(PPP) Loan Forgiveness

Birmingham Business Alliance COVID-19 Re-opening the Local Economy

Fred McCallum Birmingham Business Alliance Interim President and Chief Executive Officer Retired President, AT&T Alabama 505 20th Street North, Suite 200 Birmingham, AL 35203 (205) 324-2100 [email protected]

2 Tax Implications of Paycheck Protection Program (PPP) Loan Forgiveness

Steve Smith BMSS Advisors & CPAs Member 1121 Riverchase Office Road Birmingham, AL 35244 (205) 982-5500 [email protected]

3 Statutory Language of the Keeping American Workers Paid and Employed Act (Title I of the CARES Act)

• §1106(c) TREATMENT OF AMOUNTS FORGIVEN.— (1) IN GENERAL.—Amounts which have been forgiven under this section shall be considered canceled indebtedness by a lender authorized under section 7(a) of the Small Business Act (15 U.S.C. 636(a)).

• §1106(i) TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.

4 §

• §265(a)(1) generally provides that no deduction will be allowed for expenditures allocable to income wholly exempt from taxes • §1106 includes no reference to IRC §265 • What was Congress’ intent by its silence on §265 and the deduction side • Joint Committee on Taxation (JCT) Description of the Tax Provisions of the CARES Act (released 4.23.2020) – in discussing §1106 under the heading “Federal tax consequences” the JCT simply restates the language of 1106(i) - no reference to deductions for expenditures that are related to the forgiven loan amount

5 §

• §265 disallowance is perhaps most often encountered and identified with tax-exempt investment income (e.g., municipal bond income) but broader than that … • 1988 Tax Court case held that a Native American could not deduct his farming expenses since the income from his farm on tribal reservation land was exempt from tax • 1983 IRS revenue ruling held that a student could not deduct otherwise deductible education expenses because the student funded the expenditures from the proceeds of scholarships that were excluded from income

6 • IRC §108 generally applies to income from discharge of indebtedness • Income does not include discharges in bankruptcy or insolvency • Trade off for exclusion from income is that taxpayer must reduce certain tax attributes, such as NOL carryovers, business credit carryovers, basis other tax attributes • Is it an either / or with respect to IRC §§ 265 limitation on deductions and 108 tax attribute reductions?

7 Portions of Loans Not Forgiven - “Regular” Treatment for Loan Proceeds and Expenditures Funded with Proceeds Partnerships (tax classification) • Loan is nonrecourse – will be allocated to partners under rules for non-recourse debt and to extent so allocated will increase a partner’s basis • Nonrecourse – no increase in partner at risk amount • Deductions for interest on loan and expenditures funded with loan proceeds will be included in trade or business income, and affect partner basis accordingly

8 Portions of Loans Not Forgiven - “Regular” Treatment for Loan Proceeds and Expenditures Funded with Proceeds S corporations • Loans by third parties to S corporations generally do not increase an S corporation shareholder’s basis in stock (but see Selfe case and subsequent developments) • Deductions for interest on loan and expenditures funded with loan proceeds will be included in trade or business income, and affect partner basis accordingly

9 Portions of Loans Forgiven Partnerships (tax classification) • Exclusion from income but deductibility of funded expenses uncertain • A partner's outside basis for his partnership interest is increased by his distributive share of … tax- exempt income of the partnership • a partner's outside basis is decreased (but not below zero) by … (his distributive share of partnership losses and nondeductible expenditures of the partnership “not properly chargeable to capital account.” • Should be a wash for outside partner basis purposes assuming tax-exempt income and nondeductible /deductible expenditures are allocated proportionately to members

10 Portions of Loans Forgiven S corporations • Exclusion from income but deductibility of funded expenses uncertain • Stock basis is increased by the stockholder's share of …separately stated items of income (including tax-exempt income), • Stock basis is decreased by the stockholder's share of … nondeductible corporate expenses or credit that the separate treatment of which could affect the tax liability for tax of any shareholder • Should be a wash for outside shareholder basis purposes given that tax-exempt income and non-deductible /deductible expenditures are allocated proportionately to S shareholders

11 • §1106 of the CARES Act does not constitute an amendment to the Internal Revenue Code (IRC), as do some others sections of the CARES Act. • So even for states with a rolling conformity to the IRC, some action (legislation or ruling) by states may be necessary to provide an exclusion from income of PPP loan forgiveness • Potential issue for action by ruling – could such a ruling be challenged by beneficiaries or recipients of the tax revenue lost by excluding forgiveness

