Updated May 26th, 2020
On Monday, May 11th, 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. You can view a full video of the webinar here.
Due to lack of guidance from the SBA, there were some questions left unanswered during the webinar. The SBA has recently released their PPP Forgiveness Application, which includes instructions and clarifies some of these questions. For a copy of the forgiveness application from the SBA, see here. For your convenience, we have recapped the conversation below and responded to frequently asked questions, including the recent clarifications from the SBA. For a copy of the forgiveness application from the SBA, see here.
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. The SBA has recently clarified that any loan under $2 million will be deemed to have been made in good faith.
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 18th.
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 notconsidered 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). Retirement contributions, State and local taxes and health insurance for owners/partners/Sole proprietors are not forgivable payroll costs.
- 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).
- There is a maximum of $15,385 of forgiveness (8 weeks of 100k annualized) per individual. If the same individual is an owner of 3 business, he can only receive forgiveness once
- 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? Yes
- Is overtime pay allowed for employees? Is there a cap on the number of hours per employee based on other pay periods? Yes
- 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? Yes, incentive or hazard pay is a forgivable payroll expense, as long as it was paid during the eight-week period
- 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. QTR is not addressed on the newly released forgiveness form. We await further guidance from the SBA.
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?
The SBA has now clarified that Payroll expenses do not have to be both “paid and incurred” in the exact eight week period (56 days) that begins on the day that the first loan proceeds are received. The borrower is allowed to select the “Alternative Payroll Covered Period,” to coincide with their payroll schedule. The alternative pay period begins on the first day of the borrower’s first pay period following the date that they receive their first PPP funds and goes for the next 8 weeks.
For example, if you received your PPP funds on May 7, 2020, and the first day of your next pay period is May 15, 2020, you may elect to count the payroll costs for the 8-week period beginning May 15, 2020, rather than from May 1. In other words, you can start your 8 week period for payroll costs on your next regular scheduled payroll date after you receive the funds. This guidance ensures that companies will get 8 full weeks to use their loan for payroll costs, and get forgiveness for it.
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?
Yes. According to the forgiveness application, Payroll is considered paid on the day the paychecks are distributed or the employer originates the ACH transaction. Therefore, you could receive PPP money on May 15 and immediately pay – as part of your regular payroll process – wages that had been earned by the employees for the previous two weeks, and include the amounts in the forgiveness calculation because the amounts have been paid within your 8 weeks.
What if my 8 week period ends on June 23, but I don’t usually process payroll for that period until June 30? Should I accelerate my last payroll (which is already incurred) to ensure that it falls in the 8-week period?
You don’t have to accelerate, and it will still be forgiven. This is because payroll costs incurred for your last pay period of the 8-week period are eligible for forgiveness as long as they are paid no later than the next regular payroll date.
Can I pay ahead for benefits (such as medical) in order to maximize the forgiveness?
We await further guidance.
Can I pay the previous month’s rent if I haven’t paid it yet? Yes
Can I pay May’s rent if we received funds on May 7th?
Yes. Since the rent will have been paid during the 8 week period, it will qualify for forgiveness.
Note: The “covered period” for expenses other than payroll remains the 8 week period from when the funds were received by the borrower, regardless of whether they chose the Alternative period for payroll purposes. Therefore, if you elect the Alternative period, you will have two different 8 week periods to keep track of.
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.
- For non-payroll costs such as mortgage interest, rent and utilities, to qualify for forgiveness, these expenses must either be: 1) paid during the 8-week covered period, or 2) incurred during the 8-week period, and paid by its next regular due date, even if that due date is outside the 8-week period.
- Mortgage Interest: Amounts paid in interest on a mortgage obligation 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 40+ hours a week), plus
- B) Total amount of hours worked per week by part-time employees, divided by 40 (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
- 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.
- The employer will not be penalized for reductions in the following circumstances: (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the 8 weeks which was rejected by the employee; and (2) any employees who (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested a reduction of their hours. Employer will, however, still need to meet the 75% payroll cost requirement. They just won’t be penalized for reduction of headcount or salary. In order to prevent being penalized for reduction of headcount or salary in such cases, the SBA is now requiring that the employer inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. If the employee voluntarily requested a schedule reduction, the employer should keep documentation of such request.
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.
- 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.
