program (ppp) loan forgiveness update on paycheck protection · • extended safe harbor date of...

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Update on Paycheck Protection Program (PPP) Loan Forgiveness

Aaron M. Boker, CPA | June 25, 2020

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Paycheck Protection Program (PPP)

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Program Overview

• Maximum loan amount: – 2.5x average monthly payroll costs – Use payroll costs from 2019 or 12 prior months.– For businesses not operational in 2019: 2.5x the average total monthly payroll costs incurred

for January and February 2020. – Can’t exceed $10 million

• Loan is directly funded with a bank; available through June 30, 2020.



Included Payroll Costs for Employers

The sum of payments of any compensation with respect to employees that is: • Salary, wages, tips, commission, or similar compensation. • Guaranteed payments or profits distributions to partners (LLC’s and partnerships)• Payment for vacation, parental, family, medical, or sick leave. • Allowance for dismissal or separation. • Payment required for provisions of group health care benefits, including insurance premiums

for employees• Payment of any retirement benefit. • Payment of state unemployment tax on compensation of employee.



How to Calculate the PPP Loan

Eligible PPP Loan

sum of wages and benefits, including health insurance, dental insurance, other allowable payroll costs, state unemployment taxes, and all matched pensions

12renumeration for any employee in excess of $100,000

2.5



How to Calculate the PPP Loan: Self Employed Individuals or Sole Proprietors

Eligible PPP Loan

2019 Self Employed Earnings 12renumeration for any employee in excess of $100,000

2.5



Other Items to Consider for PPP Loan

• Need to demonstrate “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”

• Will need to provide a good faith certification that the loan funds are used to retain workers and maintain payroll or make mortgage interest, lease payments, and utility payments.

• Loan payments will be deferred for six months.

• No collateral or personal guarantees are required.


PPP Loan Forgiveness (Original Rules)


How Much Can Be ForgivenA borrower is eligible for loan forgiveness equal to amount borrower spent on following items during the eight-week “covered period” that starts on the day of the PPP Loan Disbursement:

• Payroll costs (at least 75% used for payroll and using same definition of payroll costs used to determine loan eligibility).

• Interest on mortgage obligation incurred in ordinary course of business, originated prior to Feb. 15, 2020.

• Rent on a leasing agreement (real property or personal property), originated prior to Feb. 15, 2020.

• Payments on utilities, such as electricity, gas, water, transportation, telephone, and internet.

• The loan forgiveness cannot exceed principal.



Reduction Based on Reduction in Salaries/Hourly Wages

PAYROLL COSTS during “Covered Period”

The amount of any reduction in wages (for employees making less than $100,000) that is greater than 25% compared to their most recent full quarter prior to the “Covered Period” of the loan

• Must prepare this calculation for each individual employee• Loan forgiveness is reduced dollar for dollar by any wage reduction in excess of the 25% wage reduction


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Salaries/Hourly Wages Reduction Safe Harbor

Loan Forgiveness Will Not Decrease Based on Salaries/Hourly Wage Reduction if:

• An employee’s average annual salary or hourly wage decreased between February 15, 2020 and April 26, 2020

AND

• If by June 30, 2020, the borrower restores the employee’s average annual salary or hourly wage to February 15, 2020 level



Reduction Based on Reduction of Number of FTEs

Average number of full-time equivalents (FTEs) during the eight-week covered period

Option 1:Average number of FTEs from Feb. 15, 2019 to June 30, 2019

Option 2:Average number of FTEs from Jan. 1, 2020 to Feb. 29, 2020

• FTE is defined as someone who works 40 or more hours per week

• Simplified Method Option: all FTEs who work fewer than 40 hours per week are assigned a value of .5

Option 3:Seasonal employer: average number of FTEs during any consecutive 12-week period between May 1, 2019 and September 15, 2019

FTE Reduction Percentage



FTE Reduction Safe Harbor

Loan Forgiveness Will Not Decrease Based on FTE Reduction if:

• Employer terminated employees between February 15, 2020 and April 26, 2020

AND

• If by June 30, 2020, the borrower restores their full-time equivalent (FTE) head count and wages to February 15, 2020 level