12 A draft bill, currently with the name the “Alabama Taxpayer Stimulus Freedom Act of 2020” is circulating – key components – any amount of loan forgiveness under §1106: • shall be excluded from income for Alabama purposes to same extent as under federal law • shall not be considered in determining the deductibility of otherwise deductible expenses to same extent as under federal law • shall also be excluded from any calculations in determining a taxpayer’s federal income tax deduction

13 Another component of “Alabama Taxpayer Stimulus Freedom Act of 2020” provides that any tax credits or advance refund amounts received by individuals under the CARES Act: • shall be excluded from income for Alabama individual income tax purposes • shall be excluded from any calculations in determining a taxpayer’s federal income tax deduction

14 Paycheck Protection Program (PPP) Loan Forgiveness (SUBJECT TO CHANGE BASED ON ADDITIONAL SBA GUIDANCE) APRIL 30, 2020

Bill Lorimer, CPA Mark Underhill, CPA, CM&AA BMSS Advisors & CPAs BMSS Advisors & CPAs Member Senior Manager 1121 Riverchase Office Road 1121 Riverchase Office Road Birmingham, AL 35244 Birmingham, AL 35244 (205) 982-5500 (205) 982-5500 [email protected] [email protected]

15 • PPP Update and Overview • Covered Period and Forgivable Uses of Funds • Calculation of Loan Forgiveness • Forgiveness Process • PPP Considerations • Additional Guidance Needed • Unforgiven Loan Treatment

16 • Initial funding of $349B in the CARES Act was fully utilized in the first 13 days of the program through issuance of over 1.6M PPP loans. • The Paycheck Protection Program and Health Care Enhancement Act signed into law Friday, April 24th • Adds $310B more to PPP • $30B reserved for lenders with assets under $10B • $30B reserved for lenders with assets $10B - $50B • Enhancement Act provided no other changes or clarifications to original CARES Act rules for PPP • SBA began accepting PPP applications from lenders Monday, April 27th at 9:30 a.m. CST with the system crashing within one hour of opening. • It is anticipated that this round of funding may be exhausted faster than the initial round due to a backlog of applications.

17 home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

18 • Recent pressure on larger companies to return funds • Ruth’s Chris - $20M returned • Shake Shack - $10M returned • Los Angeles Lakers - $4.6M returned • More than 200 publicly traded companies received at least $870M in PPP loans according to SEC filings. • Over $2 billion has already been returned. • SBA has not disclosed who was approved for PPP loans and the amount received although numerous organizations have filed Freedom of Information Act requests for this information.

19 • Competing viewpoints: • "When a wildly successful sports franchise that can afford to pay Lebron James nearly $40 million a year is being shamed into returning paycheck protection program funds, the question we should be asking is why the White House and Congress haven't been more prescriptive about who and what can qualify for help.” – Kyle Herrig, President of Government watchdog group, Accountable • "I never expected in a million years that the Los Angeles Lakers, which, I'm a big fan of the team, but I'm not a big fan of the fact that they took a $4.6 million loan. I think that's outrageous and I'm glad they returned it or they would have had liability.” – Treasury Secretary Steven Mnuchin • Treasury Secretary Mnuchin pledged a “full audit” of loans that are worth more than $2 million before there is loan forgiveness and said borrowers will face criminal liability if they misled the federal government.

20 • Secretary Mnuchin went on to say, “The certification was very clear in saying that if people had other sources of liquidity, they could not take this loan.” • CARES Act passed March 27, 2020 included the following certification language: • An eligible recipient applying for a covered loan shall make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. • SBA FAQ 31 released April 23, 2020 says: • Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

21 • SBA FAQ 31 released April 23, 2020 went on to say: • Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. • Reminder that borrower certification is based on uncertainty of current economic conditions at the time of PPP application. There is no requirement to factor events after PPP funds have been received. • Borrowers should consider documenting the uncertainty that existed at the time of the PPP loan application, steps taken to mitigate impacts of COVID-19, and the ongoing government actions (shutdowns, shelter at home, occupancy limitations, etc.) that are affecting the business.

