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Second draw PPP loans: How do the rules apply to nonprofit organizations?

Feb 04, 2021

On January 19, the Small Business Administration (SBA) and Treasury released guidance to assist nonprofits in calculating their revenue reduction and payroll costs, along with the relevant documentation that is required to support each of these calculations. These calculations are important in determining your nonprofit’s eligibility for a second draw of the Paycheck Protection Program (PPP) — also called PPP2 — and your loan amount.     

Are you eligible for a second draw PPP?

Eligible organizations are those that:

  • Previously received a first draw PPP loan and will or has used the full amount only for authorized uses;
  • Have no more than 300 employees; and
  • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

How do you determine gross receipts for the 25% reduction in gross receipts test?

“Gross receipts” for a nonprofit 501(c) organization, a 501(c)(19) veterans organization, an eligible nonprofit news organization, an eligible 501(c)(6) organization or an eligible destination marketing organization has the same meaning of section 6033 of the Internal Revenue Code of 1986. This includes, but is not limited to: 

  • The gross amount received as contributions, gifts, grants and similar amounts without reduction for the expenses of raising and collecting such amounts.
  • The gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts.
  • Gross sales or receipts from business activities (including business activities unrelated to the purpose of which the organization qualifies for exemption, the net income or loss which may be required to be reported on Form 990-T).
  • The gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale.
  • The gross amount received as investment income, such as interest, dividends, rents and royalties.

The notice clarifies that gross receipts do not include any amounts forgiven from the first draw PPP loan or any Economic Injury Disaster Loan (EIDL) advance.

This means that for a nonprofit organization that files Form 990, the amounts to be included in gross receipts is the sum of the following lines from Form 990, Part VIII, Statement of Revenue:

  • Line 6b(i): Rental expenses from real property
  • Line 6b(ii): Rental expenses from personal property
  • Line 7b(i): Cost or other basis and selling expenses of security sales
  • Line 7b(ii): Cost or other basis and selling expenses of other sales
  • Line 8b: Direct fundraising expenses
  • Line 9b: Direct expenses from gaming activities
  • Line 10b: Costs of goods sold of inventory sales
  • Line 12 (column (A)): Total revenue

For a nonprofit organization that files Form 990-EZ, gross receipts include the sum of the following lines of Part I, Revenue, Expenses, and Changes in Net Assets or Fund Balances:

  • Line 5b: Cost or other basis and sales expenses of sale of assets other than inventory
  • Line 6c: Direct expenses from gaming and fundraising events
  • Line 7b: Cost of goods sold from inventory sales
  • Line 9: Total revenue

What periods can you use to demonstrate at least a 25% gross receipts reduction has occurred?

The appropriate period is based on how long the applicant has been in business:

  • For all applicants, except those satisfying the conditions below, the applicant must demonstrate that gross receipts in any calendar 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 if they were in business in 2019.
  • 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 during 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.

How do you calculate gross receipts if there is an affiliated group?

The notice requires that gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) be calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.

What documentation do you need to corroborate that the organization sustained at least a 25% reduction in gross receipts?

  • Quarterly financial statements for the entity: If the financial statements are not audited, the applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.
  • Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters: The applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
  • Annual IRS income tax filings of the entity (required if using an annual reference period): If the entity has not yet filed a tax return for 2020, the applicant must fill out the return forms, compute the relevant gross receipts value, and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.

What if you use a fiscal year to file your taxes?

Entities that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns only if their fiscal year contains all of the second, third and fourth quarters of the calendar year (i.e., have a fiscal year start date of February 1, March 1 or April 1).

Maximum second draw PPP loan amounts

The guidance describes payroll costs that are used to calculate PPP2 loan amounts. The guidance refers to payroll costs using 2019 calendar year payroll as the reference; however, borrowers are permitted to use payroll costs from either calendar year 2019 or calendar year 2020 for their PPP2 loan amount calculation or the 12-month period prior to filing the PPP2 loan application.

How do you calculate the maximum PPP2 loan amount for eligible nonprofit organizations?

You should use the following methodology to calculate the maximum amount that eligible nonprofit organizations can borrow. (Note that eligible nonprofit religious institutions or other eligible nonprofits without an IRS Form 990 filing requirement should see the next section.)

Step 1: Compute 2019 payroll costs by adding the following:

  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using:
    • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c column 1) from each quarter,
    • Plus, any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages and tips,
    • Minus 1) any amounts paid to any individual employee in excess of $100,000, and 2) any amounts paid to any employee whose principal place of residence is outside the United States;
  • 2019 employer group health, life, disability, vision and dental insurance contributions (portion of IRS Form 990 Part IX line 9 attributable to those contributions);
  • 2019 employer retirement contributions (IRS Form 990 Part IX line 8); and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).

Step 2: Calculate the average monthly payroll costs by dividing the amount from Step 1 by 12.

Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5

To substantiate the applied-for PPP2 loan amount, you must provide: 1) the nonprofit organization’s 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements) and 2) the filed IRS Form 990 Part IX or other documentation of any retirement and group health, life, disability, vision, and dental insurance contributions.

You must provide a payroll statement or similar documentation from the pay period that covered February 15, 2020 in order to establish that you were in operation and had employees on that date. Eligible nonprofits that file IRS Form 990-EZ should rely on that form, and those that do not file an IRS Form 990 or 990-EZ (typically those with gross receipts less than $50,000) should see the next section.

How is the maximum PPP2 loan amount calculated for eligible nonprofit religious institutions, veterans organizations and tribal businesses (up to $2 million)? 

The following methodology should be used to calculate the maximum amount that can be borrowed for eligible nonprofit religious institutions, veterans organizations and tribal businesses:

Step 1: Compute 2019 payroll costs by adding the following:

  • 2019 gross wages and tips paid to employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using:
    • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5ccolumn 1) from each quarter,
    • Plus, any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages and tips,
    • Minus 1) any amounts paid to any individual employee in excess of $100,000, and 2) any amounts paid to any employee whose principal place of residence is outside the U.S.;
  • 2019 employer group health, life, disability, vision and dental insurance contributions;
  • 2019 employer retirement contributions and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).

Step 2: Calculate the average monthly payroll costs by dividing the amount from Step 1 by 12.

Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5

To substantiate the applied-for PPP2 loan amount, you must provide 1) the entity’s 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), and 2) documentation of any retirement and group health, life, disability, vision and dental insurance contributions.

You must also provide a payroll statement or similar documentation from the pay period that covered February 15, 2020 in order to establish you were in operation and had employees on that date.

Wipfli can assist with your PPP2 loan application

While this guidance does answer a lot of the questions that nonprofit organizations have regarding eligibility for the second draw PPP loans, there are still unanswered questions. Contact us for assistance with your application. Borrowers can apply for a PPP2 loan until March 31, 2021.

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Author(s)

Terri Rexrode, CPA
Director
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