SBA PPP Update

May 6, 2020

Presenters

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Kevin StewartAdvisory PrincipalBriggs & Veselka

Eric DiehlAssociate DirectorB&V Capital Advisors

Rick WesterfieldTax PartnerBriggs & Veselka

Jason SharpTax Partner Briggs & Veselka

Washington’s response is subject to change in response to the continually evolving COVID-19 crisis

• Phase 1 - Tax deadlines originally set for April 15 were pushed back to July 15

• Phase 2 – The “Families First Coronavirus Response Act” (FFCRA) was passed on March 18; provides financial relief for business to provide time off for employees

• Phase 3 – The “Coronavirus Aid, Relief, and Economic Security Act’’ or ‘‘CARES Act’’; provides tax benefits and potentially loans/grants for businesses and non profits

Washington’s Response

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The SBA and Treasury Department are continually releasing new guidance, andhave indicated future guidance is forthcoming. Hence, this updated slidedeck SUPERCEDES those previously presented in the Briggs & VeselkaCOVID-19 Business Continuity Resources and Update webinars and any otherinformation previously provided to this date.

Note that there remain areas of the Act where additional clarification fromthe Treasury and SBA is needed. These agencies and other governmentagencies continue to push out guidance on a daily (sometimes hourly) basis,and the information herein is subject to change at any time.

Your judgment and interpretations of the Act may be necessary. For finalguidance on your specific loan application, including the forgivenessrequirements, please consult with your lender who will be evaluatingand processing your PPP funding.

What We Know Today Can Change Tomorrow

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Latest on forgiveness

Revisiting the good faith certification

SBA to review PPP loans greater than $2 million

IRS keeping things interesting

What’s New?

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Covered Period = 8 week period beginning the date the loan was funded

Loan forgiveness applications

─ Supporting documents

Two adjustments

─ Reduction in employee headcount

─ Reduction in employee salaries

Forgiveness 101

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75%

25%

USE OF PROCEEDS

ALLOCATION FOR FORGIVENESS

Payroll Costs

Rent, utilities, loan interest

Sample PPP Timeline

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Borrower applies for a PPP loan

Lender deadline to

disburse funds

Begin Covered Period

End Covered Period

Forgiveness application

can be submitted?

Lender deadline

for forgiveness

decision

April 3

-----Max 10 days-----

April 13

--------Covered Period: 8 weeks--------

June 8 August 8

----------------Max 60 days----------------

June 9

Is there a deadline to

apply for forgiveness?

(Probably?)

Deadline to apply for

PPP

June 30

AICPA recommends using the Affordable Care Act definition of FTE, which is 30 hours per week

For employees laid off on 2/15/20 or later, the borrower has until 6/30/20 to rehire those laid off employees to avoid a forgiveness adjustment

Forgiveness Adjustment #1: FTE Count

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Source: CARES Act; AICPA PPP Recommendations Letter

Payroll Cost

Average FTE per month for

8 weeks beginning on

loan originationOption 2

Average FTE per month from 1/1/20 to 2/29/20

Option 1 Average FTE per month

from 2/15/19 to 6/30/19

× ÷Reduction

of Forgivable Amount

=

Rehiring previously laid off employees: loan forgiveness amount will not be reduced if the borrower laid off an employee after (2/15/20), offered to rehire the same employee, but the employee declined the rehire offer (before 6/30/20)

Borrower must have made a good faith, written offer to rehire

Employee’s rejection must be documented

An employee who rejects a rehire offer may forfeit eligibility for continued unemployment

Note the difference between the 500 employee test and FTE Adjustment

Qualifying for PPP: fewer than 500 total employees (exceptions apply)

Calculating Forgiveness adjustment: FTEs only

Forgiveness Adjustment #1: FTE Count

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SBA FAQ # 40

The AICPA recommends conducting this analysis on a weekly basis, as this compares apples to apples (i.e. 8 week Covered Period compared to most recent quarter (12 weeks).

Include employees who were active through the entire Covered Period

Forgiveness Adjustment #2: Salaries

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Payroll Cost

For any employee who did not earn duringany pay period in 2019 wages at anannualized rate more than $100,000, theamount of any reduction in wages that isgreater than 25% compared to their mostrecent full quarter.

-Reduction

of Forgivable Amount

=

Source: CARES Act; AICPA PPP Recommendations Letter

Are These Costs Forgivable?

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Questions from today’s audience –are these costs included?

Forgivable Non-Forgivable

GuidanceNeeded

Housing stipend (counts towards 100k annualized cap)

X

Reasonable employee bonuses (counts towards $100k annualized cap)

X

Hazard pay related to COVID-19 concerns X

Prepaying salaries, rent or mortgages X

Payroll costs incurred prior to receiving PPP funds

X

401k matching for the year X

Severance for employee who moves up scheduled retirement

X

Shared maintenance costs from condos, landlords, etc.

X

This question list is from today’s audience and is not all inclusive – see previous guidance for additional categories of forgivable expenses

Source: CARES Act; AICPA FAQ, National Small Business Town Hall

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

Unnecessary borrowing through the PPP may carry criminal consequences

─ $1 million fine

─ Up to 30 years in prison

Borrowers have until May 14th to return “unnecessary” funds borrowed

─ Original deadline was May 7th

What Was That Thing About Good Faith?

