As Covid-19 continues to affect different businesses in different ways, we know many of the business owners have either applied for or possibly received Paycheck Protection Program funds.
We have again partnered with CPA Evan Hutcheson who has been managing finances, taxes and accounting for businesses for more than 10 years.
Evan shares strategies and details below for us to share with business owners if you have received PPP funds or hope to obtain funding in a new round.
This information pertains to calculating the forgivable portion of the loan if or when you receive PPP funds. Due to the contradictions within the law, it’s essentially a list of confusing notes/scenarios, so it may not be worth trying to wrap your head around all of it yet. Hopefully though, it will provide some assistance in determining what loan expenses are forgivable.
Lastly, the banks, which are not sure exactly what they are doing, (no one does), are ultimately the ones making all the rules. The good news is that no banks want 1% loans on their books, so it’s likely they’d push for forgiveness on as much of the funds as possible.
Scenarios & Notes
1) The law says that the forgivable portion needs to be “incurred
and paid” during period. The “and” is not entirely clear. Can we forgive what has been both incurred and paid as wages, or does the payroll costs have to be both incurred and paid during the period in order to be forgivable?
In other words, let’s say a pay date is outside of the 8 week period, but it is for pay that was earned during the period. That has been incurred but not paid during the 8 week period. What if a payment was made for payroll on the first date of the 8 week period for services performed prior to the 8 week period? That would be paid but not incurred during the period.
They do not make it clear what qualifies and what doesn’t qualify by just saying “incurred and paid” in the law.
For simplicity, let’s go with just paid at this point, so you are solely focusing on pay dates rather than pay cycles.
They haven’t clarified this yet, so if that changes, we will let you know.
2) Bonuses were not intended to be forgiven, nor was forward pay, unless that is the norm of the employer.
3) The full amount cannot be forgiven for solo practitioners, since the loan forgiveness goes on an 8 week calculation and the loan amount was based on 2.5 months (10.83 weeks). If you have rent expense that can be forgiven, you will get closer to 100%, but rent/utilities/etc. can only be forgiven on up to 25% of the loan.
If you take 8 weeks forgiveness divided by 10.83 weeks that was used in determining the loan, you get a quotient of 73.86%. Best case scenario, utilizing rent expense will allow you to obtain nearly full forgiveness, but a portion will still not be forgivable.
4) Are forgivable expenses tax-deductible? The Internal Revenue Code section 265 disallows expenses related to tax-exempt income, but we’re still awaiting further guidance since this is not a scenario the drafters of that code section had in mind. I am sure they will continue not to be deductible.
5) As of now, it is unclear whether individuals with multiple business can stack forgiveness benefits.
6) The application process allowed partnerships to apply for loans, but not the partners themselves. However, we don’t know if the forgiveness portion applies to limited partners in a partnership or limited members in an LLC at this point. The guidance also does not specify treatment of payments in the form of guaranteed payments. I would guess guaranteed payments are allowed to be forgiven.
7) Payroll costs for forgiveness are defined in the law the same way they were defined during the initial loan calculations, which was in essence net payroll. The SBA eventually changed the loan amount calculation to gross payroll, but has not clarified if they are doing the same for the loan forgiveness portion. I would think they would change the forgivable portion to gross payroll as well, but they could decide not to, in order to effectively continue to collect payroll taxes for Social Security and Medicare and keep those government funds capitalized. We will know more upon further guidance.
8) The total amount of loan forgiveness is reduced by a few items, including a decrease in full-time employees (FTE’s). The law doesn’t clarify what constitutes a FTE, but prior FTE calculations used 30 hours as the baseline, while part-time employees would need to be combined to create 1 FTE. So if your FTE is reduced compared to total FTE’s during either of the following periods: 2/15/19 – 6/30/19 or 1/1/20 – 2/29/20, then your loan forgiveness is reduced. You get to pick the period to use; therefore, you want to pick the period with the least full-time employees.
There are multiple covered periods that must be taken into consideration. It doesn’t stop with the above. They then look at the period of 2/15/20 – 4/27/20, and if employees have dropped off since 2/15/20, you must rehire them to obtain full loan forgiveness.
In addition, this is probably just a drafting error, but the amount of loan forgiveness is said to decrease by multiplying the quotient above (current FTE/prior FTE) by the loan amount to equal the forgiveness reduction.
So, if the employee count did not change, then the reduction would be 1 x forgiveness amount, which would equal full forgiveness amount, and you would get zero forgiveness.. Again, this is probably an error and should be corrected later with more guidance.
9) What about the replacement of employees? Well, there’s no clear guidance on this either, but if we use the formula in #8 above, it should not affect the calculation. However, loan forgiveness is said to get reduced if employee A receives a reduction in wages in excess of 25% of what he/she did in the previous quarter, so we’ll definitely need clarifying guidance about replacement employees and whether a new employee can be used as a comparison against the old employee.
They will need to go even a bit further into the interpretation of this portion of the law, because to determine this 25% reduction, the law says to compare wages during the 8 week period to wages in the previous quarter…and a calendar quarter is a bit more than 8 weeks, so that will alter the forgiveness available in a negative way.
10) The $100,000 per-employee limit applies only to regular salary. So, additional payroll costs, such as retirement or health insurance can be added to the forgivable amount.
We know this is a lot of information. We also know there is a lot of uncertainty around PPP laws and guidelines and for business owners in general right now. We will continue to do our best to provide valuable information to our community of business owners.
If you have financial, accounting or tax questions about your business, feel free to reach out to Evan Hutcheson here.
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