 1st quarter down 18% but March thru May down 35%. Do you think there is any chance they adjust calendar quarter to 3 consecutive months?
Stephen Nelson CPA says
I don’t know if they’ll do that. My guess is they won’t. Sorry.
Lee MItchell says
Great article. Quick question – is there any discussion of being able to compare all QTRS in 2020 for the revenue decline? I was open for 43 days in the 4th qtr of 2019 and from the looks of it, I don’t qualify when comparing to a full qtr. in 2020 – Thanks! Lee
Stephen Nelson CPA says
You use the new business rules. This earlier blog post explains (see last example): https://evergreensmallbusiness.com/ppp-second-draw-loans/
Michael McGuigan says
So are you saying that if your business was not open for the entire 4th quarter of 2019, you would use the 2020 comparisons and not use the partial 4th quarters numbers? My restaurant was only open for the last 5 weeks of the 4th quarter in 2019. Yet, we still saw saw a decrease of 8% in sales over the entire 2nd quarter 2020. Not enough to qualify if I have to use the partial 2019 quarter. When comparing the 2nd quarter of 2020 to any other quarter in 2020, we show a decrease well over 25% for that 2nd quarter. Which do I use? 2019 or 2020?
Thanks Stephen!
Stephen Nelson CPA says
Yeah, I don’t think you’d use partial quarters. It wouldn’t make sense to do that. I think you need to use full quarters.
BTW, I just reread for the umpteenth time the relevant paragraphs of the interim final rule. And the paragraphs don’t say what I really would like them to say. They don’t say “use full quarters.” So what you’d need to do is read them to say you need to compare quarters. Full quarters. In other words, you can’t compare a quarter to a month or a week or a day. That doesn’t count as a comparison of two quarters.
Extreme example. You were open on February 15, 2020 so you qualify… but you only opened for New Year’s Eve of 2019. (A special party.) So you were open within 2019 Q4 a single day. Obviously, if you compare 2019 Q4’s one day of revenues to a quarter in 2020, you won’t be able to qualify. Unless you had a 90% or 99% reduction in revenues. That doesn’t seem like what Congress intended.
Nick Thompson says
Hi Stephen,
Thank you for the insights. We opened in November of 2019. Therefore, we didn’t have a full quarter open in 2019 and would not show at 25%+ revenue reduction from Q4 to any other quarter in 2020. Do you know how the SBA is treating businesses in my situation? Can we compare Q1 ’20 to any other quarter in ’20 to show the reduction in revs?
Thanks!
Stephen Nelson CPA says
You’re a new business. You can read here about the rules work in that case: https://evergreensmallbusiness.com/ppp-second-draw-loans/
Michelle Baldwin says
If a borrower has affiliated companies, does the 25% revenue loss have to be shown on a combined basis or can each entity apply if some of them had individual 25% losses?
Stephen Nelson CPA says
In general, you look at the consolidated revenues. But the rules don’t make you consolidate affiliates in some industries (like restaurants, hotels, etc.)
BTW, this guest blog post from Dan Chodan provides some really useful info about the PPP affiliation rules.
Jennifer W. says
Hi. Great blog. I know we don’t include monies received under the 1st PPP Loan, but would we include Provider Relief Funds received under the CARES Act in our calculation of gross receipts?
Stephen Nelson CPA says
I don’t know. Sorry. I’m not sure what you mean by provider relief funds. If you don’t see the funds listed in the above language about what you can exclude, however, I think you don’t exclude.
Brandon Ray says
What exactly are they looking for on the application where there are 4 spaces, next to “Reduction of Gross Receipts of at Least 25%”. There is then 4 spaces, one beside 2020 Quarter, 2019 Quarter, then under these boxes it says Gross Receipts for each quarter as well. I have my information, but am not sure exactly what to put in these spaces. Thanks!
Stephen Nelson CPA says
The four boxes get filled with the quarter number from 2019, the revenue from that quarter for 2019, the quarter number from 2020 and then the revenue number for that quarter for 2020.
BTW, you don’t have to fill this in if you borrow less than $150,000. But I think a borrower should do that. Just to make sure they understand how this works and so a mistake isn’t made.
David Roinas says
I work for a church putting together a PPP2 application and have a question in regards to calculation of revenue. We are aware that PPP forgiveness, which we show as grant income, is not included but we are wondering about grants received in 2020 from the state, peace time grants made available because of Covid19, that were made available from the state..
