CASP - PPP Loan Forgiveness Presentation - 09-24-2020 · 2020. 9. 24. · Interest on a borrower's PPP loan forgiveness amount will also be forgiven 10 11 12. 9/24/2020 5 Potential

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September 24, 2020

PPP Update: What ABA Provider Organizations Need to Know about Forgiveness

Presented for the Council of Autism Service Providers

by Steven S. Poindexter

About Lewis Rice

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Recent Updates to the PPP

5% Ownership Threshold

• New 5% threshold for the owner‐employee compensation limits • Applies to corporations, but apparently not LLCs or partnerships

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Nonpayroll Costs Attributable to Tenants or Sub‐tenants are Ineligible for Forgiveness

• "the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub‐tenant of the PPP borrower or, for home‐based businesses, household expenses."


Real Estate (and Personal Property?) Leased from a Related Party

• "Related Party" = "any ownership in common between the business and the property owner." • It appears that this would mean that the following are related parties:

• a landlord and a tenant that are each owned in whole or in part by another entity or individual; and• an individual owner of real estate that leases the property to a business in which that individual

owner has an interest (note the interim final rule does not specify whether this interest has to be above a certain threshold or a controlling interest).

• Related Party Lease: so long as the lease and the mortgage were entered into before 2/15/20, forgivable rent or lease payments to the "related party" is limited to "the amount of mortgage interest owed on the property [to a person or entity other than a "related party"] during the Covered Period that is attributable to the space being rented by the business."


Real Estate Leased from an Unrelated Party

• The borrower can seek forgiveness for the amount of rent that it pays to its landlord less the rent payable by the borrower’s sub‐tenant(s) to the borrower.

• If the borrower shares the leased space with another business, the borrower must determine the amount of rent and utility costs eligible for loan forgiveness "in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings."

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Limitations relating to Mortgaged Real Estate Owned by the Borrower and Leased to Another Business

• The portion of the borrower’s mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses."

• Example: "if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness of 75% of the mortgage interest."

• The new IFR does not specify:• how (nor how recently) fair market value should be determined or documented• how the borrower should determine utility costs eligible for forgiveness.

PPP Loan Forgiveness

Forgiveness is Based On…

• Eligibility• Payroll Costs • Nonpayroll Costs• Full‐Time Equivalent Employees• Salary and Hourly Wages• Compliance with PPP Loan Documents and PPP Rules

Eligible Payroll Costs

What payroll costs are eligible for forgiveness?

• Payroll costs are forgivable (subject to caps) if they were (i) paid during the Covered Period, or (ii) incurred during the Covered Period and paid on or before the next regular payroll date.

• Bonuses and Hazard Pay: PPP loan proceeds used to pay bonuses or hazard pay can be forgiven as Eligible Payroll Costs, subject to the $100,000 annualized limitation.

• Furloughed Employees: Salary, wages, or commission payments to furloughed employees paid are forgivable, subject to the $100,000 annualized limitation.

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Eligible Nonpayroll Costs

What nonpayroll costs are eligible for forgiveness?

• Covered mortgage obligations• Covered rent obligations• Covered utility payments

• 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 ("business utility payments").

• "A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness."

Eligible Nonpayroll Costs

Household Expenses

• If a self‐employed individual or sole proprietor PPP borrower works out of his or her home, the borrower cannot request forgiveness for nonpayroll costs in excess of “the share of covered expenses that were deductible on the borrower’s 2019 tax filing, or if a new business, the borrower’s expected 2020 tax filings.”

• The new IFR does not provide any guidance concerning how expected 2020 tax filing amounts should be determined or documented.

Maximum Loan Forgiveness Amount

Your maximum amount of forgiveness equals the lesser of:

1. (Eligible Payroll Costs plus Eligible Nonpayroll Costs minus Salary/Hourly Wage Reduction) multiplied by the FTE Reduction Quotient

2. PPP Loan Amount3. Eligible Payroll Costs divided by 0.60

Interest on a borrower's PPP loan forgiveness amount will also be forgiven

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Potential Reductions to Forgiveness

To avoid a reduction in its PPP loan forgiveness, a borrower must….

Spend at least 60% of its PPP loan on Eligible Payroll CostsMaintain its full‐time equivalency (FTE) (or qualify for a safe harbor)

o There are exceptions!o This is not the same as maintaining headcount!

Maintain employee salaries and hourly wages at at least 75% of pre‐pandemic levels (or qualify for a safe harbor)

Comply with the terms of its loan and the PPP

What Rules Apply?

Eligibility vs. Forgiveness

• Eligibility: Rules and guidance at the time of the borrower’s loan application.

