PPP Rules After the Release of the Forgiveness Application ... · 05/05/2020 · Time Topic Speaker Topic Speaker 8:00-8:10 Greeting Dean and Director 8:10-9:20 Current Developments

PPP Rules After the Release of the

Forgiveness Application and

Instructions: A Concise Overview

Presented by:

Tuesday, May 19, 2020

9 AM – 9:30 AM ET

(30 minutes)

Alan Gassman

[email protected]

Brandon Ketron

[email protected]

Kevin Cameron

[email protected]

(w/ Special Guest)

mailto:[email protected]



2

Biography of Kevin A. Cameron, MBA, CPA

Kevin is the owner of The Cameron Company, PA and a managing member partner of C&L Value

Advisors, LLC.

His primary focus in the firm is working with business owner clients. The Firm provides

comprehensive accounting, tax preparation and planning, and advisory services.

Kevin works closely with his clients, helping them make sense of their financial information so they can make accurate

decisions in running their businesses. He provides tax planning services using a proprietary system he developed in 1991. He

actively works with clients in numerous areas of business advisory services, including strategic planning and implementation,

mergers and acquisitions, growth management, business coaching, systems development and improvement, and team and

people-management.

Kevin’s clients fall into a broad range of industries, including medical, professional and technical services, construction, real

estate, manufacturing, distribution, entertainment and retail.

Kevin is a member of the Results Accountants Network and the CPA+ Network. These organizations are dedicated to helping

CPAs work more effectively with clients in the areas of business development. He has served as a two term President of the

Kiwanis Club of Tampa Bay, a member of the University of Tampa Alumni Association, a Boy Scouts of America Leader and

Leader-trainer, and a former member of The Executive Committee.

Kevin has presented over 200 programs to individuals and business owners on various topics, including tax-planning, estate

and retirement planning, business development, cash flow, financial management, fraud prevention, business growth, building

strategy, developing mission statements, and executing business plans.

Kevin earned a bachelor’s degree in accounting from the University of Tampa in 1984. He obtained his certified public

accountants license in 1985. And he went on to earn his Master’s in Business Administration from the University of Tampa in

1988.

Kevin Cameron

[email protected]

(813) 286-7373 x 108


PPP LOAN FORGIVENESS UNDER NEWLY RELEASED PPP LOAN FORGIVENESS

APPLICATION PROVIDES GREAT NEWS FOR BORROWERS AND MANY QUESTIONS

WHAT WE KNOW NOW AND HOW TO PREPARE FOR THIS

Tuesday, May 19, 20203 PM to 4:30 PM ET

(90 minutes)

Alan Gassman

[email protected]

Brandon Ketron

[email protected]

NOT-SO-FREE WEBINAR

3



Copyright © 2020 Gassman, Crotty & Denicolo, P.A. (5.6.2020 – Gassman / Ketron) Medical Practices - “How the Next $20 Billion Is Working and More”

4

Wednesday, May 20, 2020

9:00 a.m. – 9:15 a.m. ET

(15 minutes)

WEEKLY UPDATE

FOR MEDICAL PRACTICES

Alan S. [email protected]

Brandon L. [email protected]

4

Copyright © 2020 Gassman, Crotty & Denicolo, P.A.

05.19.2020 PPP Rules After the Release of the Forgiveness Application

And Instructions: A Concise Overview

[email protected]

[email protected]

[email protected] 5

Thursday, May 21, 2020

12:30 p.m. – 1:00 p.m. / EDT

(30 minutes)

REAL ESTATE TAX PLANNING

FOR THE ASTUTE REAL ESTATE

INVESTOR/DEVELOPER

Brandon Ketron

[email protected]

John Beck

[email protected]

5






Kevin Cameron CPA's PPP Spreadsheet With Repayment Calculation and

Document Tracker System

Thursday, May 21, 20201 PM to 2:30 PM ET

(90 minutes)

