Paycheck Protection Program Loan Forgiveness Issues › UploadedFiles › Files › 2020-4-… · Forgiveness for Schedule C PPP Loans. Orr-reno.com // 45 S. Main Street // Concord,

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Paycheck Protection ProgramLoan Forgiveness Issues

Orr & Reno, P.A.Nathaniel Morse, Tony Sayess and Lindsay Nadeau

April 28, 2020

Orr-reno.com // 45 S. Main Street // Concord, NH 03301 // (603) 224.2381 2

Agenda

• What is the Paycheck Protection Program?

• Logistics of Loan Forgiveness

• Special Rules for Self-Employed Individuals

• Open Issues

• Questions

WHAT IS THE PAYCHECK PROTECTION PROGRAM?

Orr-reno.com // 45 S. Main Street // Concord, NH 03301 // (603) 224.2381

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Paycheck Protection Program (“PPP”)What is It?

• Special SBA loan program created as part of the federal “CARES” Act – emergency Coronavirus response legislation

• Initially, a $349 Billion program designed to keep small businesses afloat during the Coronavirus emergency, especially through June 30, 2020

• Recently, refreshed with an additional $321 billion• Policy goal is to keep employers from laying off employees• Huge Advantage of this loan program – depending on how

the loan funds are used, some or all of it could be forgiven (tax-free)

• Also - No personal guaranty or collateral required, unlike other SBA loans


LOGISTICS OF LOAN FORGIVENESS


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PPP: Loan Forgiveness

• Word of Caution – Guidance is still needed from SBA on this issue.

• Guidance is expected before the end of Borrower’s 8-week period to spend PPP loan funds, but those funds are currently being spent today without the benefit of official guidance.

• The rules discussed in this presentation are subject to change, and in some cases are our best guesses as to how forgiveness will work based on the statute and what limited guidance does exist.



• PPP Loans should be forgiven as long as:

– The loan proceeds are used to cover payroll costs and other authorized costs over the 8-week period after the loan is made; and

– Employee and compensation levels are maintained



• PPP Loans should be forgiven as long as:

– The loan proceeds are used to cover payroll costs and other authorized costs over the 8-week period after the loan is made; and

– Employee and compensation levels are maintained

*Waiting for Additional Guidance from SBA on Loan Forgiveness

– Special rules released on April 14 for individuals with self-employment income who file a Form 1040, Schedule C



• Loan Forgiveness should be reduced if a business:

1. Uses the loan for anything other than payroll costs or authorized non-payroll costs;

2. Uses more than 25% of the loan proceeds for non-payroll costs;

3. Reduces the number of employees; or

4. Reduces an employee’s wages by more than 25%.


Estimating Loan Forgiveness

• What is the Covered Period?– 8-week period after the disbursement of funds

• What counts as payroll costs?– Same definition as when applying for PPP

Loan• Salary/wages (capped at $100,000)• Employee benefits (retirement, health care)• State and local taxes assessed on compensation


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Estimating Loan Forgiveness• What are other authorized uses?

– Mortgage interest*– Rent*– Utility Payments*

• Electricity• Gas• Water• Telephone• Internet

– Self-Employed Individuals have some special rules

*Obligation existed on February 15, 2020


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• Loan Forgiveness will be reduced if a business:






75% Payroll Cost Threshold

At least 75%• Payroll Costs

– Wages and compensation– Benefits– State and local taxes

Capped at 25%• Authorized Non-payroll

costs– Mortgage interest– Rent– Utilities


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75% Payroll Cost Threshold

At least 75%• Payroll Costs

– Wages and compensation– Benefits– State and local taxes

Capped at 25%• Authorized Non-payroll

costs– Mortgage interest– Rent– Utilities


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What are unauthorized costs?

• Anything else besides payroll costs or authorized non-payroll costs








Reduction in Workforce

• The amount of loan forgiveness will be reduced if a borrower reduces its workforce.

• There is no threshold (e.g. 75%).• The loan forgiveness reduction is

proportional to the reduction in full time employee equivalents compared to one of two comparison periods.– February 15, 2019 through June 30, 2019– January 1, 2020 through February 29, 2020


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Potential Loan Forgiveness Amount


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XAverage number of FTE per month during the covered period

Average number of FTE per month during the comparison period

Amount spent on payroll costs and authorized non-payroll costs (after 75% threshold)

Average # of employees during 8-week period

Average # of employees during either:1. 2/15/19 through 6/30/19, or2. 1/1/20 through 2/29/20

*borrower selects relevant period


Potential Loan Forgiveness Amount


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X

Average number of FTE per month during the covered period

Average number of FTE per month during the comparison period

But, any reduction could be reversed if employees reduced between February 15 and April 26 are rehired by June 30, 2020








Salary Reduction

• Loan Forgiveness will be reduced for the actual amount of salary reductions greater than 25%– Not proportional– Dollar for dollar reduction

• Only applies to employees with annual wages or salary $100,000 or less


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How to Quantify the Impact on Forgiveness

1. Identify employees with reduced wages/salary2. Remove any employee making more than

$100,0003. Calculate annualized rate for those employees

during Q1 2020 and the 8-week Covered Period4. Calculate the percent reduction 5. If the reduction is greater than 25%, quantify the

difference between the current pay and a 25% reduction over the covered period

6. Add up the actual salary reduction greater than 25% for all employees


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Sample CalculationQ1 Annual Salary

Covered PeriodWages

Covered PeriodAnnual Salary

% Reduction Amount Not Forgivable

$40,000 $6,000 $39,000 3% $0

$40,000 $4,633 $26,000 25% $0

$40,000 $4,000 $26,000 35% $633

$40,000 $3,000 $19,500 51% $1,633


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Payroll reductions result in a total reduction of the forgivable amount under the PPP loan of $2,266.