• Forgiveness: Rules and guidance at the time of the borrower’s forgiveness application.

Timing for Applying for Forgiveness

• At any time on or before the maturity date of the PPP loan, including during its Covered Period, after spending its PPP loan proceeds on costs for which it seeks forgiveness.

• It’s unclear whether the borrower can apply more than 10 months after the end of its Covered Period.

When can borrower’s apply for forgiveness?

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Timing for Applying for Forgiveness

No. A borrower may elect to not apply for forgiveness in whole or in part for its PPP loan.

Why forgo forgiveness?• Ineligible• M&A• Public Relations

Do borrowers have to apply for loan forgiveness?

When is the earliest that a borrower should apply for forgiveness?

Is the PPP loan under $150,000 or $2 million?

• Proposed legislation would make it easier to obtain forgiveness

• Proposed Continuing Small Business Recovery and Paycheck Protection Program Act’s tiered forgiveness structure:• loans under $150,000 would be automatically forgiven

• Perhaps based on a good faith effort to comply

• loans between $150,000 and $2 million would have forgiveness streamlined

• forgiveness rules for loans of $2 million+ would remain the same


Will the Salary/Hourly Wage Reduction apply?

• The borrower must account for the excess reduction for the full Covered Period, even if it applies for forgiveness before the end of its covered period

• The borrower must prorate the amount of the excess reduction over its entire 24‐week Covered Period

• It appears this would apply even if the borrower qualified for the Salary/Hourly Wage Reduction Safe Harbor

• Source: SBA Webinar on 9/4/2020

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Salary/Hourly Wage Reduction Safe Harbor

• Applies to an employee if:• the annual salary or hourly wage for the employee as of February 15, 2020 is greater than

the average annual salary or hourly wage for the employee between February 15, 2020 and April 26, 2020; and

• the "average annual salary or hourly wage as of December 31, 2020" is equal to or greater than the annual salary or hourly wage for the employee as of February 15, 2020.


Will the FTE Reduction apply?

• FTE Reduction Safe Harbor 1 is determined at the end of the Covered Period

• FTE Reduction Safe Harbor 2 is determined at the earlier of:• the date of the PPP loan forgiveness application • 12/31/20

• FTE Reduction can only be calculated after the Covered Period• This also limits ability to make staffing changes during the remaining Covered Period• If you plan on reducing headcount, it may be beneficial to apply early so long as you can

rely on FTE Reduction Safe Harbor 2


FTE Reduction Safe Harbor 1

• The borrower, in good faith, can document that it was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID‐19.

• Includes executive orders based on such requirements and guidance.

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FTE Reduction Safe Harbor 2

• Applies if the borrower:• reduced its FTE employee levels during the period beginning February 15, 2020 and ending

April 26, 2020; and • then restored its FTE employee levels by not later than December 31, 2020 to its FTE

employee levels in the borrower’s pay period that included February 15, 2020.

• The borrower must compare its total FTE as of the earlier of:• December 31, 2020; and• the date the PPP Loan Forgiveness Application is submitted.


An open FTE Reduction question….

Does a PPP borrower still qualify for FTE Reduction Safe Harbor 2 if it qualified during its Covered Period, but subsequently reduced headcount and/or hours again?


Enough Eligible Payroll Costs for full forgiveness?

• Easier to review and approve

• Less compliance risk

• According to SBA, a borrower that applies early for forgiveness must prorate the $100,000 annual compensation limit over the time that it accrues cost for forgiveness

• Example: If you use 12‐weeks of payroll, prorate $100,000 over 12 weeks ($100,000/52 weeks x 12 weeks = $23,076.92)

• Applies to non‐owners only; owner‐employees are subject to regular rules

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Is the lender prepared to accept PPP loan forgiveness applications?

• Although SBA has opened its portal to lenders, most lenders are not prepared to begin accepting applications, yet.


In a hurry to start making payments?

• The sooner a borrower applies for PPP loan forgiveness, the sooner it will be required to repay any portion of its PPP loan that is not forgiven.


Deductibility

• While forgiven PPP loan amounts are not taxable (not CODI), the amount of the payroll costs and nonpayroll costs that are forgiven are not deductible for tax purposes

• The tax impact would thus be felt in the year the PPP loan is forgiven in 2021

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Does the borrower anticipate engaging in M&A activity?