NOT-SO-FREE WEBINAR



Kevin [email protected] 6




(90 minutes)

NOT-SO-FREE WEBINAR



Kevin [email protected] 7

Planning for IRAs and Retirement Plans After the SECURE Act and the CARES Act -

How the Landscape Has Changed


(90 minutes)

NOT-SO-FREE WEBINAR


Christopher [email protected]

John [email protected] 8


05.16.2020 Cornflakes and Estate Planning [email protected] 9

Replay Of Saturday, May 16, 2020

Friday, May 22, 2019

12:30 p.m. – 1:00 p.m. / EDT

(30 minutes)

CORNFLAKES AND ESTATE

PLANNING MISTAKES

Presented by:

Ken Crotty

[email protected]




Saturday, May 23, 2020

9:00 a.m. – 9:30 a.m. / EDT

(30 minutes)

TEA FOR TWO AND TWO FOR TBE-

ALL ABOUT TBE (TENANCY BY THE ENTIRETIES FOR MARRIED FLORIDIANS)

Presented by:

Ken Crotty

[email protected]

10





[email protected]

[email protected]

[email protected]

Thursday, May 21,

2020

Brandon Ketron and John Beck present:

Real Estate Tax Planning For The Astute Real Estate

Investor/Developer

from 12:30 PM to 1 PM ET

Saturday, May 23,

2020

Kenneth J. Crotty presents:

Tea for Two and Two for TBE- All About TBE (Tenancy by the

Entireties for Married Floridians)

from 9 AM to 9:30 AM ET

Thursday, May 28,

2020

Alan Gassman presents:

What Clients Need To Know About Bankruptcy


Saturday, May 30,

2020


Creditor Protection For Physicians


Thursday, June 4,

2020

Brandon Ketron presents:

Section 199A And Related Income Tax Planning


Saturday, June 6,

2020


Planning For The Single Physician


UPCOMING FREE WEBINARS FROM OUR FIRM

11







[email protected]

[email protected]

[email protected]


Thursday, June 11,

2020

Christopher Denicolo presents:

Planning for S Corporations

The Basics, Tricks and Traps


Thursday, June 18,

2020


Understanding Charitable Remainder Trusts

Add New Tools to Your Belt


Thursday, June 25,

2020

Ken Crotty presents:

SCRAT


Thursday, July 2, 2020


Gift Tax Return Tips and Traps




LLC Drafting Tune Ups and Checklist


Thursday, July 16,

2020


Inheritance Trust Implementation and Planning

From 12:30 PM to 1 PM ET

Thursday, July 23,

2020


Estate Tax Return Tips and Traps


12




For more information, email:[email protected] 13

Time Topic Speaker Topic Speaker

8:00-8:10 Greeting Dean and Director

8:10-9:20Current Developments of importance to estate

planners.Howard Zaritsky None

9:20-10:20 Current Developments (continued) Howard Zaritsky None

10:20-10:35

Break Break

10:35-11:35

To Gift Or Not To Gift: Balancing Income and Transfer Tax Benefits For Couples Worth

Between $12 Million to $22 Million Jeff Chadwick

Rescue Planning For Existing CLATs Where Lower Asset Values Will Deplete Principal Reducing Or

Eliminating Estate Plan Benefits

Notre Dame Advisory Board

11:35-12:35

Avoiding The Estate Planning “Blue Screen Of Death” With Competent And Ethical Practices

(Ethics)Gerry Beyer

Defensive Practices Because Nothing Is Safe: How Practitioners

Can Be Safer And Reduce Malpractice Risks (Ethics)

Sandy Glazier Howard Zaritsky

Marty Shenkman

12:35-1:50 Luncheon

1:50-2:50Turning Off Grantor Trust Status: Mechanics, Tax Implications, Effect On Entities, Abusive

