Paycheck Protection Program Loans:Forgiveness Loan Application

May 18, 2020Presented by:

Ryan J. McDonellTax Manager, CPA

1

Disclaimer

This presentation is not intended to be tax or legal advice. This presentation is for informational purposes only. Businesses are not all

the same and have specific situations. Please contact your tax professional and attorney before making any decisions.

2

Topics• Paycheck Protection Plan (PPP) Overview• Borrower Certification• Loan Forgiveness• Possible Future Changes• Loan Forgiveness Application Example• Resources

3

• CARES Act Sections 1102 & 1106• Funding $349 billion + additional $310 billion• Lenders: existing SBA, federally insured, fintech• Borrowers: Businesses, self-employed, 501(c)(3)s

• Small business concern, 500 EE, alternative size standard

• Loan conditions: nonrecourse, no fee, no guarantee, no collateral, no requirement to obtain credit elsewhere

• Loan terms: 2 years at 1% with 6-month deferral accruing interest

4

Paycheck Protection Plan (PPP) Overview

Paycheck Protection Plan (PPP) Overview

• Maximum loan amount, lesser of:• Average monthly payroll * 2.5, or

• (May add the balance of any EIDL loan taken between 1/31/20 – 4/3/20)• $10,000,000

Example• Borrower pays $1,200,000 in payroll costs during 2019• Borrower’s maximum loan is $250,000, calculated as follows:

• $1,200,000 / 12 months = $100,000 average monthly payroll• $100,000 * 2.5 = $250,000

5

Borrower Certification

• Current economic uncertainty makes the loan necessary to support your ongoing operations.

• The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.

• You have not and will not receive another loan under this program.• All SBA loan proceeds will be used only for business-related purposes

as specified in the loan application and consistent with the Paycheck Protection Program Rule.

6

Borrower Certification: FAQ #31 & #37

7

8

Borrower Certification: Officials’ Statements

Borrower Certification: FAQ #46

9

Loan Forgiveness: Overview

• Amounts incurred /paid during the 8-weeks following loan funding, on:• Payroll costs• Interest on mortgage on real or personal property incurred before 2/15/20• Rent with leasing agreement in force before 2/15/20• Utilities for which service began before 2/15/20

• Electricity, gas, water, transportation, telephone, or internet access

• No more than 25% of the forgiven amount may be for non-payroll costs• Forgiveness subject to reduction based on:

• Reduction in number of full-time equivalent employees• Reduction in the pay of 1 or more employees

10

Loan Forgiveness: 8-Week Period

• Covered Period (default)• 8-week (56 day) period beginning on PPP loan disbursement date• Example:

• Funds received April 20th

• Covered period: April 20th – June 14th

• Alternative Covered Period (NEW, only for payroll costs & FTE)• For borrowers with biweekly or more frequent (i.e. weekly) pay periods• 8-week (56 day) period beginning on first day of first pay period following PPP loan

disbursement date • Example:

• Funds received April 20th

• First day of first pay period following loan disbursement is April 26th

• Alternative covered period: April 26th – June 20th

• Borrowers that elect to use alternative covered period must use it in all instances on the application where you may choose the covered or alternative covered period

11

Loan Forgiveness: Payroll Costs

• Payroll costs (“cash compensation”) include:• Gross salary, wage, commission, or similar compensation• Cash tip or equivalent• Vacation, family, medical, or sick leave• Severance pay

• Payroll costs do not include:• Payments to independent contractors• Employer share of payroll taxes• Sick leave and family leave pay eligible for the FFCRA credits

12

Loan Forgiveness: Payroll Costs

• Payroll costs paid or incurred during the covered or alternative covered period• Considered paid on day paychecks are distributed or origination of ACH credit transaction• Considered incurred on the day the employee’s pay is earned

• Payroll costs incurred but not paid during the last pay period of the covered or alternative covered period are eligible for forgiveness if paid on or before the next regular payroll date

• Eliminates “need” for a special payroll

• Cash compensation eligible for forgiveness may not exceed $15,385 ($100,000 annualized) for any single employee

• Cash compensation eligible for forgiveness for owner-employees may not exceed the 8-week equivalent of their applicable compensation in 2019 (NEW)

• What about those related to owner-employees?

