You Received a Shuttered Venue Operators Grant, What’s Next for Your Company?

Posted on Jan 24, 2022 in Shuttered Venue Operator Grants

If you are reading this article, you may be one of the thousands of business owners who received a Shuttered Venue Operators Grant (SVOG) this year and are feeling overwhelmed by the implications this new grant has on your compliance requirements. This article is intended to provide an overview of what to consider when your for-profit entity receives an SVOG.

If you are a not-for-profit or other non-federal entity as defined under the Uniform Guidance, please find more information in this Clark Nuber article.

What is the SVOG?

The SVOG program was established by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, and amended by the American Rescue Plan Act. The program includes over $16 billion in grants to shuttered venues administered by U.S. Small Business Administration’s (SBA) Office of Disaster Assistance.

In summer of 2021, eligible applicants were encouraged to apply for this grant equal to 45% of gross earned revenue, with the maximum amount available for a single grant award of $10 million.

The application portal was closed to new applicants on August 20, 2021. As of December 13, 2021, $13.5 billion has been disbursed in initial and supplemental grants to 12,816 recipients across the country, with $2.5 billion still budgeted for distribution.

What Are the New Compliance Implications?

There are allowable cost restrictions, requirements for reporting, etc. that are outlined by the SBA’s website, Applicant User Guide, and Frequently Asked Questions.

These materials provide a guide for how to be in compliance with the grant, including one particular detail which has big implications — if your company expended more than $750,000 of federal funds within its fiscal year, you will now be subject to one of two compliance requirements. Either:

  1. You must receive a Single or Program-Specific Audit consistent with Uniform Guidance Subpart F (2 CFR 200. 500 – 521); or
  2. You must receive a financial statement audit of the award in accordance with Government Auditing Standards (GAS)

Unless a business is already accustomed to receiving financial statement audits under GAS, we expect most to opt for Option 1.

To determine if your business exceeds this $750,000 threshold, let’s look at the methodology for recognizing this revenue.

The relevant guidance for this type of cost reimbursement federal award falls under U.S. GAAP ASU 2018-08Clarifying Guidance for Contributions Received and Contributions Made (Topic 958-605). This standard may be a new one to some business owners, and a familiar friend to not-for-profit entities. It clarifies that nonreciprocal revenue is to be recognized when the associated barrier to entitlement (condition) is met. We would consider there to be two conditions for this revenue to be recognized:

  1. You must receive your Notice of Award
  2. You must incur allowable costs, as defined by the legislation and the Uniform Guidance

As soon as you receive your notice of award, you may recognize all allowable costs incurred from March 1, 2020 through that date on that date, and defer what remains to be recognized as additional allowable costs are incurred.

The following examples will assist in determining when your business should record the revenue:

Revenue Recognition Example 1:

Facts:

  • Company with 6/30/2021 year-end receives a Notice of Award of an SVOG grant of $2 million dated 6/29/2021.
  • The company will a) use $500,000 of expenses incurred during March 2020 through June 2021, and then b) the remaining $1.5 million on expenses to be incurred July 2021 through December 2021.

Revenue Recognition:

  • Given the fact pattern, the company will record revenue as follows: a) the $500,000 of past expenses will trigger revenue recognized of $500,000 in June 2021 (while the expenses were incurred prior to June 2021, revenue cannot be recognized any earlier than the date of the Notice of Award); and b) the remaining $1.5 million of expenses will trigger revenue recognition in each month those expenses are incurred.
  • The result is that the company records $500,000 of SVOG grant revenue in FY2021 and $1.5 million of SVOG grant revenue in FY2022.

Revenue Recognition Example 2:

Facts:

  • Same fact pattern as Example 1, except the Notice of Award is dated 7/2/2021.

Revenue Recognition:

  • Given the fact pattern, the company will record revenue as follows: a) the $500,000 of past expenses will trigger revenue recognized of $500,000 in July 2021 (while the expenses were incurred prior to July 2021, revenue cannot be recognized any earlier than the date of the Notice of Award); and b) the remaining $1.5 million of expenses will trigger revenue recognition in each month those expenses are incurred.
  • The result is that the company records all $2 million of the SVOG grant revenue in FY2022.

Note that when you are calculating the allowable costs to apply to the SVOG, you will want to be careful not to “double dip” with other federal funding (see what this means and some exceptions in this Clark Nuber article).

If, after determining the revenue to be recognized for the SVOG, the total expenditures applied in your fiscal year exceed $750,000, you will be subject to one of the two audit requirements described above.