22 • Borrowers have 8 weeks (covered period) from the date PPP funds are received, to spend the funds on covered items. • Loan may be forgiven in whole, or in part, at the end of the 8-week period. • Borrowers must apply for loan forgiveness from the lender (forgiveness application not yet released). • Forgiven amounts are considered canceled debt. • PPP loan forgiveness is explicitly excluded from income.

23 PPP Deferred PPP Loan Lender Funds 8-week Payment Approved Borrower Renders Loan Disbursed Covered Period (10 days Applies for Forgiveness Matures (covered Period Ends to Forgiveness Decision (2 years) period Ends (6 disburse) (60 days) begins) months)

24 • Lenders must disburse PPP funds within 10 calendar days of loan approval from the SBA. • The 8-week covered period for loan forgiveness starts the day PPP funds are first disbursed to the borrower by the lender. • Calculation of loan forgiveness examines amounts incurred and paid during the 8-week period. • Timing and documentation is critical throughout this process and there is no extension or exceptions to the 8-week period. • No forgiveness is available without submission of proper documentation for use of funds.

25 • PPP borrower is eligible for loan forgiveness in an amount equal to the sum of the following costs incurred and payments made during the 8-week covered period: • Payroll Costs • Mortgage Interest • Rent • Utilities

26 • What does “costs incurred and payments made” mean? – Two main interpretations: • An expense must be BOTH incurred AND paid within the 8-week period. • This interpretation could greatly limit the payments generating loan forgiveness • Would not include payment of expenses during the 8 weeks that were incurred before the covered period • Would not include expenses incurred during the 8 weeks but paid after the covered period • Major problems with splitting payroll, rent, and utilities under this interpretation • Cash basis payment of expenses allowed with prepaid expenses prohibited

27 • Payroll costs include the same items examined when determining the PPP loan amount. These include: • Gross salary, wage, or similar compensation • Cash tips • Vacation, parental, family, medical or sick leave • Allowance for dismissal or separation • Health care benefits including insurance premiums • Retirement benefits • Payment of employer state or local tax assessed on the compensation of employees (AL SUI) • Net earnings from self-employment (including guaranteed payments and ordinary income for active partners in a partnership)

28 • Interest payments on covered mortgage obligations • Covers any indebtedness that is a mortgage on real and/or personal property • Incurred before February 15, 2020 • Unusual to see “mortgage” refer to debt other than in connection with purchase of real property • SBA Interim Final Rule (IFR) released April 14th discussed mortgage interest payments on any business mortgage obligation on real or personal property • Examples included interest on a mortgage for a warehouse purchased to store business equipment and interest on an auto loan for a business vehicle

29 • PPP funds may be used on any business rent obligations under a leasing agreement in force before February 15, 2020 • Includes rent payments on real and personal property (equipment) • April 14th IFR uses same examples of warehouse and vehicle that they used to address mortgage interest • What about self-rental? • No current exclusion for self-rental • Rent should stay consistent to the period before February 15, 2020 • Recommend a signed lease agreement for documentation

30 • Covered utility payments include: • Electricity • Gas • Water • Transportation • Telephone • Internet access • Utility service must have begun before February 15, 2020

31 • Forgiveness may not exceed lesser of loan principal or the sum of all eligible expenses during the covered period. • Generally, no reduction if all proceeds are used for forgivable purposes, employee headcount and compensation levels are maintained, and payroll costs account for at least 75% of the loan forgiveness. • Loan based on 2.5 months (76 days) while 8-week covered period is 56 days • Consistent payroll would result in roughly 74% of loan proceeds spent on payroll costs during the covered period • Reduction in loan forgiveness required if borrower: • Reduces the number of employees (FTEEs) compared to the pre-COVID-19 levels • Reduces employee compensation beyond allowable threshold compared to Q1-2020 • Potential exemptions to these reductions exists for re-hires.

32 • CARES Act Section 1102 created PPP. Section 1106 governs PPP loan forgiveness.

• Full-time equivalent employees (FTEEs) is a term not defined in Section 1102 or 1106 of the CARES Act.

• Under the rules of statutory construction, when a statute is ambiguous, you see if the same terms were used anywhere else in the same statute. If so, use that same meaning to clear up any ambiguity.

• FTEE defined in Section 2301 of the CARES Act with respect to the employee retention credit to have the definition provided under Section 4980H.

• We assume that since Congress defines “full-time equivalent employee” in one part of the statute, then they intended the term to have the same meaning throughout the rest of the statute unless clearly said differently.