Loan Forgiveness Documentation


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• After the 8-week loan period, a borrower will need to submit an application seeking loan forgiveness, which must include:– Documentation about payroll and FTE

• Payroll tax filings to IRS and/or state– Documentation about authorized costs

• Cancelled checks, receipts, etc.– Certification by borrower as to authenticity– Any other documentation the SBA determines

is necessary

SPECIAL RULES FOR SELF-EMPLOYED INDIVIDUALS


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Special Rules for Schedule C Filers


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• What is a “Schedule C” filer? – File Schedule C to IRS Form 1040– Generally, self-employed, could be working

as an independent contractor• Most single-member LLCs engaged in a

trade or business

Forgiveness for Schedule C PPP Loans


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• Forgiveness of up to full PPP loan amount, plus accrued interest.

• Eligible uses for forgiveness:– Up to 8 weeks of “Owner Compensation

Replacement”, which equals 15.38% of 2019 net profit (subject to annualized $100,000 cap)

• Not benefits• Open issue – is an actual “draw” distribution to the

owner required, as many Schedule C owners use their personal bank accounts as their business bank account?

– Payroll costs of other W-2 employees (up to $15,385 per employee), plus covered benefits



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• Eligible uses for forgiveness (continued), certain expenses incurred before 2/15/20:– Mortgage Interest deductible on Schedule C– Rent deductible on Schedule C– Utility payments deductible on Schedule C

• 75% or more must be used for employee payroll and owner income replacement during 8 weeks after loan disbursement to qualify for full PPP loan forgiveness



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• What Documentation Will be Needed for Schedule C Filers?– Borrower certifications (as with other

borrowers)– If have employees:

• Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to 8-week “covered period”

• Evidence of any retirement or health insurance contributions)



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• What Documentation Will be Needed for Schedule C Filers?– Evidence of business rent– Evidence of business mortgage interest pyts– Evidence of business utility payments– The same Schedule C from 2019 used in the

PPP loan application will also be used in the forgiveness determination



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• What Documentation Will be Needed for Schedule C Filers?– Evidence of business rent– Evidence of business mortgage interest pyts– Evidence of business utility payments– The same Schedule C from 2019 used in the

PPP loan application will also be used in the forgiveness determination

Forgiveness ofPPP Loans – Multi-Member LLCs

Taxed as Partnerships


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• Recent guidance (4/24) as to how much in PPP funds multi-member LLCs can apply for ties into tax filings, similar to the Guidance for Schedule C filers

• “Owner Compensation” = 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, and unreimbursed partnership expenses claimed) multiplied by 0.9235,2 up to $100,000 per partner

• Likely some formulation of the above, rather than “draws” is how multi-member LLC owner compensation will be determined for forgiveness purposes (8/52 of this number for each partner/member)

OPEN ISSUES


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How many hours is FTE?


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• The FTE calculation is important for determining potential forgiveness reduction due to a drop in headcount.

• Will SBA use the ACA 30-hour threshold for FTE?

• Or will it use 40 hours as FTE?

How does SBA interpret incurred AND paid?


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• Does an expense under the PPP loan have to be incurred and paid during the 8 week period, or just either incurred or paid during the 8 week period?

• How to handle monthly expenses?– Rent, utility bills, insurance premiums

When should I first use PPP funds for payroll?


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• If your lender disburses funds in the middle of a pay period, can you use PPP funds to fund the next payroll (that has accrued prior to loan disbursement)?

• Or do you need to wait until you’re funding the payroll incurred after disbursement?

Can I use PPP funds for cell phone plans?


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• Telephone is an authorized non-payroll cost (along with electricity, gas, and other utilities)

What if my employee doesn’t want to return to work?


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• Can you increase pay to “match” unemployment pay?– Should you?

• Can you hire a replacement to keep employee headcount at where it was in tested period?

• Can you pay special bonuses?

How do I handle health insurance payments?


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• Should a borrower use the costs deducted from the employees’ paychecks?

• Or should the borrower use the payments to the insurance provider?

June 30 rehire: How is this going to work?


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• How long must I keep the employee employed?

• Does it have to be the same employee?

• What if I don’t rehire ALL my laid-off employees?

June 30 salary increase: How is this going to work?


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• Do I have to raise salary back to 100%? Or just above the 25% reduction threshold?

What certifications (if any) will be included in the loan forgiveness

application?


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• What else will be included in the loan forgiveness application?

CONCLUSION


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Practical Tips to Maximize Loan Forgiveness

1. Apply for a PPP Loan2. Spend PPP Loan on payroll and

authorized uses3. Spend at least 75% of the loan on payroll4. Minimize FTE reductions5. Avoid reducing salary > 25%6. Rehire or eliminate salary reductions by

June 30, 2020


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Orr & RenoPPP Loan + Forgiveness Estimator


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https://orr-reno.com/covid-19-update-orr-reno-ppp-loan-forgiveness-estimator/

https://orr-reno.com/covid-19-update-orr-reno-ppp-loan-forgiveness-estimator/

Questions?

This Webinar is provided for general education and guidance only, and does not constitute legal advice.


45 S. Main StreetConcord, NH 03301

603.224.2381

[email protected]@[email protected]

Documents

Paycheck Protection Program Loan Forgiveness Issues › UploadedFiles › Files › 2020-4-… · Forgiveness for Schedule C PPP Loans. Orr-reno.com // 45 S. Main Street // Concord,