13

Loan Forgiveness: Payroll Costs• Payroll costs (“other payroll costs”)

• Group health care benefits, including insurance premiums / employer contributions

• Retirement benefits, employer contributions• State and local taxes on compensation (state unemployment taxes)

• Separate line on the forgiveness application• Not included as part of “cash compensation” to employees

• Therefore, not counted towards the $15,385 per employee “cash compensation” payroll cost cap

• May be determined using covered period or alternative covered period

14

Loan Forgiveness: Payroll Costs

• Employees separated into three “groups” for forgiveness calculation:1. Employees that received compensation from the Borrower at an annualized rate of

less than or equal to $100,000 for all pay periods in 2019, or were not employed by the Borrower at any point in 2019

2. Employees that received compensation from the Borrower at an annualized rate of more than $100,000 for any pay period in 2019

3. Owner-employees / self-employed individuals / general partners• Employees in groups #2 & #3 are not subject to salary/wage reduction

forgiveness adjustment• Does this mean that any employee that received “cash compensation” for

any weekly pay period in 2019 exceeding $1,923 is put in group #2?• Therefore, any decrease to such employee’s pay does not impact forgiveness amount

15

Loan Forgiveness: Salary/Wage Reduction

• Reduce forgiveness amount by decrease in average annual salary or hourly wage of any single employee during the covered period or alternative covered period as compared to the period of 1/1/20 – 3/31/20, which exceeds 25%, prorated over 8-week period.

• Example:• EE average annual salary during covered period is $50,000• EE average annual salary during 1/1/20 – 3/31/20 is $80,000• Decrease is 37.5% = (80,000 – 50,000) / 80,000

• Decrease exceeds 25%, results in forgiveness adjustment• EE salary of $50,000 exceeds 75% of $80,000 by $10,000:

• $80,000 x 75% = $60,000 - $50,000 = $10,000• Forgiveness adjustment is $1,538 = ($10,000 / 52 weeks) x 8 weeks

16

Loan Forgiveness: Salary/Wage Reduction Safe Harbor• The salary/wage forgiveness reduction does not apply for any single

employee if the safe harbor is satisfied• Safe harbor requires:

• Average annual salary or hourly wage for EE decreases between dates of 2/15/20 – 4/26/20, and

• Average annual salary or hourly wage of EE as of 6/30/20 is equal to or greater than the average annual salary or hourly wage as of 2/15/20

• Implication is that if salary/hourly wage was previously reduced, and is restored to 2/15/20 levels as of 6/30/20, then there is no forgiveness reduction

17

Loan Forgiveness: Full-Time Equivalency (FTE) Defined• Average full-time equivalency (FTE) determined using the covered

period or alternative covered period• Average FTE calculated as:

• Average number of hours paid per week, divided by 40 hours• Rounded to the nearest tenth• Cannot exceed 1 FTE (i.e. someone with 45 hours is still only 1 FTE)

• Simplified FTE method (NEW)• Assigns FTE of “1” for employees who work 40 hours or more per week• Assigns FTE of “.5” for employees who work less than 40 hours per week

• Owner-employees are not included in FTE calculation

18

Loan Forgiveness: FTE Reduction

• Compares borrower’s average FTE during:• Covered period or alternative covered period, versus either:

1. Reference period of 2/15/19 – 6/30/19, or2. Reference period of 1/1/20 – 2/29/20

• Borrower may choose whichever reference period produces better results• Percentage decrease in average FTE decreases amount of forgivable

expenses after applying the salary/wage reduction adjustment• Example:

• Borrower has $100,000 of forgivable expenses• Borrower has a salary/wage reduction of $10,000• Borrower has avg. FTE of 30 during covered period and 50 during reference period• Forgivable amount equals $54,000, calculated as follows

• ($100,000 expenses - $10,000 salary wage reduction) x 60% (30/50 FTE)

19

Loan Forgiveness: FTE Reduction Exceptions

• Borrower’s FTE count is not reduced for any of the following exceptions:

• Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee

• Any employees who during the Covered Period or the Alternative Payroll Covered Period:

• Were fired for cause, or• Voluntarily resigned, or• Voluntarily requested and received a reduction of their hours.

• In all of these cases, the exception only applies if the position was not filled by a new employee

20

Loan Forgiveness: FTE Reduction Safe Harbor

• The FTE reduction does not apply for any borrower if the safe harbor is satisfied

• Safe harbor requires:• Average FTE decreases between dates of 2/15/20 – 4/26/20, and• Average FTE as of 6/30/20 is equal to or greater than the average FTE during the pay

period inclusive of 2/15/20• Implication is that if average FTE was previously reduced, and is restored to

2/15/20 levels as of 6/30/20, then there is no forgiveness reduction• Additionally, any borrower that has not reduced the number of employees

or the average paid hours of their employees between 1/1/20 and the end of the covered period is considered to meet the safe harbor

21

Loan Forgiveness: Nonpayroll Costs

• Mortgage Interest Expense• Payments of interest (not including any prepayment) on any business mortgage obligation on

real or personal property incurred before February 15, 2020 • (e.g., the interest on your mortgage for the warehouse you purchased to store business

equipment or the interest on an auto loan for a vehicle you use to perform your business)• Rent/Lease Expense

• Business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020

• (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business)

• Utility Expense: • Business payments for a service for the distribution of electricity, gas, water, transportation,

telephone, or internet access for which service began before February 15, 2020• (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business

vehicle)

