8/22/2022 Update: This article was originally published on 1/24/2022. It has been updated to reflect the most current information available at this time.
If you are reading this article, you may be one of the thousands of business owners who received a Shuttered Venue Operators Grant (SVOG) in 2021 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 July 5, 2022, $14.6 billion has been disbursed in initial and supplemental grants to 13,011 recipients across the country, with $1.4 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. Additionally, the SBA has published a number of webinars to further clarify these requirements and distribute practical guidance on how to remain in compliance with your grant.
One of these requirements has big implications — if your company recognized more than $750,000 in revenue from federal funds within its fiscal year, you will need an audit. The SBA allows three options to meet the audit requirement. Either:
- You must receive an audit of the company’s annual financial statements
- You must receive a Single or Program-Specific Audit consistent with Uniform Guidance Subpart F (2 CFR 200. 500 – 521) and Government Auditing Standards (GAS); or
- You must receive a Compliance Examination under AT-C 315, Compliance Attestation, GAS, and additional guidance issued by the SBA
Unless a business is already accustomed to receiving financial statement audits under GAS, we expect most to opt for Option 3.
To determine if your business exceeds this $750,000 threshold, let’s look at the methodology for recognizing this revenue. The SBA stipulates that, in recognizing SVOG revenue, the cash basis of accounting and the accrual basis of accounting are both acceptable methods, however, the method used must align with the business’ normal accounting practice:
Accrual Basis Revenue Recognition:
The relevant guidance for this type of cost reimbursement federal award falls under U.S. GAAP ASU 2018-08, Clarifying 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:
- You must receive your Notice of Award
- 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:
- 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.
- 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:
- Same fact pattern as Example 1, except the Notice of Award is dated 7/2/2021.
- 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.
Cash Basis Revenue Recognition
If your business normally practices cash basis accounting, the determination of when to recognize revenue is simpler: Recognize revenue on the date the cash is received. For some, this may require a business to recognize revenue in two fiscal years.
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 three audit requirements described above.
Which of These Engagement Types is Right for My Company?
This table provides an overview of each engagement type as it relates to the SVOG:
|Requirement||Financial Statement Audit||Single Audit||Program-Specific Single Audit||Compliance Examination|
|Who do I need to engage?||An auditor||An auditor that is qualified to perform Single Audits and GAS audits||An auditor that is qualified to perform Single Audits and GAS audits||A CPA that is able to perform compliance examinations and is qualified to perform GAS engagements|
|What is in scope?||An audit of the annual financial statements of your company||An audit of your financial statements (see left), your SEFA, and the compliance and controls over any major programs selected from the SEFA||An audit of compliance and internal controls over the SVOG||An examination of compliance over the SVOG|
|Pros||The process of the audit and resulting audit report is generally more useful to the client||The process of the audit and resulting audit report is useful if you intend to solicit additional federal funding in the future||Less costly than a full Single Audit. The process of the audit and resulting audit report is useful if you intend to solicit additional federal funding in the future||It is likely that less time will be devoted to testing internal controls over disbursements allocated to the SVOG|
|Cons||Typically more costly than a program-specific audit or compliance examination||Typically the most costly option||The process may be more involved than a Compliance Examination. Auditors are required to test internal controls over compliance in addition to compliance itself||Likely a greater volume of disbursements will be selected for compliance testing|
|When is this an option?||In all cases for for-profit entities||In all cases for for-profit entities||When only one federal award (the SVOG) was expended during the fiscal year||In all cases for for-profit entities|
Unless a business is already accustomed to receiving financial statement audits, we expect most to opt for a Compliance Examination.
I Need a Compliance Examination — What Does the Process Look Like?
The first step is to identify and engage with a qualified practitioner who can perform a Compliance Attestation under AT-C 315 and Government Auditing Standards.
In planning for your Compliance Examination, the first thing your practitioner will ask for you to provide is a detailed schedule of costs you intend to apply to the SVOG during the year under examination. Your practitioner’s job will be to select a number of transactions from that schedule to test for your compliance with the following two compliance requirements stipulated by the SBA:
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?
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:
- Be incorporated into the official records of the non-federal entity.
- Reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities;
- 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;
- Comply with the established accounting policies and practices of the non-federal entity; and
- 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. Period of Performance
Were all costs applied incurred in the applicable project 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. This is referred to as your “project period.”
Practitioners 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.
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.
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.
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