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Good Faith Certification

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

SBA FAQ # 31, #43

How does a business define “necessary” in the context of the most unprecedented health and economic crisis of our lifetime?

Borrower must determine necessity; lenders are off the hook

─ Impact on revenues and expenses

─ Liquidity and access to other capital sources

─ Key employees contracting COVID-19

─ Economic hardship ahead?

EIDL’s “substantial economic injury”

Good Faith – What is “Necessary”

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Vagueness

Doctrine

A statute which either forbids or

requires the doing of an act in terms so

vague that people of common intelligence

must necessarily guess at its meaning and differ as to its

application

Loans in excess of $2 million are subject to review following lender’s submission of forgiveness application

Necessity of loan

─ Financial stress

─ Access to capital

─ Liquidity

Calculation of payroll costs to determine loan amount

Use of proceeds

Forgiveness adjustments

SBA Review

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SBA FAQ # 39

Payroll tax reports (Form 941, state income and unemployment)

Employee gross wages for 8 week Covered Period and for previous quarter (i.e. since 1/1/20)

State and local employer taxes during Covered Period (SUTA)

Average FTEs during

─ Covered Period

─ 2/15/2019 – 6/30/2019

─ 1/1/2020 – 2/29/2020

Group healthcare benefits

─ Excludes employee withholdings for their portion of contributions to the plan

Retirement plan benefits paid by employer

Other qualified costs: rent agreements, utility invoices, interest statements

Deliberate Recordkeeping

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Source: AICPA PPP Recommendations Letter

The IRS issued Notice 2020-32 on April 30. Specifically, the guidanceclarifies that no deduction is allowed for an expense that isotherwise deductible if the payment of the expense results inforgiveness of a covered loan under the CARES Act and the incomeassociated with the forgiveness is excluded from gross income.

Tax Deductions and PPP Forgiveness

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Senate Finance Committee Chair ChuckGrassley, R-Iowa, was quick to share hisdisappointment with IRS guidance. “Theintent was to maximize small businesses’ability to maintain liquidity, retain theiremployees and recover from this healthcrisis as quickly as possible,” Grassley saidin a statement. “This notice is contrary tothat intent.”

Employers can defer payment of the employer portion of the

Social Security tax (6.2%) paid over the following two years,

with half of the amount required to be paid by Dec. 31, 2021

and the other half by Dec. 31, 2022; employers would still be

responsible for FICA tax on employee wages

There is direct now guidance with respect to the interplay

between employers who defer payment of the payroll taxes if

they also received loan proceeds under the PPP

https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-

and-payments-through-december-31-2020

Delay of Payment of Employer Payroll Taxes

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From FAQ #4 - Can an employer that has applied for and received a

PPP loan that is not yet forgiven defer deposit and payment of the

employer's share of social security tax without incurring failure to

deposit and failure to pay penalties?

Yes. Employers who have received a PPP loan, but whose loan has

not yet been forgiven, may defer deposit and payment of the

employer's share of social security tax, through the date the lender

issues a decision to forgive the loan without incurring failure to

deposit and failure to pay penalties. Once an employer receives a

decision from its lender that its PPP loan is forgiven, the employer is

no longer eligible to defer deposit and payment of the employer's

share of social security tax due after that date.

Delay of Payment of Employer Payroll Taxes

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In general, section 2202 of the CARES Act provides for expandeddistribution options and favorable tax treatment for up to $100,000 ofCOVID-19-related distributions from eligible retirement plans (certainemployer retirement plans, such as section 401(k) and 403(b) plans, andIRAs) to qualified individuals, as well as special rollover rules with respectto such distributions.

The IRS is formulating guidance on section 2202 of the CARES Act andanticipates releasing that guidance in the near future. Notice 2005-92provided guidance on the tax-favored treatment of distributions and planloans under the Katrina Emergency Tax Relief Act of 2005 as thoseprovisions applied to victims of Hurricane Katrina. The IRS anticipates thatthe guidance on the CARES Act will apply the principles of Notice 2005-92to the extent the provisions of section 2202 of the CARES Act aresubstantially similar.

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

IRS adds FAQs on COVID-19 retirement plan distribution and loan rule changes

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The IRS has issued a draft version of 2020 Form 941 (Employer's Quarterly Federal Tax Return) and its instructions. It will be used beginning with the second quarter return (April 1 to June 30). The form has been updated to reflect COVID-19-related credits and other tax changes.

In the upper right of page one of the form, employers check a box to indicate what quarter they are filing the form for. The first quarter 2020 box is grayed out because the new version of the form should not be filed for the first quarter.

Updated Payroll Tax Forms

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With estate tax exemption amounts at all time highs, and business valuations at potentially historic lows, this may be a good time to consider a transfer of equity through gifting.

Tax Planning Opportunity

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Here to Help

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Ongoing expense monitoring to support forgiveness application

Forgiveness modeling to maximize forgiven amount

Tax implications and planning

Preparation for SBA loan reviews

Accounting treatment for financial institutions

Strategic advisory: M&A, recapitalization & restructuring

Resources

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Email us

SBAassistance@bvccpa.com

B&V COVID-19 Website

SBA Website

U.S. Department of Treasury

American Institute of CPAs (AICPA)

Other Resources

Industry Associations

Banks & lending institutions