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PPP Loan Forgiveness PPP Loan Forgiveness May 8, 2020 withum.com Presen ters Daniel Mayo , JD, LLM James Trubenbach‐Byrne, CPA Principal, National Lead, Federal Manager, Not‐for‐Profit, Tax Policy Government, and Education withum.com 2 Loan Forgiveness • Loan Forgiveness • Includes all eligible expenses paid during the 8‐week period after the loan is made • Eligible expenses: • Payroll costs (up to $100K annualized salary/year/employee, or $15,385 over 8 weeks) • Interest on mortgages incurred before 2/15/2020 • Rent under a lease in force before 2/15/2020 • Utilities for which service began before 2/15/2020 (e.g., electric, gas, water, transportation (e.g., gas), telephone, and internet) . Cannot exceed the principal amount of the loan . No more than 25% of amount forgiven can be for non‐payroll costs . Amount of forgiveness is reduced if there are certain headcount or wage reductions . Amount is tax‐free to the borrower . Borrower will need to document the number of FTEs and pay rates, as well as the use of funds for all purposes . Lender has 60 days to made a decision after it receives a completed application for forgiveness withum.com 3 Payroll C osts Defined . Payroll Costs (paid/incurred during the 8‐week covered period) . Employee . Wages, salary, commissions, or tips (up to cap of $100K/year/person) . Does NOT include payments to independent contractors . Likely includes imputed income for fringe benefits (e.g., housing, tuition, etc.) . Vacation, parental, family, medical, or sick leave . Dismissal or separation payments . Payments for group health care benefits, including insurance premiums . Retirement benefits (e.g., employer 401(k) match) . Employer state or local taxes on compensation . Sole proprietor or independent contractor (up to $100,000 annually) • Wage; commission; income; net earnings from self‐employment –From 2019 Schedule C (line 31) even if not yet filed with IRS . Partners in a partnership • Net earnings from self‐employment, computed from box 14a (reduced by certain items) multiplied by 0.9235, up to $100K per partner . Excludes (i) employer’s share of Federal employment taxes and federal income tax withholding, (ii) compensation to an employee whose principal place of residence is outside the United States, and (iii) qualified sick leave and family leave under the Families First Coronavirus Response Act withum.com 4 Allow able Uses vs. Forgivable Expenses Allowable Uses (during the 2‐year term of the loan) Forgivable Expenses (during the 8‐week period) 1 Payroll costs (including salary, wages, retirement benefits, group Same (note: salary cap is $15,385 for the 8‐week period) health care benefits, state and local employment taxes, etc.) for employees whose principal place of residence is in the U.S. 2 Interest on business mortgage obligations (but not prepayments Interest on business mortgage obligations (but not prepayments or or principal payments) on real or personal property principal payments) on real or personal property, if the loan was incurred before 2/15/2020 3 Business rent for real and personal property Business rent for real and personal property, if the lease was in effect before 2/15/2020 4 Business utilities (including electricity, gas, water, transportation, Business utilities (including electricity, gas, water, transportation, telephone and internet) telephone and internet), if the service was in effect before 2/15/2020 5 Interest in any other debt obligations incurred before 2/15/2020 None 6 Costs related to the continuation of group health care benefits None during periods of paid leave, and insurance premiums withum.com 5 Exam ple – non-payroll costs exceed 25% Max that can be forgiven Repayment Obligation Loan amount $100,000 Payroll during 8 weeks 60,000 $60,000 $‐0‐ Rent, Utilities and Interest 30,000 (60K/75% =$80,000 less $60,000) = $20,000 $10,000 Total spent 90,000 Loan amount not spent 10,000 $10,000 TOTALS $80,000 $20,000 withum.com 6 Loan Forgiveness Reductions . Reduction based on headcount reduction . Multiply total eligible expenses paid during 8‐week period after loan is made (covered period) by the following fraction: • Average number of FTEs per month during 8‐week period after the loan is made, divided by • At the election of borrower: . Average number of FTEs per month during 2/15/19 to 6/30/19, or . Average number of FTEs per month during 1/1/20 to 2/29/20 . Reduction based on wage reduction . Reduction amount per employee is equal to: • the amount by which total salary and wages paid during the covered period is less than 25% of total wages paid during most recent full quarter before the covered period . Although