CARES Act - SBA Update

-PPP Forgiveness-Tax Updates-PPP for Self Employed 4/17/20

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Washington’s Response

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

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The SBA issued an “Interim Final Rule” for the PPP on April 2, 2020 and again on April 14, 2020that lays out additional implementation guidelines and requirements for the PPP. Further, thehas published several FAQ documents have been released since the PPP was passed. Hence,this updated slide deck SUPERCEDES those previously presented in the Briggs & Veselka COVID-19 Business Continuity Resources and Update webinars and any other information previouslyprovided to this date.

Note that there remain areas of the Act where additional clarification from the Treasury andSBA is needed. These agencies and other government agencies continue to push out guidanceon a daily (sometimes hourly) basis, and the information herein is subject to change at anytime.

Your judgment and interpretations of the Act may be necessary. For final guidance on yourspecific loan application, including the forgiveness requirements, please consult with yourlender who will be evaluating and approving your PPP application.

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What We Know Today Can Change Tomorrow

SBA Response to COVID-19

Source: SBA.gov

Paycheck Protection Program (PPP)

SBA Express Bridge Loans

Economic Injury Disaster Loans (EIDL)

For Current SBA Borrowers Only

Cash flow assistance to employers who maintain payroll

during the emergency

Up to 100% of funds borrowed are

forgivable, if certain conditions are met

Provides immediate relief to small

businesses with non-disaster SBA loans;

the SBA will cover all loan payments on

new or existing SBA loans, including

principal, interest, and fees for up to six

months

Low interest, long term loans providing

working capital to sustain small businesses

Emergency grant provides $10,000 to businesses harmed

by COVID-19 with no repayment required

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SBA Debt Relief

For New and Current SBA Borrowers

Enables small businesses who currently have a

business relationship with an SBA Express Lender

to access up to $25,000 quickly.

Timeline

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March 13: President Trump emergency declaration for all states, territories and DC

March 18: Families First Coronavirus Response Act (FFCRA) signed

March 27: CARES Act signed

April 2: PPP First Interim Final Rule

April 3: Lenders begin accepting PPP applications

April 10: Applications accepted for self-employed

April 14: PPP Second Interim Final Rule

April 15: Latest SBA FAQ published

April 16: SBA no longer accepting applications based on available appropriationsfunding

Review: Maximum Loan Amount

Sum of Included Payroll Costs

Sum of Excluded Payroll Costs

Average Monthly Payroll Cost

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Included Payroll Costs• Salaries, wages, cash tips (excluding 1099

payments to independent contractors)• Vacation, parental, family, medical or sick

leave• Healthcare and retirement benefits• State and local tax

Average Monthly Payroll Cost

2.5 multiplierMaximum Loan

Amountx EIDL Advance- =

= - 12Excluded Payroll Costs• Cash compensation in excess of an

annual salary of $100,000• Compensation of an employee whose

principal place of residence is outside ofthe U.S.

• Qualified sick leave or family leave wagesfor which a credit is allowed under theFFCRA

The true-up period is coming, and forgiveness is not necessarily guaranteed

Forgiveness expected to be granted upon filing an application with the SBA

Loan Forgiveness

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Maximum loan amount received by borrower and provided by PPP

Qualified expenses

Eligible for forgiveness

Non-qualified expenses

Excess funds borrowed and not

used

Converted to 2 year amortizing 1% loan

Returned to SBA via principal reduction

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following qualified expenses items during the 8 week period following the loan origination date:

Loan Forgiveness

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75%

25%

USE OF PROCEEDS ALLOCATION FOR FORGIVENESS

Payroll Costs

Rent, utilities, loan interest

• Qualified payroll costs • Rent on a leasing agreement• Payments on utilities: electricity, gas,

water, telephone, or internet• Mortgage interest• Interest on other debt obligations

incurred prior to February 15, 2020

The loan forgiveness cannot exceed the principal borrowed

Example: Loan Calculation

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Included Payroll Costs

1 Salaries, wages, tips (excluding 1099 payments) $770,000 Annualized Qualified Principal

2 Employer healthcare contributions $500,000 Employees Gross Wages Gross Wages Residence

3 Employer retirement contributions $10,000 1 $40,000 $40,000 U.S.

4 State and local tax $5,000 2 $50,000 $50,000 Mexico

5 Total Payroll $1,285,000 3 $60,000 $60,000 U.S.

4 $70,000 $70,000 Canada

Excluded Payroll Costs 5 $80,000 $80,000 U.S.

