As a startup founder, you may be wondering if and how you can be eligible for the second round of the Payment Protection Program, or PPP2 loan. Some founders have even come to me asking the question, “can my startup change its accounting method to be eligible for the PPP2 loans?”. This article will dive into the difference between the accrual and cash accounting methods as well as answering the question of should you switch methods.
Background
When the second round of the PPP2 came out, there was a clause that said if your startup company had a 25% reduction in gross receipts or revenue in any 2020 quarter compared to the same quarter in 2019, then you would be eligible for a second PPP loan. So in other words, if you had a great year in 2019 but then COVID hurt your company in 2020 and you were down more than 25% in one of your quarters, then you would get a second bite of the apple.
Aside: You can read our earlier summary of the CARES Act/PPP loans for startups if you need more information on how we ended up with this particular stimulus.
There is a lot of money at stake and I’ve had a couple of founders state:
“We’re on the accrual method. Why don’t we change our accounting method to cash? Then it will show more than a 25% reduction and we’ll be eligible for PPP2”.
Accrual Versus Cash Accounting Explained
Accrual Method- This means that all your revenue and costs are booked when the services are provided or when the expenses are incurred.
Cash Method-You pay for things when you collect the revenue or actually pay the money for a service/good.
Which Accounting Method Should Your Startup Choose?
Startups should be on the accrual accounting method.
This is GAAP or General Accepted Accounting Principles based and it is what VCs want. It is what M&A acquirers want.
It also makes running your business a lot easier because you are going to see what is going on all the time.
Answer to “can my startup change its accounting method to be eligible for PPP2 loans?”:
The short answer is no, you don’t want to mess with this and change your accounting method. The IRSand SBA have guidance out saying explicitly to not do this. Do not pick and choose or flip around to get a second bite of the apple, a second PPP loan.
It is unethical and it is against the regulations or their guidance. If you do that, you are setting yourself up for a very painful audit and potentially some embarrassing press.
I am confident that none of our Kruze clients would do it. Even if they were leaning towards doing it, we would help educate them. However, if you are working with another accounting firm and maybe they are not on the up-and-up and don’t advise against this, please just don’t do it.
I know it is a lot of money and is tempting; but, it is not best practice. Don’t take the chance. You are expressly violating what the IRS and SBA have prescribed. Don’t tinker with your revenue recognition or flipping to cash accounting to just try to stretch and get this loan. So I hope that helps. Thanks.
