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Calculating Revenue Reductions for Second Draw PPP Loans

second draw PPP loan revenue reduction calculation artAs 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.

 

 

 

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