33 • A full-time employee is someone who normally averages 30 hours per week or 130 hours per calendar month. • Hours for bi-weekly, semi-monthly or annual pay periods are not provided, but PPP loan forgiveness requires FTEEs to be determined for each payroll period so, pending future guidance, we have extrapolated these amounts. • Anyone hired as full-time or normally averaging the hours for the pay period to be considered full-time is treated as one FTEE. • All variable or part-time hours worked by employees not exceeding the full-time level are summed and then divided by the full-time hour level for the applicable pay period.

• Number of full-time equivalent employees (FTEEs) for a weekly payroll is calculated by adding: • The number of full-time employees (>30 hours per week); plus • Total of all hours worked by all part-time employees (<30 hours per week) divided by 30 hours per week.

• Regulations require that you determine the average number of FTEEs for each pay period falling within a month during the covered period. First calculate FTEEs per pay period, then average out over each 4-week period during the 8-week covered period.

34 • Example – Company A has 7 full-time employees who each work over 30 hours per week. Additionally, Company A has 6 part-time employees who work a combined 90 hours per week. Company A’s FTEE calculation for this pay period would be: • 90 (combined hours worked by part-time employees) ÷ 30 = 3 • 7 + 3 = 10 Full-time Equivalent Employees • Assuming bi-weekly payroll and FTEE for each of the four pay periods is as follows: • 10, 7, 6, 9 • Average FTEEs = (10 + 7 + 6 + 9) = 32 ÷ 4 = 8 FTEEs over the 8-week covered period

35 • The amount of potential loan forgiveness is reduced to account for any reduction in the number of employees during the covered period. • Potential forgiveness is multiplied by the quotient obtained by dividing: The average number of FTEEs during the 8-week covered period (numerator) The average number of FTEEs during the period February 15, 2019 and ending June 30, 2019; or the average number of FTEEs per month during the period January 1, 2020 and ending February 29, 2020 (denominator)*

*For the denominator, the borrower must elect which of the periods to use in the calculation.

36 Covered Period FTEE’s

Instructions for this tab Enter employee names and hours by pay period, starting with first pay period on or after the loan date and ending with last pay period on or before the date 8 weeks after the loan If a full-time salaried employee and report does not show their hours, enter 40 as hours If client does a special payroll, enter info in cells below. If not, clear column J. Loan Date 4/15/2020 If a full-time employee is rehired, enter 40 as hours in all pay periods 8 week period end 6/9/2020 FTEE Average 9.41 Monthly Avg 4 9.42 9.42 9.42 9.42 5 9.42 9.42 9.42 9.42 9.42 6 9.42 9.38 9.40 7 8 9 Full time equivalent employees (FTEE) 9.42 9.42 9.42 9.42 9.42 9.42 9.42 9.42 9.38 Full time employees (>= 30 hours) ------Hours on part-time employees / 30 9.42 9.42 9.42 9.42 9.42 9.42 9.42 9.42 9.38 Hours on part-time employees 282.50 282.50 282.50 282.50 282.50 282.50 282.50 282.50 112.50 Part-time employees (<30 hours) 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 Workdays per Calendar Week 5.00 *enter standard week - 5 if only weekdays, 6 if also Saturdays, 7 if also Sundays Total headcount 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 Workdays in special pay cycle 2.00 *enter number of days included in special payroll Check figure (should be 0) ------Workdays in regular pay cycle 5.00 *this is used in calculation below; do not change or delete this cell Converted Full Time Hours for Special Pay Cycle 12.00 Pay Period 1 2 3 4 5 6 7 8 *Special payroll run Pay Period Ended 4/16/2020 4/23/2020 4/30/2020 5/7/2020 5/14/2020 5/21/2020 5/28/2020 6/4/2020 6/9/2020 Employee Larry 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Dave 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Beth 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Fred 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Mark 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Anne 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Tom 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 John 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 7.50 Jane 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 5.00 Jeff 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Susan 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00 Bobby 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 10.00

37 2/15/19 – 6/30/19 FTEE’s Instructions for this tab Enter employee names and hours by pay period, starting with first pay period on or after 2/15/2019 and ending with last pay period on or before 6/30/2019 If a full-time salaried employee and report does not show their hours, enter 40 as hours