Stephen Nelson CPA says
I think those do get included. To be excluded, the money needs to be specifically identified as something excludible.
Joseph P says
Great information – thank you for your efforts and insight.
Question – as a real estate agent (1099 – independent contractor), many of us do not use Quickbooks to calculate monthly/quarterly revenue, although this past year has me thinking that we should! My personal situation is that I operated my first full year in 2019. Since it was my first full year in business, I paid taxes based on the 1099-MISC received rather than paying quarterly estimated taxes. However, I did begin paying quarterly estimated taxes in the 2020.
While the SBA likely needs to give more guidance, in your opinion, would it be feasible for me to use the total gross receipts from my 2019 Schedule C to calculate an average quarterly revenue number for that year, then apply for the second draw PPP loan by using my Q1 & Q2 estimated tax worksheets from 2020? I did not earn a single dollar of revenue in Q2 of 2020, which clearly demonstrates a decrease of more than 25% from a prior year’s quarter, but the quarterly estimated tax worksheet would be the only documentation I have that would show that. Thanks again!
Stephen Nelson CPA says
You need to either company the full year 2020 to the full year 2019… or compare actual revenues in the quarter.
BTW, if you had a quarter in 2020 with zero revenue and you had $1 of revenue that same quarter in 2019, that quarter lets you qualify for the second draw PPP loan.
James says
Any update on whether accrual or cash based options can be used? We show a 25.3% revenue loss when using a cash-based method, but with accrual based we do not meet the qualification. Our normal method is accrual based, if that matters. Thanks in advance.
Stephen Nelson CPA says
Important question, but one we don’t have guidance on yet. I’m guessing SBA might let you use either method regardless of what your tax accounting method shows or what your book accounting method is. But I think you’d want explicit guidance from them before relying on that gambit.
Jeff says
My accountant says that we do not qualify for PPP round II because we cannot show the 25% loss in revenue, since we’re a startup and our expenses and revenue were capitalized in 2019. We did have revenue where we contracted out one of our designer/developers in 2019, which does in fact show a more than a 25% loss from 2019 to 2020. Can you explain why we may or may not be able to qualify for round two?
Stephen Nelson CPA says
I can’t explain, no, sorry. I guess one thought would be maybe you don’t have a full quarter in 2019? Just guessing though.
This thought: The language for how the revenue reduction works is pretty straightforward for accountants. So if your person is technically strong, they should have no problem deciphering the rules.
Tim Southwell says
Hi Stephen… great stuff, thanks!
In 2019, we were building our tech out with minimum payroll and sub-contracted labor. We recorded zero income over the entire year. In 2020, we launched 2q with a full-time team (150k monthly in payroll), with income generated in the hospitality / travel sector (far below original modeling).
So, we have zero income in 19, and little in 20… how can one show a 25% reduction from year to year, when 19 was a no revenue year? Basis this, do you know if this would be possible for qualification due to not being actively pursuing revenue in `19?
Thanks, and any resources for further research appreciated.
Tim
Stephen Nelson CPA says
I wonder if your issue isn’t that you’re not really fully in business in 2019 or on February 15, 2020. I.e., you were still in the start-up phase.
One thing to explore, maybe, is whether you are a seasonal business or new business. The rules work differently for firms in those categories.
TT says
Hello and thanks for the great info. Do the EIDL grant and HHS stimulus count toward gross receipts/revenue?
Thanks in advance!
Stephen Nelson CPA says
Everthing counts basically as indicated by the language I quote above… but I think the EIDL money may be excluded with the PPP money. Also I’m sorry but I’m not sure what you mean by the HHS stimulus. But unless you see that specifically excluded in language above–look back at that–I think you include.
Clairice Ellisor says
Is there anything in writing specifically stating that HHS Stimulus receipts are to be included as revenue?
Stephen Nelson CPA says
Not that I am aware of. But look at the language in blog post above. It says what you can exclude and then says include everything else. So–and this is a tax accountant bias–I’m thinking you include everything except what the statutes and interim final rules explicitly call out as stuff you can exclude.
I think this approach to reading the rules is right. But I also acknowledge that this is potential blindspot in the way a tax accountant thinks.