Transactions, And State Law ObstaclesDavid Kirk

Estate Planning To Obtain The Best Economic Outcome For Beneficiaries of IRA And

Retirement Assets

Steve Trytten

2:50-3:50 Michael GordonCreative Planning With Charitable

Remainder Trusts: You Will Flip When You See This

Michael MulliganJohn Grzybek

3:50-4:05 break break

4:05-5:35

Perspectives On Planning For Personal Property: Collectibles, Philanthropy, Auction

Houses, Income Taxes, And The Next Generation

Kim KaminAdd OthersShenkman, Moderator

None

Agenda

Thursday, October 29, 2020(Wednesday)

3:30 pm to 5:30 pm

A Comprehensive Review of the SECURE Act And How To Draft For What Is Still Not Clear.

Christopher Denicolo

Time Topic Speaker Topic SpeakerTrack A Track B

8:00-9:00

Designing Trusts For Multi-Generations: Key Trust Language That Allows Flexibility, Still Be

Effective And Accomplishes A Settlor’s Objectives

David HerzigAn Estate Planning Roadmap for 2020 and

2021Marty Shenkman

9:00-10:00Bob Keebler

Foreign v. Domestic: Which Jurisdiction Is Right For Your Client Considering Asset

ProtectionGideon Rothchild

10:00-10:15 Break

10:15-11:15Life Insurance Best Interest Pressures And Evaluation Other Factors Advisors Need To

Consider

Rebecca RyanBarry Flagg

Todd Steinberg, Moderator

The Land of Oz: A Hard And Candid Look At Opportunity Zone Tax Incentives: Would You Make The Investment If There Were No Tax

Incentives?

Jay Darby

11:15-12:15Todd Petit


I Have A Lot of Investment Expenses: What Is And What Is Not Deductible

Louis Harrison

12:15-1:15 Luncheon Luncheon

1:15-2:15Navigating Common Trustee Liability Exposures

And Defensive Steps To Take In Advance

Stacy SingerTom Abendreth

The Income Tax Impact Of The New Transfer For Value Regulations: What Is No Longer A

Safe Harbor For Transfers Of A Life Insurance Policy

Stuart KohnAdam Garber

2:15-3:15Securing Client Data And Teleworking: Ethical

Concerns and Practical Tips (Ethics)Karin Prangley

The Mine Fields Of The Lawyer As A Fiduciary: Do You Know How To Navigate

Them? (Ethics)Paul Hood

3:15-3:30 Break Break

3:30-4:30Variations On A Theme: The Uniform Trust

Code In The Midwest And States Considering Its Adoption

Susan BartBDITs and BDOTs: The Basics, Concerns To

Evaluate And Best PracticesAnita Sarafa

4:30-5:30Basis Planning And Income Tax Deferral While A

Client Is Living Or For Appreciated Assets Owned By Trusts Not Exposed To Estate Tax

George Karibjanian

Defined Value and Price Adjustment Clauses: Background, How to Mitigate the Need to Use Them, and How to Handle an

IRS Audit

Chris Siegle

Agenda

Friday, October 30, 2020* Ethics credits are tentative, depending on the accrediting bodies for each state.

16Copyright © 2020 Gassman, Crotty & Denicolo, P.A.

(5.19.2020 – PPP Rules After the Release of the Forgiveness Application and


[email protected]

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[email protected]

TABLE OF CONTENTS1 Summary of Paycheck Protection Program Round 2 data as of 5:00 p.m. EDT, Thursday, May 14, 2020 17

2 The Top 10 Revelations from the PPP Loan Application and Instructions 18

3 SBA Issued FAQ 46 on May 13, 2020 19

4 On May 13, 2020, SBA Issued FAQ 47 – Extension of Repayment Date to May 18th 22

5 Paycheck Protection Program – Recent Developments (SBA FAQs Guidance as of May 6, 2020) 20

6 On May 13, 2020, the SBA Issued Interim Final Rule to Allow for Two Situations In Which You Can Amend Your PPP Application