6 Cash compensation in excess of $100,000 ($80,000) 6 $90,000 $90,000 U.S.

7 Non-domestic employees ($120,000) 7 $110,000 $100,000 U.S.

8 Qualified credits taken under FFCRA ($1,000) 8 $120,000 $100,000 U.S.

9 $150,000 $100,000 U.S.

9 Net Payroll Costs $1,084,000 Total $770,000 $690,000

10 Average monthly payroll costs $ 90,333

Legend

11 2.5 Multiplier $225,833 Blue Text = Inputs or Assumptions

Black Text = Calculations

12 Add Desired EIDL Refinance (optional) -

13 Subtract EIDL Emergency Grant ($9,000)

(required, if applicable)

14 Final Loan Amount $216,833

Calculating Maximum Loan Amount Qualified Gross Wages Calculation

Example: Use of Proceeds Rule

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Forgiveness

Final Loan Amount $ 216,833 $ 216,833

Qualifying for 100% loan forgiveness

Minimum proceeds for used payroll $ 162,625 75% $ 162,625 75%

Maximum proceeds used for rent, utilities, interest $ 54,208 25% $ 54,208 25%

Actual use of proceeds over 8 weeks

Payroll costs $ 158,000 73% $ 165,000 76%

Rent $ 33,833 16% $ 26,833 12%

Utilities $ 15,000 7% $ 15,000 7%

Interest on debt obligations $ 10,000 5% $ 10,000 5%

Total Expenses $ 216,833 100% $ 216,833 100%

Payroll forgiveness $ 158,000 $ 165,000

Non-payroll forgiveness $ 52,667 $ 51,833

Eligible for Forgiveness $ 210,667 97% $ 216,833 100%

Forgiveness Adjustment

Reduction in FTE

Reduction in Salaries

Adjusted Forgivable Amount $ 210,667 $ 216,833

Balance owed $ 6,167 $ 0

Scenario 1 Scenario 2

Additional guidance needed

Forgivable amount is reduced if there is a reduction in the number of employees

Seasonal employers use Option 1

Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages

Forgiveness Adjustment

Source: U.S. Chamber of Commerce

Payroll Cost

Average FTE per month for 8

weeks beginning on loan

origination

Option 2Average 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

=

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Forgivable amount is reduced if there is a greater than 25% reduction in wages paid to employees

Forgiveness Adjustment

Source: U.S. Chamber of Commerce

Payroll Cost

For any employee who did not earn during any payperiod in 2019 wages at an annualized rate morethan $100,000, the amount of any reduction inwages that is greater than 25% compared to theirmost recent full quarter.

-Reduction

of Forgivable Amount

=

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Maximizing Forgiveness

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Forgiveness is processed through the lender; approved by SBA

Keeping clean records• Separate bank account

• Evidence of rent, interest payments utilities

• Payroll documentation provided by a payroll provider or PEO that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider or PEO for the borrower’s employees will be considered acceptable PPP loan payroll documentation.

Consult with your tax advisor on applying for forgiveness to help maximize forgiveness amount

Closing Thoughts on PPP

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“You have to hand it to the SBA. It has done a remarkable job of providing answers to questions that only create more questions.”--Tony Nitti, Forbes Senior Contributor

Lenders have 60 days to make a decision on forgiveness• In the absence of guidance, lenders will be left to interpret forgiveness

calculations on their own

Additional guidance is needed on • Forgiveness application and process• Forgiveness adjustments • Tax implications

Remember amount not forgiven has to be repaid over two years at 1% interest

Payroll cost analysis and forgiveness forecasting• We can help navigate the complex rules to help estimate loan amounts,

forecast forgiveness, and provide guidance on prudent expense management to maximize forgiveness benefit

Ongoing expense monitoring to support PPP loan forgiveness application• Documentation providing back up supporting data for the number of

employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings

• Documentation providing back up supporting data for payments on covered mortgage obligations, lease obligations, and utilities.

How B&V Can Help

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Our network of bankers, regulators, attorneys, investment bankers and tax professionals provides real time access to the continually evolving stimulus

programs and underlying economic conditions that will challenge businesses around the world in the coming weeks, months and years

How B&V Can Help

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PHASE 1 – Time Extension

• This was originally designed for smaller businesses and individuals, but was later expanded to apply to everyone.