FTEE Average 10.61 Monthly Avg 1 2 10.00 10.00 10.00 3 10.00 11.00 11.00 11.00 11.00 10.80 4 11.00 11.00 11.00 11.00 11.00 5 11.00 11.00 11.00 11.00 11.00 11.00 6 11.00 10.00 10.00 10.00 10.25 Full time equivalent employees (FTEE) 10.00 10.00 10.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 10.00 10.00 10.00 Full time employees (>= 30 hours) 8.00 8.00 8.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 8.00 8.00 8.00 Hours on part-time employees / 30 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 Hours on part-time employees 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 60.00 Part-time employees (<30 hours) 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Total headcount 11.00 11.00 11.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 11.00 11.00 11.00 Check figure (should be 0) ------

Pay Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Pay Period Ended 2/15/2019 2/22/2019 3/1/2019 3/8/2019 3/15/2019 3/22/2019 3/29/2019 4/5/2019 4/12/2019 4/19/2019 4/26/2019 5/3/2019 5/10/2019 5/17/2019 5/24/2019 5/31/2019 6/7/2019 6/14/2019 6/21/2019 6/28/2019 Employee Larry 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Dave 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Beth 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Fred 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Mark 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 - - - Anne 30.00 30.00 30.00 30.00 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 32.50 30.00 30.00 30.00 30.00 Tom 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 John 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 Jane 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 Jeff - - - 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Susan 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Bobby 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00

38 1/1/20-2/29/20 FTEE’s Instructions for this tab Enter employee names and hours by pay period, starting with first pay period on or after 1/1/2020 and ending with last pay period on or before 2/29/2020 If a full-time salaried employee and report does not show their hours, enter 40 as hours

FTEE Average 10.85 Monthly Avg 1 11.00 10.83 10.83 10.83 10.88 2 10.83 10.83 10.83 10.83 10.83

Full time equivalent employees (FTEE) 11.00 10.83 10.83 10.83 10.83 10.83 10.83 10.83 Full time employees (>= 30 hours) 9.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 Hours on part-time employees / 30 2.00 2.83 2.83 2.83 2.83 2.83 2.83 2.83 Hours on part-time employees 60.00 85.00 85.00 85.00 85.00 85.00 85.00 85.00 Part-time employees (<30 hours) 3.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00

Total headcount 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 Check figure (should be 0) ------

Pay Period 1 2 3 4 5 6 7 8 Pay Period Ended 1/5/2020 1/12/2020 1/19/2020 1/26/2020 2/2/2020 2/9/2020 2/16/2020 2/23/2020 Employee Larry 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Dave 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Beth 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Fred 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Mark 32.50 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Anne 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 Tom 27.50 27.50 27.50 27.50 27.50 27.50 27.50 27.50 John 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 Jane 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 Jeff 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Susan 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Bobby 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00

39 Example: • Facts • Potential Forgiveness = $100,000 • Average FTEEs during 8-week covered period = 8 • Average FTEEs 2/15/19 – 6/30/19 = 11 • Average FTEEs 1/1/20 – 2/29/20 = 10 • 8 ÷ 10 = 0.80 • Loan Forgiveness (after 1st reduction) = $80,000 ($100,000 x 0.80)

40 • CARES Act states the amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of ANY employee during the 8-week covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter in which the employee was employed before the covered period. • Employee by employee calculation (based on the words “any employee”). • This language presents multiple interpretations for the calculation.

41 • The Act calls for the payroll over the 8-week covered period to be compared to the full Q1 payroll for each employee. • A literal interpretation • Pay employees for 67.5 days over a 56-day (8-week) period • Q1 had 13 weeks (56 days ÷ 91 days = 61.5%) • To avoid any forgiveness reduction requires an increase in compensation levels compared to Q1 (basically saying - pay for 67.5 days over a 56-day covered period). • 25% reduction allowed interpretation • Congress intended to allow a maximum 25% reduction in compensation compared to Q1 over a pro-rated 8-week period (essentially paying 6 of the 8 weeks they loaned in the beginning). • Congressional math error interpretation • Congress intended employers to keep consistent compensation levels during the 8-week period as the government is providing the funding. (Assumes Congress made a mathematical error in allowing a 25% reduction that should have been 38.5% if comparing to a full Q1).

42 • In examining a reduction in salary and wages, the Act requires that you only look at employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay more than $100,000. • Literal interpretation • Examine every pay period in 2019 and any employee who earned in a single pay period an annualized rate of pay more than $100,000 is excluded (essentially one 2019 payroll with a bonus could exclude an employee who earned less than $100,000 for all of 2019). • $100,000 annualized interpretation • Designed to exclude the highly compensated employee from reduction calculation. (Not intended to exclude the employee who makes less than $100k annually but received a special bonus or commission on one payroll that would be over $100k if annualized).

