Business owners in the market for a second round of Paycheck Protection Program financing are in luck, thanks to the Consolidated Appropriations Act, 2021, which gives businesses greater accounting flexibility to qualify for a second round of forgivable financing to make it through the pandemic.
The new program gives business owners with 300 or fewer workers the flexibility to show which quarter they want to select to show they’ve experienced a 25% reduction in gross receipts when compared to the corresponding quarter in 2019. The maximum loan amount is $2 million dollars, calculated by taking 2.5 times a business’s average monthly payroll for the last 12 months. Hotels and restaurants are eligible for 3.5 times the monthly average payroll.
One way businesses can move the needle on their eligibility for a PPP2 loan is by calculating sales under a differing basis of accounting, James Pierzynski, a partner in the accounting firm of Lombardo, Ayers & Co. LLC in Annapolis, Md., said via email.
“A business may have had consistent sales (accrual basis), but may have had a slow-down in cash-basis receipts, such as customers that have gone from paying in 60 days to paying in 120 days,” Pierzynski said. “So in any given quarter, that same business may have not met the 25% reduction threshold under the accrual method, but does meet it under the cash method.”
The law is silent on the basis of accounting to be utilized in the 25% reduction calculation, so the Small Business Administration, which administers PPP lending, will have to issue further guidance, Pierzynski added. “They could mandate one basis or the other, give borrowers a choice based on whichever is most advantageous, or mandate that the method comport to the entity’s method of accounting on its tax return and/or financial statements.”
With the 25% reduction being looked at on a quarterly basis, day-to-day accounting at a business could also skew the calculations, he said. For instance, many small businesses are functionally cash basis for accounting purposes throughout the year and only make revenue and expense accruals at year-end for tax and/or financial statement purposes. These business may have to go back and re-evaluate their accounting treatment for sales at each quarter-end date for both 2020 and for the comparative 2019 period, Pierzynski explained.
Certainly any business on the cusp of qualifying for a given quarter would want to take a hard look at their sales in the current and comparative periods, he added. They would be looking to make sure the revenues are reported in the proper period, under whatever basis of accounting is utilized.
“For instance if a business sold a physical item, did it ship to the customer before quarter-end and what were the contract terms for when sale took place?” Pierzynski said. If there is a multiple-item deliverable, were all of the components shipped within the quarter? If it's a service, were all of the services to be provided actually performed? Were there any subsequent adjustments to prices? Are there warranty considerations or other deferred revenue considerations?
“Management could utilize some of the above arguments to move revenues to different periods,” Pierzynski said.