• The IRS has released Notices 2020-18 and 2020-23 an FAQ page that answers many of the common questions taxpayers are having with respect to this postponement of certain filings and payment of taxes.

See https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers for more detailed information.

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PHASE 1 (continued)

• Taxpayers are not required to file anything to qualify for the extension.

• 2019 Form 1040 (Individual tax return) due on April 15• 2019 Form 1120 (Corporation tax return) due on April 15• 1st quarter 2020 Estimated Tax Payments originally due

on April 15• 2nd quarter 2020 Estimated Tax Payments originally due

on June 15• Other various tax filings

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PHASE 2 - FFCRA

• Families First Coronavirus Response Act (the “Act”). This bill provides assistance and relief in multiple areas:

• Family and medical leave• Sick leave for employees• Tax credits to employers and self-employed individuals providing

the leave• Impacts on employer-sponsored health plans.

• Per the DOL, effective date is April 1, 2020.

• More information is available at: https://www.dol.gov/agencies/whd/pandemic/ffcra-questions

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PHASE 2 - FFCRA

• Briggs & Veselka created a webinar dedicated to the provisions created by the FFCRA.

• Below is the link to a recorded version of this presentation

https://www.bvccpa.com/services/advisory-services/sba-loans/

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PHASE 3 – CARES Act

Could be divided into two main areas:

• Tax Savings

• SBA Loan Program

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Rebate Checks

• Individual Rebate• $1,200 ($2,400 for eligible individuals filing a joint return), plus • $500 for each qualifying child of the taxpayer

• LIMITATION: The amount of the credit is reduced (but not below zero) by 5% of the taxpayer's adjusted gross income (AGI) in excess of: • $150,000 for a joint return, • $112,500 for a head of household, and • $75,000 for all other taxpayers

• IRS Website with information for taxpayers regarding payments:

https://www.irs.gov/coronavirus/economic-impact-payments

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• 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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• The CARES Act provides that NOLs arising in a tax years 2018, 2019 and 2020 can be carried back to each of the five tax years preceding the tax year of such loss.

• On April 9, 2020, the IRS released Revenue Procedure 2020-24 that outlines the procedures for taxpayers to take advantage of the NOL carryback opportunities.

• On April 10, IRS released Notice 2020-26 which grants a six-month extension of time to file Form 1045 or Form 1139, as applicable, to taxpayers that have an NOL that arose in a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.

Guidance on NOL Carrybacks

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Guidance on NOL Carrybacks

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Created by American Bar Association Section of Taxation

• On April 14, SBA released Interim Final Rule Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans.

https://www.sba.gov/document/policy-guidance--ppp-interim-final-rule-additional-eligibility-criteria-requirements-certain-pledges-loans

• This interim final rule supplements the First PPP Interim Final Rule with guidance for individuals with self employment income who file a Form 1040, Schedule C. Also provides some guidance for partners/partnerships.

PPP Loans for Self Employed

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• Seems to state that self employed individuals with no employees will be limited to $20,833 PPP loan (general $100,000 compensation limit ÷ 12 months X 2.5 months).

• If applicable, the PPP loan application should add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 (if you want to refinance through PPP), less the amount of any advance under an EIDL COVID-19 loan

• Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount

PPP Loans for Self Employed

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• What can self employed individuals spend PPP loan proceeds on?

• The same categories of items discussed for businesses with PPP loans, with the caveat that these items must be deductible on Schedule C.

• Payroll costs – for employees (if applicable) and owner compensation (up to $100,000)

• Mortgage interest payments for real or personal property used directly in the business.

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

• Business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle)

PPP Loans for Self Employed

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• What can self employed individuals spend PPP loan proceeds on?

• Same limitations as businesses using PPP loans

• At least 75 percent of the PPP loan proceeds shall be used for payroll costs

PPP Loans for Self Employed

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• If you are a partner in a partnership, you may NOT submit a separate PPP loan application for yourself as a self-employed individual.

• Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. This seems to imply that guaranteed payments are considered “Payroll” for purposes of PPP loans.

PPP Loans for Partners

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Briggs & Veselka SBA Disaster Reliefhttps://www.bvccpa.com/services/advisory-services/sba-loans/

SBAhttps://www.sba.gov/funding-programs/loans/coronavirus-relief-options

AICPAhttps://www.aicpa.org/news/aicpa-coronavirus-resource-center.html

U.S Department of Treasuryhttps://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

Resources

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