32

7 SBA Form 1502 36

8 PPP Loan Forgiveness Rules 37

9 PPP Loan Forgiveness Application – SBA Form 3508 45

10 Paycheck Protection Program Loan Timeline 69

11 Paycheck Protection Loan Forgiveness Expense Tracker-provided by Kevin A. Cameron, CPA | C&L Value Advisors, LLC

99

12 HHS Provider Relief Fund - $20 Billion Disbursement 131

13 SBA NOTICE – EIDL Now Provides Relief Only to U.S. Agricultural Businesses 154

14 IRS Notice 20-32 – Non-Deductibility of Expenses Paid with PPP Funds That Are Later Forgive 159







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Lender Size Approved Loans Approved Dollars

>$50B in Assets 1,283,590 $102,521,030,018

$10B to $50B in Assets 383,888 $29,670,409,695

<$10B in Assets 1,096,108 $62,980,434,442

Total: 2,763,586 $195,171,874,154

# of Participating Lenders

5,475 Avg Loan Size: $70,622

Summary of Paycheck Protection Program

Round 2 data as of 5:00 p.m. EDT,


Total Funds Remaining - $114,828,125,846







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1. We need to understand these and be prepared to file the application immediately following the end of the eight week period before the rules change for the worse.

2. Application provides borrowers with an alternative eight week period for measuring payroll costs that aligns with pay periods, and payroll costs incurred but not paid during the Borrower's last pay period are eligible for forgiveness if paid on or before the next regular payroll date, even if such date is outside of the eight weeks.

3. Necessity is still required, and compliance with rules in place must be reaffirmed on Loan Forgiveness Application.

4. It appears that retirement plan contributions may be counted in their entirety, however retirement plan contributions for sole proprietors, independent contractors and partners in a partnership may not be counted.

5. It may be possible to pre-pay rent.

6. Consider rehiring to have the same number of employees on June 30 as the business had on the pre virus test date chosen.

7. Employers with a significant number of employees who work under 20 hours per week may elect the new “1.0 or .5 measurement.

8. Non-payroll costs can be counted if incurred during the eight week period and paid on or before the next billing date, even if the billing date is outside of the eight week period.

9. The 75% test is not a cliff - it limits rent, interest, and utilities (the non-payroll costs) to be no more than 1/3rd of the sum of payroll costs (including health insurance, retirement plan amounts, and state and local taxes).

10. You have to run the numbers!

The Top 10 Revelations from the PPP Loan Application and Instructions:







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SBA Issued FAQ 46

on May 13, 2020-

“Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the

necessity of the loan request in good faith.”







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SBA Issued FAQ 46 on May 13, 2020 Question 46 published May 13, 2020.

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns…







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[email protected]

SBA Issued FAQ 46 on May 13, 2020, Cont. Question 46 published May 13, 2020.

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: …Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.







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On May 13, 2020, SBA Issued

FAQ 47– Extension of Repayment

Date to May 18th







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SBA FAQ 47

Question 47 published May 3, 2020.

47. Question: An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?

Answer: Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.







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Question 45 published May 6, 2020.

45. Question: Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?

Answer: Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.

Paycheck Protection Program – Recent Developments

(SBA FAQs Guidance as of May 6, 2020)







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Employee Retention Credit for Employers Subject to Closure Due to COVID-19 – An Alterative to PPP Loans

• Eligible employers will receive a refundable payroll tax credit for up to 50% of wages paid to employees after March 12, 2020 through January 1, 2021 (if one of the below two requirements are met).

• Eligible Employer is defined as any employer that is carrying on a trade or business in 2020 and for the calendar quarter:

(1) The operation of the business is fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19.

OR

(2) Gross receipts are less than 50% of the gross receipts for the same quarter in the previous year until gross receipts are 80% of the gross receipts in the same quarter for the previous year.

• Wages are limited to $10,000 per employee (maximum credit of $5,000) and cannot exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately proceeding such period.