43 Q1-2020 and 8-Week Covered Period Comparison

Instructions for this tab Enter employee names, gross wages and benefits for the periods below. Indicate if an employee made over $100,000 in 2019 by placing an X in column B Indicate if employee is an 5% or more S-corp shareholder or any member of LLC by placing an O in column C Loan Date 4/15/2020 If the employer is receiving a credit for FFCRA wages on their 941, reduce total comp by the related wages in column N 8 week period end 6/9/2020

Over $100k Gross Benefits Total Gross Reduction Benefits Total in Wages Health Dental Vision Retirement Unemploy Comp Wages for FFCRA Health Dental Vision Retirement Unemploy Comp Employee 2019 Owner 2020 Q1 Insurance Insurance Insurance Benefits Benefits SUTA 2020 Q1 8 weeks Wages Insurance Insurance Insurance Benefits Benefits SUTA 8 weeks Larry 8,500.00 100.00 50.00 4.25 8,654.25 3,500.00 - 61.54 30.77 - - 2.62 3,594.92 Dave 9,000.00 100.00 50.00 500.00 4.50 9,654.50 4,000.00 (500.00) - 61.54 30.77 307.69 - 2.77 3,902.77 Beth 7,500.00 100.00 50.00 3.75 7,653.75 5,000.00 - 61.54 30.77 - - 2.31 5,094.62 Fred O 12,000.00 1,000.00 100.00 50.00 800.00 6.00 13,956.00 8,000.00 615.38 61.54 30.77 492.31 - 3.69 9,203.69 Mark 8,000.00 100.00 50.00 4.00 8,154.00 5,500.00 - 61.54 30.77 - - 2.46 5,594.77 Anne 8,000.00 1,000.00 100.00 50.00 900.00 4.00 10,054.00 8,000.00 615.38 61.54 30.77 553.85 - 2.46 9,264.00 Tom 7,500.00 3.75 7,503.75 5,500.00 - - - - - 2.31 5,502.31 John 9,000.00 100.00 50.00 300.00 4.50 9,454.50 6,000.00 - 61.54 30.77 184.62 - 2.77 6,279.69 Jane 10,000.00 1,000.00 100.00 50.00 600.00 5.00 11,755.00 5,500.00 615.38 61.54 30.77 369.23 - 3.08 6,580.00 Jeff 6,000.00 100.00 50.00 3.00 6,153.00 5,500.00 - 61.54 30.77 - - 1.85 5,594.15 Susan X 20,000.00 100.00 50.00 1,000.00 10.00 21,160.00 17,500.00 - 61.54 30.77 615.38 - 6.15 18,213.85 Bobby X O 20,000.00 1,000.00 100.00 50.00 1,000.00 10.00 22,160.00 18,000.00 615.38 61.54 30.77 615.38 - 6.15 19,329.23

44 Reduction in Salary and Wages (Cont.) 8-Week Covered Period Cap on $100k Annualized Compensation

Instructions for this tab Enter payroll costs total at top of spreadsheet Payroll detail should be entered on tab 5 Total payroll costs: Loan Date 4/15/2020 Gross wages, less FFCRA 91,500.00 8 week period end 6/9/2020 Health insurance 2,461.54 Dental insurance 676.92 Vision insurance 338.46 **for employees, this is Gross Wages; for owners it is total comp Employee benefits 3,138.46 Unemployment benefits - SUTA 38.62 Less wages in excess of maximum (6,060.00) Maximum 8 week payroll 15,384.62

Net eligible payroll costs 92,094.00 Amount Comp** Over Employee 8 weeks Max Larry 3,500.00 - Dave 4,000.00 - Beth 5,000.00 - Fred 9,203.69 - Mark 5,500.00 - Anne 8,000.00 - Tom 5,500.00 - John 6,000.00 - Jane 5,500.00 - Jeff 5,500.00 - Susan 17,500.00 (2,115.38) Bobby 19,329.23 (3,944.62)