Cynthia says
If you received a primary PPP loan in the quarter you were down 25%, does that PPP loan amount count as revenue? towards the second PPP loan. For example:
Qtr 2 was down 41%, but received 1st PPP loan that quarter which when added in only makes that quarter down 15%?
Or is it based soley on business revenue; not government loans?
Stephen Nelson CPA says
PPP money doesn’t count as revenue, no. You should qualify, it sounds like.
James Tillman says
Does a quarter have to be an actual first,second,third or fourth quarter. i.e. Jan,Feb, Mar? Or could it be March,April,May calculated against the same period of the previous year? In other words , can any 3 consecutive months be classified as a quarter? It makes a difference in whether I qualify for PPP2 or not. Thanks
Stephen Nelson CPA says
The IFRs don’t explicitly define quarters as J-F-M, A-M-J, J-A-S, and O-N-D… but I think we assume that’s the case. Unless the SBA rules otherwise.
Andree Huffine says
My 2nd Q revenue was down 48%, but my annual revenue was up overall because of sales made in 2019 that did not close until later in the year 2020. Will the annual increase in revenue cause any sort of red flag when I apply for forgiveness? Loan amount is < $150k so I won't be providing documentation until asking for forgiveness
Stephen Nelson CPA says
The test looks at quarters–though you have the option to look at a full year (because if the year is down 25% at least one quarter HAS to down 25% or more).
So you qualify based on your second quarter. I think you apply. (Tip: I would fill in the quarterly revenue blanks on the application just to double-check your math and verify your calculations. Why not….)
Dennis Quinn says
question
Do you have to use the affiliation rules to determine 25% revenue decline? Company a got an intial PPP loan and a related company got an PPP loan on applying for the second PPP loan only one company had a revenue decline of 25% or more but combined the revenue loss was under 25% can the one company file or must they file as consolidated
Mike says
Question:
I spent $15,000 on COGS in March 2020 – stocking up on our raw materials in anticipation of supply chain problems due to the pandemic. Those materials were used in March, April, and May. Can I allocate all of the expense to Q1 for COGS since that is the month they were purchased, instead of Q1 and Q2?
Stephen Nelson CPA says
Well, no, I don’t think that’s quite right. I would rewrite your question as shown below.
When I edit your comment in manner above, you can see the problem right? The inventory doesn’t become COGS until you sell it.
Mike says
Thank you for the info! One question. We were a new entity but made the deadline for the first round. Only got a small amount $30k. After April our business has been almost non existent. I’ve pumped my own savings to keep bills paid and power on. Would I use the original profit loss from Jan 1 2020 to feb 28 2020 that we turned in to acquire the first round and hope for the the best?
Stephen Nelson CPA says
See the second draw PPP loans blog post and its discussion of new and seasonal employer PPP loans. It might provide a bit of additional clarity.
may Hong says
I have a question regarding a calculation of gross receipt. I operate a restaurant. Last year, my restaurant heavily depended on 3rd party delivery sales even though charges such as commission, processing fee, delivery fees and other charges are more than 12% of total quarterly sales. If I include these charges in the gross receipts amount, I am not qualified to apply for the 2nd PPP Draw. My net income went down further because of these charges. I am in minus position because of these charges, yet my sales figure increased. Would you please advise me if fees that 3rd party delivery companies are charging should be included or excluded when I am calculating the gross receipts on the 2nd PPP Draw application? Your guidance on this matter will be very helpful.
Stephen Nelson CPA says
I don’t know. Sorry. Maybe someone else can share an insight.
Here are some thoughts though…
1. Nothing in that language above lets you exclude something like the delivery charges.
2. If you collect the total fee (say $25) and then remit the charge (say $5) that seems like you have $25 of gross receipts. On the other hand, if the delivery service collects $25 and then remits the net of fee amount (so $20) to you, that seems like you have $20 of gross receipts. I guess what I’m trying to say is, how the transactions works would logically seem to matter here.
3. Your situation surely is faced by hundreds of thousands of fellow restaurant owners and the PPP statutes rather explicitly try to right the wrong or mitigate the damages you guys have suffered. Accordingly, I would not be surprised if additional guidance provides some grace to you. The SBA in my opinion has tended to bend the rules to help out small businesses here.
oscar says
I have our numbers proving a greater loss of _25%. What is the accepted form that needs to be uploaded ? Would a QBO generated report for both Q’s suffice ?