PPP Loan Forgiveness Calculation

• Step 1: Total the Payroll and Nonpayroll Costs

• Step 2: Reduce Payroll and Nonpayroll Costs by any Salary/Hourly Wage Reductions

• Step 3: Multiply the FTE Reduction Percentage by Sum of Step 2 = Modified Total

• Step 4: Loan Forgiveness Equals the Lesser of:– Modified Total– PPP Loan Amount– Payroll Costs divided by .75


Paycheck Protection Flexibility Act of 2020


Paycheck Protection Flexibility Act of 2020 Summary

• Signed into law on June 5, 2020

• Extension of “Covered Period” from 8 weeks to 24 weeks– Can still elect to use the original 8-week period if you receive a PPP loan before the Act was

enacted

• Extended safe harbor date of December 31, 2020 to restore salaries and FTE’s– May still be June 30th if you elect to use the original 8-week period but unlikely

• Mandatory payroll spending percentage decreased from 75% to 60%



Paycheck Protection Flexibility Act of 2020 Summary Continued

• Extended loan maturity date from 2 years to 5 years– Only applicable to loans that were issued after the Act was passed– Might be made universal to all loans

• Due date to apply for loan forgiveness is 10 months from the last day of the “Covered Period”



Reduction Based on Reduction in Salaries/Hourly Wages

PAYROLL COSTS during “Covered Period”

The amount of any reduction in wages (for employees making less than $100,000) that is greater than 25% compared to their most recent full quarter prior to the “Covered Period” of the loan

• Must prepare this calculation for each individual employee• Loan forgiveness is reduced dollar for dollar by any wage reduction in excess of the 25% wage reduction



Salaries/Hourly Wages Reduction Safe Harbor

Loan Forgiveness Will Not Decrease Based on Salaries/Hourly Wage Reduction if:

• An employee’s average annual salary or hourly wage decreased between February 15, 2020 and April 26, 2020

AND

• If by December 31, 2020, the borrower restores the employee’s average annual salary or hourly wage to February 15, 2020 level



Reduction Based on Reduction of Number of FTEs

Average number of full-time equivalents (FTEs) during the 8 week or 24 week covered period

Option 1:Average number of FTEs from Feb. 15, 2019 to June 30, 2019

Option 2:Average number of FTEs from Jan. 1, 2020 to Feb. 29, 2020

• FTE is defined as someone who works 40 or more hours per week

• Simplified Method Option: all FTEs who work fewer than 40 hours per week are assigned a value of .5

Option 3:Seasonal employer: average number of FTEs during any consecutive 12-week period between May 1, 2019 and September 15, 2019

FTE Reduction Percentage



FTE Reduction Safe Harbor

Loan Forgiveness Will Not Decrease Based on FTE Reduction if:

• Employer terminated employees between February 15, 2020 and April 26, 2020

AND

• If by December 31, 2020, the borrower restores their full-time equivalent (FTE) head count and wages to February 15, 2020 level



PPP Loan Forgiveness Calculation

• Step 1: Total the Payroll and Nonpayroll Costs

• Step 2: Reduce Payroll and Nonpayroll Costs by any Salary/Hourly Wage Reductions

• Step 3: Multiply the FTE Reduction Percentage by Sum of Step 2 = Modified Total

• Step 4: Loan Forgiveness Equals the Lesser of:– Modified Total– PPP Loan Amount– Payroll Costs divided by .60


PPP Loan Forgiveness: Various Items


Other Items of Note: Payroll Costs

• Payroll costs paid OR incurred (not both) during the 8 or 24 week period are eligible for forgiveness

• Payroll cost incurred during the last pay period of the covered period may be considered “paid” if it’s paid after the 8 or 24 week period

• For each individual employee, total compensation eligible for forgiveness can’t exceed $15,385 for a 8-week period or $46,154 for a 24-week period

• Can use an “Alternate Payroll Covered Period” for the payroll costs– Employers with a bi-weekly (or more frequent) payroll schedule may elect to start the 8-week or

24-week covered period for PAYROLL ONLY on the first day of their first pay period following the loan disbursement



Other Items of Note: Owner Compensation Payouts

• Any amounts paid to owner-employees, a self-employed individual or general partner during a 8-week period are capped at the lesser of $15,385 or the “eight-week equivalent of their applicable compensation in 2019.”