45 Wage Comparison by Employee

Instructions for this tab Payroll detail should be entered on tab 5

Loan Date 4/15/2020 8 week period end 6/9/2020 Total Reduction in Forgiveness (11,836.55) 1. A literal interpretation Pay employees for 68.25 days over a 56-day (8 week) period 1 Interpretation to Use (1, 2 or 3) Q1 had 13 weeks (56 days ÷ 91 days = 61.5%) To avoid any forgiveness reduction requires increase in compensation levels compared to Q1 (basically saying - pay for 68.25 days over a 56-day covered period) 75.0% 1. Based on 100% of Q1 Comp * 75% 2. 25% reduction allowed interpretation 46.2% 2. Based on Prorated Q1 Comp * 75% Congress intended to allow a maximum 25% reduction in compensation compared to Q1 61.5% 3. Based on Prorated Q1 Comp over a pro-rated 8-week period (essentially paying 6 of the 8 weeks they loaned in the beginning) 3. Congressional math error interpretation Congress intended employers to keep consistent compensation levels during the 8-week Total Applicable Total Compare Reduction period as the government is providing the funding. (Assumes Congress made a Comp Comp Comp 8 weeks to in Employee 2020 Q1 2020 Q1 8 weeks Q1 Amt Forgiveness Notes Larry 8,654.25 6,490.69 3,594.92 (2,895.77) (2,895.77) Dave 9,654.50 7,240.88 3,902.77 (3,338.11) (3,338.11) Beth 7,653.75 5,740.31 5,094.62 (645.69) (645.69) Fred 13,956.00 10,467.00 9,203.69 (1,263.31) (1,263.31) Mark 8,154.00 6,115.50 5,594.77 (520.73) (520.73) Anne 10,054.00 7,540.50 9,264.00 1,723.50 - Tom 7,503.75 5,627.81 5,502.31 (125.50) (125.50) John 9,454.50 7,090.88 6,279.69 (811.19) (811.19) Jane 11,755.00 8,816.25 6,580.00 (2,236.25) (2,236.25) Jeff 6,153.00 4,614.75 5,594.15 979.40 - Susan - - - - - Excluded due to $100,000 limit Bobby - - - - - Excluded due to $100,000 limit

46 Example: • Potential forgiveness: $100,000 • Compensation for one employee during Q1-2020: $10,000 • Pro-rated 8-week salary for one employee during Q1-2020: $6,154 • Salary for employee during 8-week covered period with a 10% decrease in compensation: $5,539

47 • Answers based on interpretations • Literal interpretation: • 75% threshold = $7,500 ($10,000 based on Q1 x 75%) • Reduction = $7,500 threshold – $5,539 actual = $1,961 reduction in loan forgiveness • Potential loan forgiveness = $100,000 – $1,961 = $98,039 • 25% reduction allowed interpretation: • 75% threshold = $4,616 ($6,154 based on pro-rated Q1 x 75%) • No reduction as $5,539 compensation exceeds threshold • Potential loan forgiveness = $100,000 • Math error interpretation: • 61.5% threshold = $6,154 • Reduction = $6,154 – 5,539 = $615 reduction in loan forgiveness • Potential loan forgiveness = $100,000 - $615 = $99,385

48 • Any reduction in loan forgiveness due to a reduction in number of FTEEs or in salary and wages will be granted an exemption for circumstances where the employer: • Eliminates the reduction in number of FTEEs not later than June 30, 2020 (uncertainty exists if you must do this by end of the 8-week period if that occurs prior to June 30th) • Eliminates the reduction in the salary or wages of employees not later than June 30, 2020 (uncertainty exists if you must do this by end of the 8-week period if that occurs prior to June 30th) • Plain English version – rehire the employee at any time during the 8- week period and pay them wages above threshold that they would have received if they worked the entire period and there is no reduction in forgiveness.

49 • Not more than 25% of loan forgiveness amount may be attributable to non-payroll costs. • Example: • Payroll costs during the covered period = $60,000 • Amounts paid on mortgage interest, rent, utilities = $40,000 • Total eligible expenses = $100,000 • Max loan forgiveness = $80,000 (60,000 ÷ 0.75)

50 • Example with same facts from previous slides: • Potential Forgiveness = $100,000 • FTEE reduction = $20,000 • Payroll reduction (literal interpretation) = $1,961 • Net loan forgiveness = $78,039 • Note – 25% cap on non-payroll not applied as loan forgiveness is below $80,000 threshold

