Gregory S. Schreacke, CPA
CEO, RCGILTNER Digital Lending
Many who have received Paycheck Protection Loans are eager to know
how to apply for the forgiveness component of these of these loans. Ambiguity
still exists as specific guidance from the SBA has still not been released. Hereis what bankers and borrowers might expect based on current information.
For Bankers Concerning PPP Forgiveness
Bankers are in the business of helping
their customers. However, the lack of
SBA guidance on how forgiveness of PPP loans will work leaves a frustrating
lack of clarity that bankers cannot remedy. Bankers are advised to acknowledge
we are all waiting for guidance, and:
·
Avoid
making statements that suggest that the rules for forgiveness assessment are settled.
·
Recommend
that customers consult their other trusted advisors (accountants and lawyers)
for guidance in formulating strategies to achieve optimal loan forgiveness.
·
Ensure
that any guidance provided clearly indicates that the standards are unsettled
and that the bank is in no position to opine on how the law will ultimately be interpreted.
·
Suggest
best practices that will be useful regardless of how the
law is ultimately interpreted (record keeping, account segregation, types of
records likely needed to demonstrate compliance with forgiveness standards);
and
·
Reference to relevant government issued rules
and guidance.
For Borrowers
Concerning PPP Forgiveness
This section for borrowers in presented
in two parts: A. Review of Paycheck Protection Rules and Ambiguities which is
meant to assist in understanding the confusion about forgiveness, and B.
Preparing for Forgiveness, the steps borrowers can use to prepare for
forgiveness.
I.
Review of
Paycheck Protection Rules and Ambiguities
For
businesses, sole proprietors and self-employed individuals, the Paycheck
Protection Program allows loans equal to 2.5 time monthly allowable payroll and
related expenses. Components of these loans may be forgivable if the proceeds
are used for allowable payroll, rent, interest and utilities over the
eight-week period following the receipt of the loan. Certain limitations exist such as 75% of the
funds to be forgiven must be used for payroll.
The American Institute of CPAs, AICPA, has reviewed the ambiguities of PPP
forgiveness, and is making the following broad recommendations for the PPP application and forgiveness
process. We have no knowledge if
these will be accepted.
- The
eight-week covered period under PPP should align with the beginning of a
pay period, not the date loan proceeds are received.
- The eight-week period should be flexible,
with businesses able to choose to commence it once stay-at-home
restrictions are lifted instead of when loan proceeds are received.
- Full-time equivalents (FTEs) should be
calculated using a simple wage-based proxy when hours worked are not
tracked by the employer (e.g., for salaried workers or those paid by
piece).
- Payroll reduction calculations should be
based on an employee’s average payroll per week in the eight-week period
compared to the prior quarter, rather than comparing total compensation in
the periods. Loan forgiveness is reduced if an employee’s compensation
decreases by more than 25% but an eight-week period will naturally have
33% less payroll than a 12-week quarter.
These recommendations reflect the confusion about exactly how forgiveness
may happen. The lack of clarity is
particularly well defined by Evergreen
Small Business and summarized below.
A.
The 8-week period for forgiveness
immediately after funding occurs while many states are still in quarantine,
making use of funds more challenging.
B.
Headcount reduction or pay rate
reduction during the 8-week period after the receiving the loan could limit
forgiveness.
C.
The re-hire window is limited and
leaves open what to do with re-hires after 8 weeks.
D.
The 25% non-payroll costs limitation
and failing to spend at least 75% on payroll may present challenges.
E.
Self-employed individuals and sole
proprietors are likely limited to 75% loan forgiveness by SBA rules.
F.
Documentation is critical and not
fully clarified.
Our next section provides likely documentation required for
forgiveness by entity type for your preparation with thanks to AICPA, no
specific guidance exists.
II.
Preparing for Forgiveness
A. Loan forgiveness documentation for corporations,
LLCs and partnerships.
1.
Payroll tax reports: 2020 IRS Forms 941, state income and unemployment tax returns that include the 8-week covered period. (See recommendation below regarding 8-week covered period.) If your organization contracts with a payroll provider or Professional Employer Organization (PEO) you can supply other documents, such as reports reflecting employment tax returns filed.
2.
Compensation and FTEs: In general, payroll reports which will include the following:
a. Gross wages for each employee for the following:
i. During the 8-week covered period
ii. During the most recent full quarter before the 8-week covered period
b. Identifying employees who during any period in 2019, received an annualized pay of more than $100k and also employees whose principal place of residence is outside the U.S.
c. State and local employer taxes assessed on an employee’s compensation (i.e. SUTA) during the 8-week covered period
d. The average number of full-time equivalents (FTEs) per month for the following:
i. During the 8-week covered period
ii. Feb. 15 through June 30, 2019
iii. Jan. 1 through Feb. 29, 2020
Note: borrower elects which
period, ii or iii, to compare to i
3. Group health care benefits: Documentation showing
total costs paid for all health care benefits, including insurance premiums
paid by the organization under a group health plan. a. Include all employees
and company owners. b. Do not include employee withholdings for their portion
of contributions to the plan.
4.
Retirement plan benefits: Documentation showing the sum of all retirement plan funding costs paid by the organization.
a. Include funding for all employees and the company owners.
b. Do not include employee withholdings for their portion of contributions to the plan.
5. Other documentation: Canceled checks, receipts, account statements or other documentation of payment for other eligible costs incurred and paid during the covered period such as mortgage interest, lease payments, utility payments.
B. For Sole
Proprietors Having More Than One Employee
1.
The 2019 Form 1040 Schedule C to verify net income (line 31) for owner income replacement calculation.
2.
Provide payroll documentation including 2020 IRS Forms 941, state income and unemployment tax returns that include the 8-week covered period, including documentation of healthcare and retirement benefits costs. Exclude
owner from healthcare and retirement costs.
3.
Canceled checks, receipts, account statements or other documentation of payment for other eligible costs incurred and paid during the covered period such as mortgage interest, lease payments, utility payments. Note: these types of expenses must have been deducted on the 2019 Form 1040 Schedule C to be eligible for forgiveness.
C. For Sole
Proprietors Having One Employee, 1099 Provider or Self-Employed
1.
For individuals with self-employment
income who file a Schedule C (for farmers Schedule F, line 34) or a 1099, the Administrator,
in consultation with the Secretary, has determined that it is appropriate to
limit loan forgiveness to a proportionate eight-week share of 2019 net profit
or 1099, as reflected in the individual’s 2019 Schedule C (for farmers Schedule
F, line 34) or a 1099. You will only be
eligible for about 74% of your loan to be forgiven, although final guidance may
allow you to round this to 75%.
2.
To illustrate this, if your 2019 Schedule
C or 1099 shows exactly $48,000 of profit or income in 2019, so you earned
$4,000 a month and $923 a week in 2019.
3.
Your loan likely equaled 2.5 times
$4,000, or $10,000. But forgiveness equals 8 weeks times $923 per week, or
$7,384. You will want to provide your
2019 Schedule C or 1099 as documentation for profit last year, and your payroll
records and/or cancelled checks showing you paid yourself the $7,384 during the
eight-week forgiveness period. Sole proprietors or self-employed may be able to pay themselves at a higher rate during the 8-period to achieve full forgiveness of the loan.