I Need a Single Audit — What Does the Process Look Like?

A Single Audit is a financial statement and federal awards’ audit of a non-federal entity that expends $750,000 or more in federal funds in one year. It is there to provide assurance to the federal government that an organization has adequate internal controls in place and is in compliance with program requirements.

Generally speaking, most types of for-profit commercial entities are excluded from the requirement to receive a Single Audit. However, clarifying guidance was released by the SBA which scoped the recipients of the SVOG into this requirement.

The auditor follows a prescribed testing approach as outlined in the Uniform Guidance (2 CFR 200) and the related Compliance Supplement. The Single Audit may be performed by your current audit firm if they meet the competency requirements in Government Auditing Standards.

Single Audits are generally due the earlier of 30 days after report issuance or within nine months after your fiscal year end. However an extension was granted by the Office of Management and Budget (OMB) for entities with a June 30, 2021 year-end. They have until September 30, 2022 to file their Single Audit results.

In planning for your Single Audit, the first thing your auditors will ask for you to provide is a Schedule of Expenditures of Federal Awards (SEFA). Your SEFA will include information regarding the entity’s SVOG award and any other federal awards expended during the fiscal year, including the related assistance listing number and amount expended, as calculated based on the revenue recognition guidance above.

Using the fact patterns found in the revenue recognition examples earlier in the article, let’s see how the entity’s costs translate to the SEFA.

SEFA Example 1:

  • This company will prepare its annual SEFAs using the amounts of revenue recognized. Accordingly, the FY2021 SEFA will report $500,000 for the SVOG and the FY2022 SEFA will report $1.5 million for the SVOG.
  • Assuming this company has no other federal awards, a Single Audit will only be required for FY2022.

SEFA Example 2:

  • This company will prepare its annual SEFAs using the amounts of revenue recognized. Accordingly, the FY2021 SEFA will report $0 for the SVOG and the FY2022 SEFA will report $2.0 million for the SVOG.
  • Assuming this company has no other federal awards, a Single Audit will only be required for FY2022.

Depending on the makeup of your SEFA once it is compiled, your entity may have one of two options in how to go about this audit:

  1. “Full Scope” Single Audit – In the case that your SEFA includes federal funding from more than one federal agency, a full scope Single Audit is required. Under the Uniform Guidance, your auditor is required to evaluate your SEFA to select “major programs” for testing, using a prescribed selection methodology. Under this methodology, it is more than likely that the SVOG will be the only major program that your auditors need to apply testing procedures over. Other funding that is not determined to be a “major program” by your audits will not require detailed compliance and control testing. One implication of having a “full scope” Single Audit performed is that this reporting must be accompanied by audited financial statements.
  1. Program-Specific Audit – You may find yourself in a position that the SVOG is the only federally funded grant you received during the year, in which case you may be eligible to receive a program-specific audit as defined in the Uniform Guidance (2 CFR 200.507). Under a program-specific audit, your auditor would have the same responsibility of testing the grant as a major program, without the additional step of needing to submit your financial statement audit.

The following flowchart clarifies if, and when, one of these audit types would come into play:

Flowchart describing SVOG audit requirements

What Does the Testing for a Major Program Entail?

In testing the SVOG as a “major program,” your auditor will likely be interested in testing the compliance and controls over the following compliance activities:

1. Allowable Costs and Activities

Are the costs and activities applied to the grant allowable as defined by legislation and the Uniform Guidance, and is this supported with adequate documentation?

Your auditor will be required to make selections from a detailed schedule of costs applied to determine if they all represent allowable costs and activities. To determine if a cost is allowable, the entity must refer to the SBA publications. The allowable costs under the SBA may be further constrained by limitations stipulated in the Uniform Guidance. For example:

  • While the SBA allows for all payroll costs to be applied to the grant, the Uniform Guidance (2 CFR 200.442) states that the costs of fundraising, including payroll, are not allowable unless the grantee obtains prior written approval from the awarding agency.
  • While the SBA allows for other ordinary and necessary business expenses, including maintenance costs, the Uniform Guidance disallows activities like lobbying (2 CFR 200.450), certain types of incentive compensation (2 CFR 200.430), and others.

