A big Thank you to Roth & Co for their partnership with us in keeping people up-to-date with what they need to know to deal with their financial situation during the COVID-19 outbreak.
On Monday, May 12th, Roth&Co hosted a webinar on the topic of maximizing Paycheck Protection Program loan forgiveness. It was presented by Ahron Golding, our in-house tax controversy attorney, and moderated by Zacharia Waxler, Roth&Co Co-Managing Partner. There were opening remarks by Rabbi Abba Cohen, Vice President for Government Affairs and Washington Director and Counsel of Agudath Israel of America.
For your convenience, we have recapped the conversation below and responded to frequently asked questions.
Please note that we are sharing what we currently know about PPP forgiveness, however we are still waiting on guidance regarding the many unknowns. This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice.
Secretary of Treasury Steven Mnuchin has indicated that loans over $2 million will be reviewed or audited for compliance. With this in mind, we recommend keeping detailed documentation as you make use of PPP funds to ensure you adhere to the guidelines and maximize forgiveness.
Determining & Documenting “Necessity”
The purpose of the PPP Program is to assist businesses and nonprofits facing financial difficulty with retaining workers, maintaining payroll or making mortgage interest, lease and utility payments. Each PPP applicant is required to sign a certification that specifies that: “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” The SBA guidance further clarifies that this takes into account current business activity and other sources of liquidity to support operations in a way that is not significantly determinantal to the organization. We therefore recommend documenting why the loan is necessary. This could be a memo or board meeting minutes where cashflow and forecasting are reviewed and makes clear that financial assistance to maintain operations is needed.
If, upon further consideration, you determine that the PPP loan you received is not necessary under these guidelines, the funds can be returned under “safe harbor” amnesty until May 14th.
UPDATE: As of May 13th, the SBA has issued guidance that they will not audit any loans under $2 Million and will assume that certification was valid.
Note: PPP loan amounts may become public information as per the Freedom of Information Act, however this is not the case with tax information.
Maximizing Forgiveness – In General
The following guidelines were issued to ensure full or maximum forgiveness:
· A minimum of 75% of received funds must be utilized for payroll.
· The remaining 25% of the funds can be used to pay mortgage interest, rent, and utilities.
· For full forgiveness, businesses must maintain employee headcount and salary levels.
· Eligible expenses need to be incurred and paid over the eight-week period beginning from the day of the first PPP loan disbursement.
Payroll Costs: The Details
· Payroll includes salary, vacation, leave, health and retirement benefits. There is a $100,000 annual salary maximum per employee (which translates to $15,385 maximum for the 8 weeks) allowed for forgiveness.
· Shuttered businesses may pay employees that are not currently working. They are considered full-time employees (FTE) if you pay full wages.
· Wages paid as parsonage is a payroll cost, and is considered cash compensation which is subject to the $100,000 annual salary cap.
· The $100,000 annual salary cap is only a cap on cash compensation. Therefore employee benefits such as retirement contributions and health insurance are not limited by the $100,000 cap and are allowable as an additional payroll cost.
· Businesses may use PPP funding to pay employees’ sick leave, unless they are already taking a credit for Family Medical Leave or Emergency Paid Sick Leave made available under the Family First Coronavirus Response Act.
· Payments to 1099 contractors are not considered payroll costs.
· Sole Proprietors (reported on Schedule C) can take a salary, which is also subject to the $100,000 annual cap (resulting in $15,385 maximum forgiveness for the 8 weeks).
· Cash distributions to active partners reported on a K-1 are allowable so long as it is allocated during the eight-week period (subject to same $100,000 annual cap).
· If a husband and wife are both owners, they are each most likely subject to their own $100,000 annual salary cap.
The Unknowns: What SBA Has Yet to Clarify
The following questions and considerations do not have clear guidance from the SBA.
· Can we give raises or bonuses in order to reach the 75% payroll criteria for forgiveness?
· Is overtime pay allowed for employees? Is there a cap on the number of hours per employee based on other pay periods?
· Is an employer allowed to offer incentives to employees to entice them to return to work? Incentive pay has a good chance of being forgiven so long as it was paid during the eight-week period and documented correctly with concrete reasons as to why it was necessary.
