How to Calculate a 25% Reduction in Revenue for PPP 2

With the second stimulus bill, businesses are eligible for a second PPP loan if they meet certain conditions. One of those conditions is showing a 25% reduction in revenue from 2019 to 2020.

Here’s what you need to know about proving a 25% reduction in revenue and the documents you need to provide.

What is the 25% reduction in revenue criteria?

The 25% reduction in revenue criteria only applies to businesses applying for their second draw PPP loan. This new, second PPP loan means new eligibility requirements.

To apply, a business must have used up their first PPP loan, have no more than 300 employees, and show a 25% reduction in revenue from 2019 to 2020.

For loan amounts under $150,000, the 25% reduction needs to be proven during the forgiveness process. If your loan amount is greater than $150,000, you will need to prove it during the application process.

Further reading: Do I Qualify for the PPP Loan?

The 25 percent reduction in revenue is calculated one of two ways:
  • Comparing annual gross receipts between 2019 and 2020 as reported on a completed tax return
  • Comparing gross receipts in a quarter of 2020 with that same quarter in 2019
For businesses that started in 2020:

If a business started in 2020 and was operational on February 15, 2020, it is eligible for a second PPP loan. You must use Q1 2020 as your comparison period. The 25% reduction can be shown using Q2, Q3, or Q4 2020.

What are gross receipts?

Gross receipts is the total amount of money your business has received in a given period.

The SBA provides a detailed explanation on what’s included in gross receipts:

Receipts means all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.

You can find your gross receipts by looking at line 1 or 1C of your respective tax return. You can also find your gross revenue and returns and allowances by looking at your income statement.

Do not include any relief received in 2020 in your gross receipts.

Revenue reduction calculation examples

Using annual gross receipts

Toni’s Temporary Tattoos received a PPP loan in 2020 and applied for forgiveness in December of the same year. Toni is now looking to apply for a second draw PPP loan.

In looking at her year end financials, Toni sees that her business recorded $250,000 in gross receipts in 2020. When she checks her records, she sees $500,000 in gross receipts recorded in 2019. That’s a drop in revenue of 50% between 2019 and 2020.

Because Toni’s business saw a greater than 25% reduction in revenue on the year, she is eligible for a second PPP loan.

Using quarterly gross receipts

Bixby’s Farmer Bees Honey received a PPP loan in 2020 that was fully forgiven. But now, Bixby’s business needs more funds to make it through to spring.

When looking at his annual numbers, his business recorded $200,000 in gross receipts in 2019 and $180,000 in 2020. At first glance, he thinks he’s ineligible—until he looks at his quarterly earnings.

2019 2020 % change
Q1 $40,000 $50,000 +25%
Q2 $80,000 $60,000 -25%
Q3 $60,000 $50,000 -17%
Q4 $20,000 $20,000 0%
Total $200,000 $180,000 -10%

Although he didn’t record a 25% reduction in gross receipts when comparing years, Bixby is still eligible. He recorded a 25% reduction in Q2 2020 relative to what he recorded in Q2 2019. This is the minimum reduction amount required to be eligible for a second ppp loan.

We put together a video demonstrating how to calculate a 25% reduction in gross receipts between a quarter in 2020 and the same quarter in 2019. The example uses income statements generated from within the Bench app. However, the same process applies if you have your income statements housed elsewhere.

What documents are required to prove a 25% reduction?

In the latest guidance provided by the SBA, it states that no documents are needed when applying for your second PPP loan. Instead, you must certify that you are applying in good faith on the basis that you experienced a 25% or greater reduction in gross receipts.

However, documents are required when you apply for forgiveness of your loan. If it’s found you did not meet the revenue criteria, your loan will not be forgiven. You will be required to pay back the entirety of the loan. If the SBA believes that your application was made knowing you did not have a drop in revenue, you will face fines and potential imprisonment.

Documents required if using annual gross receipts

If you are comparing your gross receipts in 2020 to those in 2019, you must provide tax returns for both years when applying for forgiveness. Your tax return doesn’t need to be filed, but will need to be complete. It’s best to complete these forms with a tax professional.

Documents required if using quarterly gross receipts

If you are comparing your gross receipts in a quarter in 2020 to the same quarter in 2019, you will need to provide financial statements for those quarters when applying for forgiveness. Bank statements covering both quarters will also need to be provided.

How Bench can help

Get ready for your next PPP loan application by having your bookkeeping up to date. Use the financial reports we provide to prove a 25% reduction in revenue. Our expert bookkeepers can answer any questions you have about the relief programs ensuring you’re getting the support you need to keep your business thriving. Then, once it’s time to file your taxes, you’ll have access to everything you need for a stress-free tax season.

More PPP resources

What’s Bench?

We’re an online bookkeeping service powered by real humans. With Bench, you get a dedicated bookkeeper and powerful reporting software for a crystal clear view of your financial health. All of our services are eligible expenses for PPP forgiveness, and we’ll even provide support in applying for the PPP (or getting that loan forgiven). Whatever happens next, we’re right there with you. Get started on a free trial today.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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