• Reduced by any credits received under the Families First Coronavirus Response Act.

• No credit available if employer has taken a loan through the Payroll Protection Program.

• Available for employers with more than 500 employees.

• If the employer has over 100 employees then the credit is only available if employees stay at home and do not provide ANY services.







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PPP Loan Rules Relaxed By SBA For Loans Under $2,000,000 -Uncertainty Still Abounds For Many | Alan Gassman, Contributor

Forbes Post May 14, 2020

The CARES Act, which was enacted on March 27, 2020, implemented the Paycheck Protection

Program ("PPP"), which allows small businesses to receive a forgivable loan of up to two and a half

times their average monthly payroll costs for the prior year. The CARES Act provided that in order

to be eligible for the loan, the business must certify, among other things, that the "uncertainty of the

current economic conditions makes necessary the loan request to support the ongoing operations" of

the business.

The SBA subsequently issued guidance that required borrowers to take into account current business

activities and their ability to access other sources of liquidity in determining whether the loan was

necessary, and provided a safe harbor for borrowers to return the loan prior to May 14th. This

guidance, and tweets from Senator Marco Rubio that set a very high bar for what "necessary" meant,

significantly muddied the waters for many borrowers who were left wondering if the loan was in

fact necessary, and if they would face civil and even criminal prosecution for applying for and

receiving a PPP loan.




27Copyright © 2020 Gassman, Crotty & Denicolo, P.A. | PPP Rules After the Release of the Forgiveness Application & Instructions: A Concise Overview (Gassman, Ketron, Cameron)

Forbes Post May 14, 2020 | PPP Loan Rules Relaxed by SBA for Loans Under $2,000,000, Cont’d

In a dramatic turn of events, the SBA released FAQ #46 on May 13th, which provides immunity from the "necessary"

requirement for borrowers with loans under $2,000,000. This FAQ states that if the PPP loan amount is less than

$2,000,000, it is deemed to be necessary, and if it is over $2,000,000 and was not necessary, then the result is that it has

to be repaid; however, there will apparently be no penalty or criminal exposure. This should put the vast majority of

borrowers at ease that if they did not intentionally answer the question of necessity on their PPP loan application

inaccurately, then they are likely safe from possible SBA action. This new guidance appears to provide much needed

relief to small businesses that were considering whether or not to return their Paycheck Protection Program loan prior to

the May 14th deadline.

Additionally, FAQ# 47, which was also issued on May 13th, extends the repayment deadline for amnesty and to not be

disqualified from the ability to qualify for the $5,000 per employee payroll credit from May 14 th to May 18th to “give

borrowers an opportunity to review and consider FAQ #46.”

Borrowers with PPP loans over $2,000,000 that are concerned with the necessity requirement can still return the loan

prior to this deadline in order to be eligible for the Employee Retention Payroll Tax Credit. It is not clear whether

borrowers with loans over $2,000,000 may return enough to be just under $2,000,000 to qualify for the safe harbor.

The full text of FAQ #46 is as follows:

“Question: How will SBA review borrowers' required good-faith certification concerning the necessity of their

loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA's review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.



SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are

generally less likely to have had access to adequate sources of liquidity in the current economic environment than

borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers

with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP

loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans,

where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an

adequate basis for making the required good-faith certification, based on their individual circumstances in light

of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of

$2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program

requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines

in the course of its review that a borrower lacked an adequate basis for the required certification concerning the

necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the

lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving

notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its

determination with respect to the certification concerning necessity of the loan request. SBA's determination

concerning the certification regarding the necessity of the loan request will not affect SBA's loan guarantee.”