· How is Qualified Tuition Reduction considered? This has not been clarified by the SBA. We have reason to believe that this falls under “other fringe benefits,” and would be included as an eligible payroll expense.
Expenses Paid & Incurred in the Covered Period
The statute states that, “costs incurred and payments made during the covered period” are eligible for forgiveness. How do we determine “incurred and paid” for the purpose of forgiveness?
This would answer questions like:
· If I receive funds on May 15th, can I use those funds to make payroll which covers the preceding 2 weeks?
· Can I pay ahead for benefits (such as medical) in order to maximize the forgiveness?
· Can I prepay my employees for future pay periods?
· Can I accelerate my last payroll (which already incurred) to ensure that it falls in the 8-week period?
· Can I pay a year’s worth of retirement benefits during the 8 weeks?
· Can I pay the previous month’s rent if I haven’t paid it yet?
· Can I pay May’s rent if we received funds on May 7th?
The safest approach: Assume that costs needs to have been both incurred and paid in the covered eight-week period to be eligible for forgiveness. We are waiting on more guidance.
Other Expenses (up to 25%)
· The remaining 25% of the funds can be used to pay mortgage interest (not including prepayment), rent, and utilities in force before February 15th, 2020.
· Mortgage Interest: Amounts paid in interest on a mortgage obligation on real property that the company incurred in the ordinary course of business before February 15th, 2020.
· Rent: Rent paid pursuant to a lease agreement in force prior to February 15th, 2020.
· Utility payments: Payment for services including the distribution of electricity, gas, water, transportation, telephone and internet access for which service began before February 15th, 2020. This also includes payments of a business’s car leases, gas, cellphones, Internet and landline bills.
· Keep away from anything that looks like business expansion.
Forgiveness Reduction Issues
For full forgiveness, businesses must maintain prior employee headcount and 75% of salary levels.
How to calculate your prior headcount:
Step 1: Calculate your average full-time equivalent (FTE) headcount by adding:
A) Total amount of full-time employees (defined as those working 30+ hours a week), plus
B) Total amount of hours worked per week by part-time employees, divided by 30 (to add up the part timers)
Step 2: Choose the time period with the lower average FTE headcount:
A) February 15th – June 30th 2019
B) January 1st – February 29th 2020
You must have the same level now, from what you had prior (based on the above calculation).
· If an employer rehires previously laid-off or furloughed employees by June 30th, the employer will not be penalized for the reduction. However, employers should keep in mind that they still need to ensure that 75% of their loan be paid towards payroll costs, to maximize forgiveness
· Businesses may “replace” an employee to maintain headcount. The total number of employees needs to remain the same – not the employees themselves
· If an employer offers to rehire a previously laid-off employee, but the employee declines (in writing), PPP loan forgiveness will not be affected. The employer will, however, still need to meet the 75% payroll cost requirement. They just won’t be penalized for reduction of headcount.
· Employers may not reduce the salaries of those earning less than $100,000 annually by more than 25%. However, they can cure that issue by raising the salaries back up before June 30th.
Adding It All Up: Financial & Tax Considerations
Here are some additional details on what can and cannot be included in your expense totals:
· Employer-side payroll taxes are not forgivable.
· Accrued interest on the loan is forgivable. If the loan is forgiven, the employer will owe $0 in interest.
· The IRS has currently ruled that payroll and other expenses paid which eventually lead to forgiveness, will not be deductible as business expenses by the employer. Members of Congress are currently attempting to make a rule change to allow the expenses to be deductible. Stay tuned.
· The CARES Act permits employers to defer the payment of the employer’s portion of payroll taxes. The employer will need to deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022. If an employer receives forgiveness on a PPP loan, it is no longer eligible for this deferral. However, the deferral is still allowed until the date of forgiveness. At that point, employers will need to make regular payroll tax deposits.
Loan Forgiveness Timeline
The lender is required to issue the loan forgiveness decision within 60 days from the application of forgiveness.
We will continue to keep you updated as more information becomes available.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.