Stephen Nelson CPA says
That should work, yes. And note that at this point, if you’re borrowing $150K or less, you don’t need to provide documentation or even the numbers.
Dominic Juneau says
Does taking money out of a 401K count as revenue? I did in 2019 and it would help me get to the 25% reduction from 2020.
Thank you
Stephen Nelson CPA says
No, that doesn’t count.
may Hong says
Thank you for your respond on this matter.
Eydie says
My son purchased 100% of the stock of a Subchapter S Corporation on 9/30/2020. The S Corp has been in business for several years. The business has seen more than a 25% drop in revenues when comparing Q4 2020 to Q4 2019. The business did not participate in the first round of PPP. Only my son and one other employee work in the business now, but prior to 9/30/2020, a variety of six different people worked temporarily on short term projects for the business (i.e. Q3 had 3 employees, Q2 & Q1 had 5 employees). I believe my son is eligible to apply for his first PPP loan now, but am unsure how the number of employees previously employed will impact the forgiveness calculation.
BTW, thank you for your blog and emails. I find them very informative.
Stephen Nelson CPA says
I think–but check carefully with the bank to extent possible–that if the S corp existed on 2/15/2020–he can apply for a first draw PPP loan if one wasn’t already applied for.
I also think that probably the way the payroll adjustments work if he adjusted downward the headcount from say 4 to 2 employees won’t matter matter much. E.g., they may fund 10 weeks roughly to pay 4 employees… so if $1K a week for an employee, maybe that totals $40K in PPP loans based on old staffing levels.
Then if he only employs 2 employees, he’ll be penalized 50 percent theoretically because of 50 percent reduction headcount. But it won’t actually be that bad. He’ll get to accumulate payroll over 24 weeks. Also nonpayroll spending. He might accumulate $30K in payroll over the 24 weeks maybe another $20K in other expenses. That $50K in potentially forgivable spending might be adjusted to let him only get $25K of forgiveness. But that’s still pretty good. He got a $40K loan but only needs to pay back $15K. And note that some of what that $15K was probably used for was his payroll.
Tabitha says
Hello,
Sorry if this has been addressed but could you tell me where you found your information on Seasonal business’? I’ve scoured the SBA website and not found any clear documentation on how to calcuate directly from them. Thank you!
Stephen Nelson CPA says
It’s in the IFR: https://home.treasury.gov/system/files/136/PPP-IFR-Paycheck-Protection-Program-as-Amended-by-Economic-Aid-Act.pdf
Note that you can search the pdf for the word “seasonal” and get to all the guidance.
Matt says
Our food service business set up a Go Fund Me account to cover lost revenue from March thru June. We provided meals to Frontline workers to keep our staff employed, so the funds were used for sustaining our operations. Would this money be considered gross receipts or capital infusion? If the Go Fund Me funds were taken out of the equation, our gross receipts for Q2 2020 would have been down 80%. Thanks.
Stephen Nelson CPA says
I think that counts. Basically, everything counts–unless Congress says otherwise.
william b says
I am in a medical group that increased 3 partners from 38 to 40 to cover additional sites from 2019 to 2020. Our gross receipts are down 24 % but per partner we are down much more. How does this work for PPP 2 loan?
Stephen Nelson CPA says
So I think you’re just short. Sorry. I know that being down 24% (or 20%!) is way worse than it sounds. If a firm’s profit margin was 20%, a 24% drop in revenues means lots of red ink.
You guys might want to look at possibility of seeing whether you have two accounting methods you can use and whether one moves you from 24% to 25%. I don’t think we have any reliable guidance on this issue yet. But for forgivable spending, the SBA let borrowers basically use either cash basis or accrual basis account. And maybe they will let people do the same thing for the gross receipts.
One caution–which I mention not because it’s what you suggest or hint at–but because someone else asked this yesterday. Just to be clear, one does not fudge the revenue numbers to qualify. I.e., this isn’t like a tax return’s deductions where you can sort of sometimes rework the numbers and pick up a few more dollars of deductions. (Maybe you change the depreciation method, make a larger pension contribution, write off obsolete inventory, and so forth). If someone tweaks the gross receipts numbers to qualify for a second PPP loan, I think that’s fraud.
Again, just to be clear, I know you, William, are not in anyway contemplating that. I’m just going off on a tangent your comment makes me think of.