22

Loan Forgiveness: Nonpayroll Costs

• Nonpayroll costs must be paid during the covered period, or• Nonpayroll costs must be incurred during the covered period and

paid on or before the next regular billing date, even if the billing date is after the covered period

• Cannot use the alternative covered period for nonpayroll costs

23

Loan Forgiveness: 75% Payroll / 25% Nonpayroll Rule• No less than 75% of total forgivable expenses may be on payroll costs

• You do not have to spend at least 75% of the total loan amount on payroll in order to be eligible for forgiveness

• However, you will need to spend at least 75% of the total loan amount on payroll if you want to obtain 100% loan forgiveness

• Example:• Borrower received PPP loan of $100,000• Borrower spends $60,000 on payroll costs• Borrower’s maximum forgivable expenses is $80,000:

• $60,000 payroll costs / 75% = $80,000 total forgivable expenses• Borrower may therefore have up to $20,000, or 25%, of forgivable expenses consisting of

nonpayroll costs

24

Loan Forgiveness: Application Documentation to Submit• Payroll:

• Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.

• Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:

• Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and • State quarterly business and individual employee wage reporting and unemployment

insurance tax filings reported, or that will be reported, to the relevant state. • Payment receipts, cancelled checks, or account statements documenting the

amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount

25

Loan Forgiveness: Application Documentation to Submit• FTE Count:

• Documentation showing the average number of FTE employees on payroll per month employed by the Borrower during the chosen reference period of either 2/15/19 – 6/30/19, or 1/1/20 – 2/29/29

• The selected time period must be the same time period selected for purposes of completing PPP Schedule A

• Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.

26

Loan Forgiveness: Application Documentation to Submit• Nonpayroll costs:

• Mortgage interest:• Copy of lender amortization schedule and receipts or cancelled checks verifying eligible

payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments

• Rent/lease expense:• Copy of current lease agreement and receipts or cancelled checks verifying eligible

payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.

• Utility expense:• Copy of invoices from February 2020 and those paid during the Covered Period and

receipts, cancelled checks, or account statements verifying those eligible payments.

27

Loan Forgiveness: Application Documentation to Retain• PPP Schedule A Worksheet or its equivalent • Documentation supporting the listing of each individual employee in PPP

Schedule A Worksheet Table 1, • Including the “Salary/Hourly Wage Reduction” calculation, if necessary.

• Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2;

• Specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.

• Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.

• Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”

28

Loan Forgiveness: Application Documentation to Retain• All records relating to the Borrower’s PPP loan should be retained for

at least six years after the loan is forgiven or repaid including:• Documentation submitted with its PPP loan application • Documentation supporting the Borrower’s certifications as to the necessity of

the loan request and its eligibility for a PPP loan• Documentation necessary to support the Borrower’s loan forgiveness

application• Documentation demonstrating the Borrower’s material compliance with PPP

requirements.

29

Possible Future Changes

• Interim final rule / regulations on forgiveness is forthcoming• HEROES Act (unlikely to become law in current form)

• Extends covered period through end of year• Removes 75% payroll forgiveness requirement• Allows borrowers to defer ER Social Security tax even after loan forgiveness• Changes loan repayment term to minimum of 5 years

• Bill introduced to make expenses paid with forgiven PPP funds deductible

• Bill introduced to increase 8-week covered period to 12-weeks

30

Loan Forgiveness Application Example• Borrower obtains PPP loan of $80,000 on 4/10/20

• Borrower has 4 employees, A, B, C, and D (the owner)

• 2019 compensation & FTE• Employee A made $50,000 in 2019, average FTE of 20 hours per week• Employee B made $90,000 in 2019, average FTE of 40 hours per week• Employee C made $110,000 in 2019, average FTE of 40 hours per week• Employee D made $150,000 in 2019, average FTE of 40 hours per week, and is also the owner

• Due to COVID-19, Borrower laid off Employee A on 4/1/20

• Covered period compensation. Hours paid remained the same as 2019.• Employee B: $9,200 (pay cut from $90,000 to $60,000 on 4/1/20)• Employee C: $16,900• Employee D: $23,000

• Borrower paid the following other payroll costs• $2,000 of health insurance premiums• $1,000 of retirement contributions• $500 of SUTA

• Borrower paid the following nonpayroll costs during covered period:• $5,000 of mortgage interest• $4,000 of rent• $3,000 of utilities

• Borrower rehires Employee A on 6/20/20

31

Resources• PPP Loan Application• Treasury PPP Guidance Page• www.ocd.com/covid-19 (recorded presentation, slide deck, forgiveness worksheet)

Contact Us With Your Questions

32

Mark V. DowManaging Principal,

CPA, MSTmdow@ocd.com

Kevin J. CarnesPrincipal, CPA, CVAkcarnes@ocd.com

Lauren A. CarnesTax Principal, CPAlcarnes@ocd.com

Ryan J. McDonellTax Manager, CPA

rmcdonell@ocd.com