Article by: Jeffrey Skolnick, CPA, M.S. Taxation
| I want to start this article off by discussing why I believe it makes sense for almost all small businesses that received PPP funds to hold off just a bit on applying for forgiveness. Let’s start at the beginning. A Payroll Protection Program Loan is an SBA loan. To further clarify it is also considered an Economic Injury Disaster Loan (EIDL). All EIDL loans are SBA loans, however, not all SBA loans are EIDL loans. Also, all PPP loans are EIDL loans, but not all EIDL loans are PPP loans. In other words, PPP loans are a subset of EIDL loans which are a subset of SBA loans. When individuals borrow money from the SBA, it is generally treated as any other loan. The loan is expected to be repaid. The PPP loans contain a specific provision which allows these loans to be forgiven if certain conditions are met.We’ve heard and read about these provisions for months, I have included the provisions below in red for your convenience.There are a number of reasons why I believe small business owners should wait on PPP forgiveness.As with the rollout of the PPP, nobody has ever been involved in this program before. If you remember the CARES Act was passed on March 27, 2020 and the PPP started the following week, April 3rd. Many lenders were not ready on day 1 and the process was complicated and confusing during the first 6 or 7 weeks while rules were constantly changing, and lenders and the SBA were still figuring it all out. If you applied for a PPP loan before approximately May 15th and after May 15th you had far different experiences. Once the system had more defined rules and the lending institutions and SBA had some experience, the process was much smoother. It is my belief that the same thing will occur on the forgiveness end. There was a forgiveness form released. Before the form was even used it was replaced by 2 more forms (an EZ short form and a more simplified long form). My feeling here is that there can still be changes made to these forms as well. Even if no changes are made none of these forms have been processed to date.I believe that almost all borrowers should utilize the 24-week, compared to the 8-week covered period for forgiveness. Please read the section below on owner’s compensation and also it allows businesses that may not have been able to restore their full payroll to use payroll and costs for up to 24 weeks. It also allows nonpayroll costs (rent, utilities or mortgage interest) to be used for 24 weeks, instead of 8 weeks.There is no benefit to being forgiven in August vs. being forgiven in November or December. The only thing that happens if borrowers wait and have a portion of the loan not forgiven is that interest has accrued at the rate of 1% over that time period. It is my feeling that the Payroll Protection Program Flexibility Act passed on June 5th allows almost all businesses to achieve total forgiveness which makes the interest a moot point. Even if there is a portion not forgiven, it should be exceedingly small and 1% interest for a few months will be negligible.Lastly, there is currently talk of forgiving all loans under $150k. It may be as simple as borrowers certifying on a 1-page form that the PPP funds were used for their intended purpose. The push for this legislation is because loans under $150k account for 86% of the total loans, but only 26% of the total proceeds. This would allow the SBA and lenders to focus their resources on the remaining 14% of borrowers that are responsible for 74% of the borrowed funds. If this legislation were to pass this would simplify the process for most borrowers. HOW TO STILL APPLY FOR PPP FUNDS The PPP was extended for 5 weeks until August 8, 2020. If you have not yet borrowed funds through this program, please do so quickly. While the ending date of the program is August 8th, keep in mind that once a lender approves your application, it must be sent to the SBA for approval. Based on this step, almost all lenders stopped accepting applications days before the original June 30th deadline. I anticipate the same thing occurring with the August 8th deadline. I am advising everyone to submit applications by no later than July 31st in order to ensure that your application is processed. Many times, applications must be tweaked after their initial submission and you want to make sure you have the time to fix anything that may pop up. Owner’s Compensation Eligible for Forgiveness 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. 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. 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. Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/ If you’d like to book an appointment with me, please click on the link HERE. Hang in there and stay safe, Jeff Skolnick, CPA, M.S. Taxation |