On Tuesday June 30th the Senate passed an 8 week extension of the Payroll Protection Plan until August 8th. The bill will still have to pass the House and be signed by the President. I will update you as soon as possible.
I have also wanted to repost some highlights of the Payroll Protection Program flexibility Act and the loan forgiveness applications. I have previously written on both, however with everything going on there still appears to be some confusion, therefore I have included details below. The section in blue addresses changes made to the Loan forgiveness forms. I added a Section on S Corporation Shareholders. The section in red addresses the provisions of the Payroll Protection Program Flexibility Act.
On Wednesday June 17th, the SBA released a revised loan forgiveness application and EZ application for forgiveness of PPP loans. Additionally, the SBA issued revised guidance on owner’s compensation and its good news!
Owner’s Compensation Eligible for Forgiveness
Most of the changes reflected on the revised application for PPP forgiveness were made to accommodate the changes relating to the Payroll Protection Flexibility Act. The changes made by the new law are shown in red below for your convenience. The big surprise (at least to me) was the change in owner’s compensation. The law was originally written to allow a maximum of 8/52 of 2019 compensation for owner employees. The maximum allowable payroll is $100,000 and therefore the maximum allowed was 8/52, or $15,385. The revised ruling allows 2.5 times the monthly payroll cost. If we use $100,000, then the maximum amount becomes $20,833. This assumes that the small business owner has selected the expanded 24-week covered period. If the owner selects the 8-week period, then only $15,385 is allowed. Businesses can choose either an 8-week or 24-week covered period. I suggest to any Schedule C filer that they take the expanded 24-week covered period and use 100% for payroll. The reason for this suggestion has to do with the “Key Item Excluded” listed below. The IRS has ruled that since PPP funds forgiven are not considered taxable, then expenses paid with those funds are not deductible. I still believe this will be changed, more on that in the “Key Item Excluded” section below. If, however, the law is not changed, then I would rather see the Schedule C filer use all the PPP for his/her own compensation because that isn’t deductible on a Schedule C anyway. Let’s take an example of a sole proprietor that capped themself at $100,000 and therefore borrowed $20,833. If the sole proprietor were to use $15,385 as compensation and the remaining $5,448 for rent and the IRS ruling is not changed, then the $5,448 is not deductible. If the sole proprietor elects the 24-week covered period and takes all $20,833 as compensation, then he/she still gets to deduct rent expense.
Special Rule for S Corporation Shareholders
We learned upon the publishing of the updated loan forgiveness forms that S corporation shareholders can take 8/52 of wages and retirement fund contributions from 2019 (if the 8-week covered period is elected). S corporation shareholders are not allowed to take 8/52 of medical expenses because these are supposed to be included in wages. If S corporation shareholders elect the 24-week covered period then they would be entitled to forgiveness on 2.5 X their monthly payroll cost, which would be there 2019 W-2 and retirement plan contributions.
Revised Loan Applications
The new form is far more streamlined then the original and there is even an EZ form if certain criteria are met. If the borrower can satisfy any of the following 3 requirements, they can file the EZ form:
Are self-employed individual, independent contractor, or sole proprietor with no employees.
Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and did not reduce the number of employees; or
Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and was unable to operate during the Covered Period at the same level of business activity due to compliance guidance issued in response to the Pandemic
Borrowers not meeting any of these criteria are required to file the long form which has been streamlined down to 5 pages.
Key Item Excluded
Deductibility of expenses paid with PPP forgiven funds. I have discussed in previous writings that the IRS has ruled that since PPP funds forgiven are considered nontaxable income, then expenses paid with these funds (both payroll and nonpayroll expenses) are not considered deductible. 19 senators, in a bipartisan effort, sent a letter to Treasury Secretary Mnuchin declaring this was not the intent of the law and they would like a ruling that allows expenses paid with PPP funds to be deductible even though the proceeds are not taxable. My belief is the easiest way to fix this would be for congress to pass a provision that allows these expenses to be deducted, but as of now this has not happened.
Changes to PPP Loan Proceed Forgiveness
Covered Period
This bill changes the covered period from 8 weeks beginning on the day proceeds are received by the borrower to the earlier of 24 weeks or December 31, 2020.
Restoration date for FTE count
The law, as originally written, allowed employers whose Full time equivalent (FTE) employee count had fallen to restore the workforce by June 30th and avoid a reduction in PPP loan forgiveness. Part of forgiveness is calculated by looking at the total FTEs a business had in place and if that number had dropped, forgiveness of loan proceeds was reduced. Let’s take an example where an employer had 3 full time employees (40 hours per week employees) and 2 part time employees (20 hours per week each). The calculation would assign each full-time employee a value of 1.0 and each of the two-part timers would count as 0.5 FTE. Based on this calculation the employer would have a total of 4.0 FTEs ((3 X 1.0) + (2 X 0.5)). If the employer had received PPP money but based on reduced business hired back 2 full time employees and the two-part timers then the FTE calculation was reduced to 3.0. This would cause a reduction in loan forgiveness, however, if the employer rehired one full-time employee (or 2 part time employees) by June 30th, then there would be no reduction. This law changes the June 30th date to December 31, 2020. Additionally, while the simplified calculation assigns a value of 1.0 to each individual that works 40 hours or more and 0.5 to any employee that works less than 40 hours, businesses can use an actual percentages if it benefits them. Using the actual percentages would assign someone who works 35 hours as 0.875 (35 hours / 40 hours). Again, while this method is more tedious to calculate, businesses may use this method if it is more beneficial than the simplified method.
Additional Section added Based on Employee Availability
The law adds a new paragraph to the existing law which states the following:
(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—
“(A) is able to document—
“(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
“(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
“(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
The above standard gives employers additional protection against having their forgiveness reduced if circumstances out of their control prevent them from restoring their workforce to pre pandemic levels.
Change to the 75% Payroll cost rule
Previously, to receive forgiveness, borrowers must have spent 75% of the forgiven amount on payroll costs. The law changes the parameters from a minimum of 75% payroll costs to 60%. This means that up to 40% can be spent on nonpayroll costs. Nonpayroll costs include rent, utilities, and mortgage interest.
Change in Loan Deferral Period
The law previously allowed a deferral of loan repayments on any portion of PPP proceeds not forgiven for 6 months after receiving the proceeds. This law changes this to the date on which the amount of forgiveness determined is remitted to the lender or a maximum of 10 months after the last day of the covered period if the borrower does not apply for forgiveness within 10 months after the last day of the covered period.
Change in Repayment Period
The law previously allowed loan proceeds to be repaid over two years at one percent interest. This law changes the repayment period from two years to five years.
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Hang in there and stay safe,
Jeff Skolnick, CPA, M.S. Taxation