Business owners in the market for a second round of Paycheck Protection Program funding are in luck, thanks to the Consolidated Credits Act of 2021, which gives businesses greater accounting flexibility to qualify. for a second round of repayable funding to get through the pandemic.
The new program gives business owners with 300 or fewer employees the option to indicate which quarter they wish to select to show that they experienced a 25% reduction in gross revenue compared to the corresponding quarter in 2019. Maximum loan amount is $2 million. dollars, calculated by taking 2.5 times a company’s average monthly payroll over the past 12 months. Hotels and restaurants are eligible for 3.5 times the average monthly payroll.
One way for businesses to change their eligibility for a PPP2 loan is to calculate sales on a different accounting basis, said James Pierzynski, partner at accounting firm Lombardo, Ayers & Co. LLC in Annapolis, Md., via e-mail. mail.
“A business may have seen consistent sales (accrual) but may have experienced a slowdown in cash receipts, such as customers moving from 60-day to 120-day payment,” said Pierzynsky. “Thus, in a given quarter, that same company may not have reached the 25% reduction threshold under the accrual method, but has reached it under the cash method.”
The law is silent on the accounting basis to be used in calculating the 25% cut, so the Small Business Administration, which handles PPP loans, will have to issue additional guidance, Pierzynski added. “They could mandate one basis or the other, give borrowers a choice as to which is more advantageous, or require the method to be consistent with the entity’s method of accounting in its tax return and/or financial state.”
With the 25% cut being reviewed on a quarterly basis, a company’s day-to-day accounting could also skew the calculations, he said. For example, many small businesses are functionally cash-based throughout the year and only recognize income and expenses at the end of the year for tax and/or financial statement purposes. . These companies may need to go back and reassess their accounting treatment of sales at each quarter-end date for 2020 and for the comparative period of 2019, Pierzynski explained.
Surely any company about to qualify for a given quarter would want to take a close look at its sales in the current and comparative periods, he added. They would seek to ensure that income is reported in the correct period, regardless of the accounting method used.
“For example, if a company sold a physical item, was it delivered to the customer by the end of the quarter and what were the terms of the contract at the time of the sale?” said Pierzynski. If there is a multi-element deliverable, have all components been shipped during the quarter? If it is a service, have all the services to be provided actually been performed? Were there any subsequent price adjustments? Are there any warranty considerations or other deferred revenue considerations?
“Management could use some of the arguments above to shift revenue to different time periods,” Pierzynski said.