As indicated in the above safe harbor, the fact that a borrower received a loan of less than $2,000,000 is now seen as

self-evident that the necessity certification was made in good faith, according to FAQ #46. The SBA justifies this

circular logic by assuming borrowers with loans below this threshold are unlikely to have the same access to adequate

sources of liquidity compared to those borrowers with loans over the $2,000,000 threshold. The SBA has made this

determination in an effort to conserve finite audit resources. This appears to create little risk for any borrower with a

loan of less than $2,000,000, even for those for whom the loan may not be explicitly “necessary”.



The use of the word “necessary” in FAQ numbers 31 and 46 creates a zone of ambiguity. FAQ #31 asks an applicant to

certify in good faith that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing

operations of the Applicant.” FAQ #46 now provides that the SBA automatically assumes that, for any borrower

awarded a loan of less than $2,000,000, the certification was made in good faith.

This presumption of good faith, coupled with the SBA’s implied admission that an audit is unlikely for borrowers with

loans of less than $2,000,000, would appear to mean that there is little, if any, risk for any borrower of a loan less than

$2,000,000. This is not to say that any borrower of a loan less than $2,000,000 is immune from compliance review,

however. FAQ #46 still maintains “[a]ll PPP loans in excess of $2 million, and other PPP loans as appropriate, will be

subject to review by SBA for compliance with program requirements . . . .” Additionally, FAQ #46 establishes that,

should it be found that any borrower lacked adequate justification for the necessity certification, then that borrower will

be afforded the opportunity to return the loan before administrative enforcement is pursued by the SBA.

Although FAQ numbers 31 and 46 appear to contradict each other, perhaps a distinction can be drawn. FAQ #31

specifically references “businesses owned by large companies with adequate sources of liquidity to support the

business’s ongoing operations”. The answer goes on to state that, although the CARES Act suspends the ordinary

requirement that borrowers must be unable to obtain credit elsewhere, borrowers still must certify that their PPP loan is

considered to be necessary. More specifically, FAQ #31 provides that borrowers should take into account their ability to

access other sources of liquidity sufficient to support their ongoing operations in a manner not significantly detrimental

to the business when certifying that their loan request is necessary. In doing so, one could conclude that FAQ #31 stops

short of explicitly preventing borrowers with access to liquidity from certifying that the loan is necessary. Rather, FAQ

#31 provides that access to liquidity is an important factor to be weighed heavily when considering whether the loan is

“necessary.” In an effort to provide further clarification, FAQ #46 further elaborates on the “necessary” certification by

drawing a distinction between loans above and below the $2,000,000 threshold respectively. FAQ #46 maintains that all

borrowers must still certify in good faith that "[c]urrent economic uncertainty makes this loan request necessary to

support the ongoing operations of the Applicant."



However, FAQ #46 goes on to provide that any borrower with loans totaling less than 2,000,000 will be deemed to have

made the required certification concerning the necessity of the loan request in good faith.

FAQ numbers 31 and 46 may be viewed together as a sort of continuum. Both of them maintain that all applicants must

make good faith certifications that the loan request is necessary to support the ongoing operations of the applicant.

FAQ# 31 provides that applicants should consider whether or not their access to liquidity would truly allow them to

make a good faith certification that the PPP loan would be “necessary” to support the ongoing operations of the

applicant. FAQ #46 picks up where #31 left off by drawing a distinction between loans above and below the $2,000,000

threshold. Borrowers with loans totaling less than $2,000,000 are presumed to have made their certification in good

faith, due to the SBA’s assumption that borrowers with loans below this threshold are generally less likely to have

access to adequate sources of liquidity in the current economic environment. Of course, the inverse of this assumption

is that borrowers with loans totaling more than $2,000,000 will have adequate access to liquidity, therefore, their good

faith certifications will be subject to a higher level of scrutiny.

