There are lots of articles out there about who qualifies for a PPP loan and how is it calculated. The purpose of this communication is to discuss the 25% reduction in revenue requirement and the non-quantifiable element which is “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
25% Decrease in Revenue
In order to qualify for a loan the primary calculation is that gross receipts must have decreased 25% in any quarter (2020 vs 2019) in accordance with the entity’s accounting method.
As we have done these calculations, we have come up with some surprising results. In one case the employer was not shut down nor was there a lack of work, but they have both a service component and a sales component. The sales component is the much bigger ticket (but low margin) item, and some sales were delayed from Quarter 2 to Quarter 3 causing a significant decrease in Quarter 2.
Another common case is in the construction business where Quarter 2 revenue was postponed into Quarter 3. Ditto for medical practices who experienced a major Quarter 2 hiccup but who have been made whole through CARES Act funding available to medical professionals in subsequent quarters.
In all three cases and many others, showing a 25% drop in business, especially in Quarter 2, is not a problem. One of the unfortunate issues is that only drop in revenue is measured. There is no calculation for drop in profit, so if you are a contractor who experienced delays or were required to perform as an essential service provider that caused losses or reductions in profit no matter how substantial, you are out of luck if you don’t meet the 25% reduction in gross receipts.
Another factor in the 25% calculation is the question of what basis of accounting do I use for this calculation. There is no specific guidance on this issue. We believe it is your tax accounting method whether it be cash, accrual, completed contract or percentage of completion. These four methods can yield very different results. Additionally many contractors do not calculate percentage of completion or completed contract revenue on a quarterly basis. If you are bogged down in this calculation we certainly can help.
“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
As one client said, “I am really good at calculations. I have always paid my taxes timely and if I qualify I want to apply.” In fact, economic uncertainty is always an issue. One approach is to say, “I have no problem making this assertion on an application as is required.”
The requirement to certify is not new. During Round 1 of PPP we routinely tried to make clients comfortable with this good faith certification. In our view, in April 2020 when most people applied, there were shutdown orders in effect, no one understood how hospitals could or could not cope with the potential caseload, death rates were higher, PPE availability was limited, productivity was significantly curtailed, and supply chain issues – especially from China – were rampant. Additionally, people were talking about it being years until a vaccine was available.
Businesses have a lot more knowledge today about what to expect at least in the short-term, with hopes that vaccine distribution and effectiveness is coming before fall. For businesses directly or indirectly involved in entertainment, restaurants, hotels or admissions, the economic uncertainty is a clear and present danger to their economic future.
For the rest of us, it’s a judgment call. Ultimately, the decision rests with the applicant. As professionals it is our job to educate clients not judge their decisions. Unfortunately there is very little guidance on the certification and the new law passed last month added no new guidance whatsoever.
Numerous FAQs (found here) were devoted to the topic in late April and especially early May in reaction to publicly traded companies applying for the loan. If you’re a PPP geek, the specific questions were 31, 37, 43, 46 and 47. At the end of day, the SBA is focusing on those with loans over $2 million dollars. In theory, those with under $2 million could be scrutinized in an audit, but at this point that appears unlikely. Not to scare anyone off but we have the included the link to the loan necessity questionnaire (found here) for loans over $2 million during PPP1. To the best of our knowledge, the SBA has not begun the process of formal forgiveness of amounts over $2 million from Round 1.
There are two main parts to the questionnaire. They are Business Activity Assessment and Liquidity Assessment. Most of the questions revolve around the initial application date of the loan or shortly thereafter, but some questions relate to distributions and officer salaries paid later in the year.
The second round of PPP does not allow public companies to borrow, nor for the most part does it allow for loans in excess of $2 million. It is not expected that banks are going to require anything other than the certification itself or much of any explanation beyond the certification. For lack of a more technical explanation and at the risk of being sarcastic in what is a very serious discussion, “any excuse will do”. Furthermore, it is doubtful that the SBA will decline loans submitted. We have heard turnaround time of 48 hours for the SBA during Round 2 application, so there will not be time for initial determination.
While the audit process will most likely be limited for PPP1, we have no guidance on how PPP2 loan forgiveness will be reviewed or if in fact the SBA will look more closely at loans under $2 million in this round. Among the certifications applicants will be required to sign is in small print below.
I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 U.S.C. 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 U.S.C. 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 U.S.C. 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
We routinely help clients interpret tax laws and accounting guidance in a manner which is favorable to the client (the gray) and typically take a stand in opposition only when a client is clearly on the wrong side of an issue that requires judgment. We have already heard many thoughts from clients who qualify under the revenue criteria. I believe there are three basic answers:
1. Forget it. Even though we qualify numerically, I cannot say in good faith that I need the money to support ongoing operations
2. I qualify and I have faithfully paid my taxes and I have no idea what lies ahead, so I am going to apply.
3. I can put the money to better use than the government through rewarding my employees and/or giving any money that turns out to be extra to charities.
We are not signing the application so this is not a judgment we will be making for you.
We are a no judgment zone here at Walz 😊.
Let us know how we can help you with your PPP2 application or other questions regarding the ERC credit or any provision of the original CARES act or the recently passed Consolidated Appropriations Act. Resources, including links to webinars, can be found here.
By the way there is no certification in order to use the ERC (Employee Retention Credits) if you meet the 50% reduction in gross revenue test for any quarter (2020 vs 2019).