• The PPP loan would impact M&A transactions in a variety of ways. • M&A transaction is likely prohibited without PPP lender consent, and perhaps

SBA consent. • If the parties want to keep the PPP loan in place post‐closing, then prior

lender and SBA consent will likely be required. • If the PPP loan will remain in place post‐closing, consider:

• purchase price and valuation• representations and warranties • indemnification• covenants (e.g., control of the forgiveness process and audits)

Process: Submit the Application

How to apply for forgiveness…

• Complete and submit one of the following: • SBA Form 3508• SBA Form 3508EZ• Lender equivalent


Can the borrower use SBA Form 3508EZ? Yes, if…

The borrower is a self‐employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).

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Both of the following are true: • No reduction in annual salary or hourly wages of any employee by > 25% during the Covered

Period compared to the period between 1/1/20 and 3/31/20 • "employees" means only those employees that did not receive, during any single period

during 2019, wages or salary at an annualized rate of pay > $100,000• No reduction in the number of employees or the average paid hours of employees between

1/1/20 and the end of the Covered Period• Ignore reductions that arose from an inability to rehire individuals who were employees

on 2/15/20 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before 12/31/20.

• Ignore reductions in hours the borrower offered to restore but the employee refused• This is different than the FTE calculation, which doesn't have a headcount component



OR both of the following are true: • No reduction in annual salary or hourly wages of any employee by > 25% during the Covered

Period compared to the period between 1/1/20 and 3/31/20 • "employees" means only those employees that did not receive, during any single period

during 2019, wages or salary at an annualized rate of pay > $100,000• (B) the borrower was unable to operate during the Covered Period at the same level of

business activity as before 2/15/20, due to compliance with requirements established or guidance issued between 3/1/20 and 12/31/20 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID‐19

Process: Submit Eligible Payroll Cost Documentation

Verify eligible cash and non‐cash compensation:

• Bank account statements or third‐party payroll service provider reports• Tax forms (or equivalent third‐party payroll service provider reports)

• 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.

• For health insurance and retirement plans, payment receipts, cancelled checks, or account statements

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Process: Submit FTE Documentation

Verify FTE:

• Documentation showing, at borrower’s election, average number of FTE employees on payroll per month employed by the borrower between:• 2/15/19 and 6/30/19; or • 1/1/20 and 2/29/20.

• Different rules apply to seasonal employers.• Because this FTE information "at the end of the Covered Period" is required, it

appears that a borrower Filing early for PPP loan forgiveness cannot use SBA Form 3508EZ.

Process: Submit Eligible Nonpayoll Costs Documentation

Business mortgage interest payments:

Copies of lender amortization schedule(s) 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.


Business rent or lease payments:

• Copies 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.

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Business utility payments:

• Copies of invoices from February 2020 and those paid during the Covered Period; and

• Receipts, cancelled checks, or account statements verifying those eligible payments.

Process: Maintain (not Submit) the Following Documentation

Borrowers are required to maintain, but not submit, the following:

• 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."

Process: Maintain (not Submit) the Following Documentation

But note…

As stated in SBA Procedural Notice 5000‐20038:

"The Lender must also request that the borrower provide the Lender with the applicable documentation that the instructions to the Loan Forgiveness Application Form (SBA Form 3508, 3508EZ, or Lender’s equivalent form) instruct the borrower to maintain but not submit (documentation listed under "Documents that Each Borrower Must Maintain but is Not Required to Submit"). The Lender must submit the additional documents received from the borrower to SBA within 5 business days of receipt from the borrower."

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Review and Decision

Lender Review

• Within 60 days from receipt of a complete application, lender must issue a decision to borrower and SBA

• The lender must confirm:• Receipt of the borrower’s certifications• Receipt of the documentation the borrower must submit to aid in verifying

payroll and non‐payroll costs• Various calculations on SBA forms or lender equivalent forms

PPP Audits

Generally

• SBA has not published guidance on the extent, timing, or process for SBA Audits of PPP loans.

• An adverse decision in an PPP Audit could result in denial of loan forgiveness, a demand for immediate repayment of the PPP loan, and potentially civil or criminal penalties or prosecution.

PPP Audits

Audit Focus Areas

• PPP Loan Eligibility• PPP Necessity Certification• Loan Amounts• Permitted Uses• Loan Forgiveness Certifications and Amounts

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PPP Audits

Best Practices for Mitigating Liability and Preparing for an Audit

• Preserve Documentation• If contacted by SBA, gather the following basic documentation:

• PPP loan application and supporting documentation• 2019 tax returns and financial statements• Corporate organization and ownership structure• Number of affiliated employees• PPP loan documentation executed• PPP Loan Forgiveness Application and supporting documentation• Copies of all emails or other correspondence with lender or SBA

• Prepare for Auditor Interviews• Key personnel should be prepared to address questions relating to the applicant's decision‐making

process and why the applicant needed the PPP loan.• Adopt Protocols• Stay Apprised of PPP Developments

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Questions?

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