unclear, calculation of the reduction applies only to employees making less than $100K/year . Can restore headcount and wages by 6/30/2020 to account for any reductions made between 2/15/2020 and 4/26/2020 . FAQ #40 (May 3, 2020)– An IFR will be issued to exclude from the reductions any laid‐off EE who rejects a written offer of employment at a comparable wage, and the ER documents the rejection • Example: 100 EEs –2 laid off and reject offer, and 2 others hired; is the FTE count effectively 102? What about furloughed EEs? withum.com 7 Key Dates – assu m e loan issu ed May 1, 2020 . For expenses on loan application . Use either calendar 2019 or 12 months ended 3/31/20 . For expenses used during 8‐week period after loan is received (5/1/20 to 6/25/20) . Reduction of forgiveness based on: . Reduction in # of employees • Average # of FTEs from 5/1/20 to 6/25/20 compared to either: . Average number of FTEs per month during 2/15/19 to 6/30/19, or . Average number of FTEs per month during 1/1/20 to 2/29/20 . Reduction in wages (more than 25% per employee) • Salaries of employees from 5/1/20 to 6/25/20 compared to • Most recent full quarter before loan (1/1/20 to 3/31/20) . Reduction eliminated by re‐hires . Average # of FTEs during 2/15/20 to 4/26/20 compared to 2/15/20 . Salaries from 2/15/20 to 4/26/20 compared to 2/15/20 . If cured by 6/30/20, then there is no reduction in the forgiveness amount withum.com 8 How Does a Sole-Proprietor Calcu late Forgiveness? . Amount up to full loan and accrued interest can be forgiven based on SPEND • For employees – include salaries up to $100,000 annualized (maximum of $15,385 for 8 weeks), plus benefits, retirement contributions, and state/local taxes imposed on payroll • For owner compensation –use 2019 Schedule C (Line 31 amount x 8/52) • Payments of interest on mortgage of real or personal property incurred before 2/15/20 to the extent deductible on Sch. C • Includes interest on vehicles • Rent payments on lease agreements dated before 2/15/20 to the extent deductible on Sch. C • Includes lease payments on vehicles • Utility payments under service agreements dated before 2/15/20 to the extent deductible on Sch. C • Includes costs for gasoline for vehicles withum.com 9 What would cau se th e loan not to be fu lly forgiven? . Based on # of FTEs (reduces by a % of the amount spent on forgivable expenses) • If the average number of FTEs during the 8‐week period is less than the average # of FTEs during either the period 2/15/19 to 6/30/19 or 1/1/20 to 2/29/20 (borrower’s choice) AND . Based on reduction in wages (reduces by a $ amount) • Any reduction in total salary or wages of any employee during the 8‐week period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the loan origination withum.com 10 Frequently asked questions The SBA continues to release interim final rules that address various aspects of the PPP. Withum has compiled a running list of uncertainties regarding loan forgiveness. It can be found at https://www.withum.com/resources/ppp‐and‐the‐enigma‐of‐loan‐forgiveness/#1usesvsexp withum.com NOT-FO R-PRO FIT CON SIDERATIONS withum.com Key Term s and Takeaw ays • Cost reimbursement: Award/contract in which an Organization receives reimbursement for costs incurred for specific program. Contract may include overhead costs in budget or overhead may be charged as an indirect cost rate • Fee‐for‐service: Award/contract in which an Organization receives reimbursement based on quantity of service provided • Agency cannot charge both the PPP and a funder for the same costs (including payroll and overhead costs) • Guidance has been provided by the SBA that PPP loans made to NFPs will not be subjected to single audit • However, loans made to NFPs under the EIDL program are considered a direct loan disbursed from the SBA and will be considered federal assistance. withum.com 13 How Do Em ployees Covered by Contracts/Grants Affe ct Headcount . Headcount for covered employees should be based on an Organization’s initial PPP application (but adjusted to FTEs) • Consistency is the key • For entities that excluded employee payroll costs supported by grants/contracts in loan application, they should exclude them in the forgiveness calculation • For entities that claimed all payroll costs in application, they should include them in the forgiveness calculation • Example: entity A has 100 total employees of which 20 were supported by a Federal award. Entity claimed costs for the 80 uncovered employees on initial application. Therefore, 80 should be used as base headcount for loan forgiveness withum.com 14 What C osts Are Reasonable to Charge to PPP .
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