• Any amounts paid to owner-employees, a self-employed individual or general partner during a 24-week period are capped at the lesser of $20,833 or the “2.5 month equivalent of their applicable compensation in 2019.”

• Can’t include health insurance or retirement benefits for owners in forgivable payroll costs

• Payments to furloughed employees, bonuses, and hazard pay are eligible payroll costs



Other Items of Note: FTE’s

• Any FTEs that were offered the opportunity to be rehired and decline won’t count towards the FTE reduction if ONLY their position was not filed by a new employee

• FTE figure won’t be reduced for any employee that is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction

• Employers are not double penalized on both the salary reduction and FTE reduction if a specific employee’s hours get reduced



Other Items of Note: Self Employed Individuals or Sole Proprietors

• PPP Loan = 2.5 months of 2019’s self employed earnings

• PPP Loan Forgiveness

– 8-week period: Forgiveness equals 8 weeks of 2019 self employed earnings as this is deemed as the “presumptive salary”

– 24-week period: Forgiveness equals 2.5 months of 2019 self employed earnings



Other Items of Note: Nonpayroll Costs

• Nonpayroll costs are eligible for forgiveness if:– Paid during the covered period OR– Incurred during the covered period and paid on or before the next regular billing date

• Prepayments of mortgage interest are not eligible for forgiveness; payments of principal are also not eligible for forgiveness



Other Items of Note: Various

• PPP loan forgiveness is reduced by any EIDL advances that are received

• The PPP loan and EIDL must be used for different purposes if you receive funding for both loans

• Can’t use PPP money to fund wages covered by the Families First Coronavirus Response Act (FFCRA)



Tax Implications: PPP Loan Forgiveness

• Any loan forgiveness is non-taxable income at the federal level– Goes from a liability on the books to income when the loan is forgiven

• Can not deduct any expenses that are funded by forgiven loan proceeds– Don’t know the timing of when the expense become non-deductible for tax purposes


PPP Loan Forgiveness Application


Loan Forgiveness Application• Revised Form 3508 takes into account changes from the Paycheck Protection Program Flexibility Act

• Can fill out the shorter Form 3508EZ if one of the three categories apply:

1. Must be self-employed and have no employees; OR

2. Did not reduce the salaries or wages by more than 25% AND did not reduce the number of employees or average hours paid between January 1, 2020 and the end of the covered period; OR

3. Did not reduce the salaries or wages by more than 25% AND unable to operate during the covered period at the same level of busines activity before February 15, 2020 due to compliance with health requirements*

* Need more guidance



Loan Tracking

• Keep the PPP loan proceeds segregated (e.g. separate bank account)

• Track the usage of the PPP loan proceeds carefully (e.g. journal or account ledger)

• Maintain appropriate documentation (receipts, payroll records)



What Will Lenders Need to Approve Loan Forgiveness• FTEs

– Documentation to confirm number of FTE’s for elected prior period (e.g. payroll tax fillings, individual wage reports, unemployment insurance filings)

– 3508EZ: support for average number of FTE’s on January 1, 2020 and at the end of the covered period

• Payroll Costs– Bank account statements– Payroll tax filings, individual wage reports, unemployment insurance filings– Canceled checks for contributions to health insurance/retirement plans

• Nonpayroll Costs– Copy of loan amortization schedules– Copy of lease agreements– Account statements for utilities, mortgages– Canceled checks

• Borrower must attest that it has accurately verified the payments were for forgivable costs


Conclusion and Q&A


Key Things To Consider For Planning

• Do I use a 8-week period or a 24-week period?

• What will be my timeline for putting employees back on payroll and spending the PPP loan funds?

• Will I need the December 31, 2020 safe harbor date to restore compensation levels and FTE’s?

• When do I apply for the loan forgiveness?



Who to Contact with Questions

Aaron BokerPartner, Tax Services Group

[email protected]


mailto:[email protected]

Any Questions?

Thank you for your time.

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