Notes on Payroll Costs

Payroll costs are likely to be the most significant cost types applied to your SVOG. Payroll costs must be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated. These costs should:

  1. Be incorporated into the official records of the non-federal entity.
  2. Reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities;
  3. Encompass federally assisted and all other activities compensated by the non-federal entity on an integrated basis, but they may include the use of subsidiary records as defined in the non-federal entity’s written policy;
  4. Comply with the established accounting policies and practices of the non-federal entity; and
  5. Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one federal award; a federal award and non-federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.

2. Applicable Compliance Period

Were all costs applied incurred in the applicable compliance period?

The SBA stipulates that funds may be applied to costs incurred as early as March 1, 2020. If an entity receives only an initial round of funding from the SBA, funding may be applied to costs incurred through December 31, 2021. If an entity receives a supplemental round of funding, the entity may apply costs incurred through June 30, 2022.

Auditors will be looking to test a sample of costs to determine that they were incurred during the applicable time period. FAQ 141 from the SBA clarifies that the cash basis of accounting is allowable in addressing this compliance requirement.

3. Procurement Standards

Do applicable costs meet Procurement Standards as defined by the Uniform Guidance?

Some non-payroll costs are also subject to compliance with procurement standards. Costs not subject to procurement standards include rent, utility payments, scheduled mortgage or debt payments, state and local taxes and fees, operating leases in effect as of February 15, 2020, and insurance payments.

Costs typically subject to procurement standards include worker protection expenditures; payments to independent contractors; some administrative costs; and some advertising, production transportation, and capital expenditures related to producing a theatrical or live performing arts production. If any of these costs are in excess of the micro purchase threshold ($10,000), then there are prescribed methods for procurement at specified levels such as sealed bid, competitive, and noncompetitive proposal. Please see Clark Nuber’s OMB Uniform Guidance on Administrative Requirements – Update for Procurement Standards article for more detail on these types of procurements.

For purchases below the $10,000 threshold, the purchase may be awarded without competition if the entity determines the price to be reasonable. When determining if the entity has any purchases in excess of the micro purchase threshold, keep in mind the threshold applies to the aggregate of purchases from each vendor, not an individual invoice or purchase order.

4. Accurate and Timely Reporting

Is all reporting required under the legislation submitted accurately and timely?

Grantees are required to submit a SF-425 report upon closeout of the grant with the SBA, within 14 days of receiving notification. Your auditors will be interested in reviewing that reporting accurately reflects the details of how the grant was used.

My Single Audit is Done! Now What?

The results of your Single Audit will be uploaded to the Federal Audit Clearinghouse and are publicly available. This upload package includes the Single Audit Report and the related audited financial statements, if applicable.

What Do I Have to Consider for My Tax Return?

As is common with different relief programs implemented during the COVID-19 pandemic, special rules apply to the tax treatment and reporting of SVOG funds and expenses applied to SVOG.

Unless an exception applies, gross income for tax purposes includes all sources of income. In the case of SVOG funding, the Consolidated Appropriations Act of 2021 (PL 116-260) established that revenue received from the SVOG program is not included in gross income for federal income tax purposes.

In addition, expenses applied to SVOG are deductible on a federal income tax return, though taxpayers should use caution when using the same payroll costs for SVOG and the employee retention tax credit (ERTC). For all of 2020 and the first two quarters of 2021 the same payroll may be applied to both programs. The amount of the retention credit, however, is not eligible for a federal income tax deduction. Therefore, even if payroll costs are allowed as an income tax deduction under the SVOG program, those same costs may not be ultimately deductible on the taxpayer’s federal income tax return because of the ERTC rules.

Taxpayers with state income tax filing requirements should verify treatment of SVOG revenue and expenses with each state. There is no requirement that states follow the federal treatment of SVOG revenues and expenses, and states vary in approach.

For partnerships and S Corporations, SVOG is treated as tax-exempt income. Thus, SVOG increases a partner’s basis in its partnership interest, and, for S Corporations, increases a shareholder’s basis in the S Corporation’s stock. In addition, SVOG increases an S Corporation’s other adjustments account (OAA).

Following Up on Your SVOG

SVOG awards were an important financial lifeline to businesses during this tumultuous time in our economy. Now, it’s important to get the accounting of those funds correct. If you have any questions regarding how to recognize revenue, how to navigate a Single Audit, or anything else related to the SVOG you received, please reach out to a Clark Nuber professional.

Laura Becker, Audit and Assurance Manager at Clark Nuber

Laura Becker is a manager in Clark Nuber’s Audit and Assurance Services Group.

© Clark Nuber PS, 2022. All Rights Reserved.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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