51 Highlighted cells throughout require input; all other cells are formulas Applicable Tab Potential Loan # Forgiveness Client Name Template Financial Institution Bank Loan Amount $ 150,000.00 Loan Proceeds Deposited on 4/15/2020 8 Week Period Ends on 6/9/2020 Total Use of Proceeds 123,783.00 Maximum Loan Forgiveness 123,783.00

FTEE Calculation: (*if not using one of the FTEE periods, delete the formula from that cell ) Average FTEEs 2/15/2019 - 6/30/2019 2 10.61 * Average FTEEs 1/1/2020 - 2/29/2020 3 10.85 * Lower average FTEEs 10.61 Average FTEEs in 8 week period 4 9.41

FTEE Numerator 9.41 FTEE Denominator 10.61

Ratio (maximum of 100%) 88.69% $ 109,783.04

Reduction due to decrease in Wages 6 (11,836.55) $ 97,946.49

Cost Summary: Eligible payroll costs 7 92,094.00 Mortgage Interest 8 5,400.00 Rent 9 19,000.00 Utilities 10 7,289.00

Total use of proceeds 123,783.00 Non-payroll % 26% Payroll % 74% Maximum forgiveable amount based on payroll % 122,792.00

Estimated forgiveable amount $ 97,946.49

Remaining loan balance at 1% over 2 years $ 52,053.51

52 • Borrower must submit an application with the bank for forgiveness. • Application must include documentation providing support for loan forgiveness. • No forgiveness will be allowed without submitting the required documentation. • Lender to provide a forgiveness decision within 60 days of borrower application. • No details provided for potential appeal process if borrower disagrees with the decision.

53 • Documentation required for loan forgiveness application shall include: • Documentation verifying number of FTEEs on payroll and pay rates including: • Payroll tax filings reported to the IRS, and • State income, payroll, and unemployment insurance filings. • Documentation including canceled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgage obligations, lease obligations, and utility payments. • Borrower must certify that documentation is true and correct, and the amount requested for forgiveness was used to retain employees and make covered payments.

54 • The CARES Act specifically holds all lenders harmless (no penalty or enforcement action taken) with respect to loan forgiveness if they received the documentation required from an eligible recipient attesting that the recipient has accurately verified the payments on covered items during the covered period. • All liability rests on the borrower. • No details on statute of limitations or enforcement period on borrowers with respect to PPP. • All borrowers should: • Take the time and appropriate steps to ensure compliance with the program’s rules and regulations. • Be diligent in ensuring all information provided to the SBA is accurate.

55 • Calculate baseline FTEEs now to determine the lesser of the two available options and establish a baseline for the forgiveness FTEE reduction calculation. • Examine salary and wages threshold by employee now looking at Q1-2020 payroll. • At the end of the 8-week period, consider a special payroll and pay any accrued mortgage interest, rent, utilities to fully capture costs.

56 • Re-hire employees that were terminated or furloughed. • Examine 2019 pay periods for annualized $100k threshold. • Recommend using a separate bank account to house PPP Funds to help with documentation and tracking. • Treat as a reimbursable expense account. • No need to change payment methods from existing accounts.

57 • Clarity on salary and wage comparison to Q1. • Clarity needed regarding the requirement that covered expenses are “incurred and paid” during the 8-week covered period. • Can businesses pay interest on non-mortgage debt during the covered period and have it forgiven? • Section 1102 allows borrowers to spend PPP money to pay interest on “any other debt obligation” incurred before February 15, 2020. • Section 1106 governs forgiveness and excluded this item in the list of covered expenses when determining loan forgiveness. • What about natural turnover of staff in relation to the FTEE and wage reductions? • Currently you are harmed in the forgiveness calculation in respect to both headcount and salary reduction for staff who voluntarily terminate their employment.

58 • What are the terms on any portion of a PPP loan not forgiven? • Maturity date of two years • 1% interest rate • No guaranty, no collateral, nonrecourse loan • Principal and interest payments are deferred for six months from the date of loan disbursement • Interest accrues during the six-month deferment • Any interest accrued on the forgiven portion of the loan is also forgiven

59 • BMSS is here to walk through this with you as you have questions or need assistance. • We are available to consult on questions throughout the 8-week covered period and the forgiveness process. • We can assist in the calculations required by the act including: • Assistance with portions of the calculations (such as FTEE’s) • Assistance in packaging required documentation for the forgiveness application • Complete calculation of PPP forgiveness with a report issued

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