It is noteworthy that the SBA did not explicitly annul or withdraw FAQ numbers 31 and 37, which are now inconsistent

with FAQ# 46 and will cause continued confusion. In addition, would-be borrowers who would have qualified, but for

doubt as to whether they had the economic need for PPP loans, will now consider whether they should apply when they

have no necessity at all. Those businesses may want to apply now and decide whether to accept the loan if it is

approved and funded, after we have more guidance, or do they risk perjury exposure for signing an application that

requires necessity when there is no necessity, although this new pronouncement seems to throw necessity out the

window? Perhaps the applicant can insulate themselves by providing an addendum to the application to the effect that

they are relying upon FAQ #46 in concluding that there is necessity given the economic uncertainty now faced by every

business. This, of course, assumes that the SBA has the power to issue all of these pronouncements.



While Sec.1114 of the CARES Act states that the SBA “shall issue regulations to carry out [Title 1]” of the Act,

numerous lawsuits have already been filed challenging the SBA’s authority to issue regulations which "change the rules,"

and guidance that establishes borrower eligibility requirements. The plaintiff's claim that the regulations and FAQ's are

contrary to Congressional intent, and the plain language of the CARES Act. However, it seems likely that borrowers can

rely on SBA pronouncements, even if they are wrong. But please remember that taxpayers cannot rely upon erroneous

IRS instructions, so we need to be careful and advisors need to encourage clients not to be “hogs that get slaughtered.”

Further, while FAQ #46 states that the safe harbor will apply to SBA’s review of PPP loans with an original principal

amount of less than $2,000,000, it does not explicitly state that all civil and criminal liability exposure eliminated.

Although fraud may not be asserted by the SBA in an audit, this does not prevent it from being asserted in other forums.

The expression “loose lips sink ships” can easily apply to businesses and these loans. For instance, a disgruntled

employee or other individual that learns of a loan taken without necessity may be happy to make their discovery known

to the right authorities. With taxpayers footing the bill for these loans and businesses sinking every day due to their

inability to secure them, it isn’t a far-fetched assumption that many will want to see legal ramifications when the local

mom & pop shop had to close because it was deprived of funds that another business received when it truly didn’t need

them.

Although many may interpret the language of FAQ #46 as giving a free pass to take out a loan of less than $2,000,000

that is now automatically deemed as “necessary,” businesses that aren’t in jeopardy, are making more money than they

were before the pandemic, or that have secure government contracts and no obstructions to meeting their obligations to

fulfill the contracts, need to keep in mind that the loan application still requires the certification that the loan is necessary,

regardless of the amount being borrowed. With the amount of uncertainty there still is, in addition to changing guidance,

erring on the side of caution is never a bad idea.

The new FAQ provides a change in the rules and also in the tone of the SBA, after issuing guidance that seemed to

greatly exceed what was intended by Congress, and what we believe it was authorized to do. We can only hope the trend

continues and that the promised and much needed guidance on the details of loan forgiveness is forthcoming soon. It

would also be helpful if future acts of Congress either authorize the SBA to make rules, or better define what those rules

are, upon issuance, or by technical correction.




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On May 13, 2020, the SBA Issued Interim

Final Rule to Allow For Two Situations in

Which You Can Amend Your PPP

Application:

1. Partnerships that did not include partner

compensation in average monthly payroll costs

calculation.

2. Seasonal Employers that applied before April 28th

and would receive a higher loan under alternative

calculations.







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Loan Increases For PartnershipsInterim Final Rule Issued May 13

If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation?

Yes. If a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted.

After the initial SBA Form 1502 report on the PPP loan has been submitted to SBA, or after the date the first SBA Form 1502 was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase…







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Loan Increases For Partnerships, Cont.

Interim Final Rule Issued May 13

If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation?

…The interim final rule posted on April 14, 2020, describes how partnerships, rather than individual partners are eligible for a PPP loan. The interim final rule further explained that the self-employment income of general active partners could be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. Guidance describing how to calculate partnership PPP loan amounts and defining the self-employment income of partners was posted on April 24, 2020 (see How to Calculate Maximum Loan Amounts, Question 4 at https://www.sba.gov/sites/default/files/2020-04/How-toCalculate-Loan-Amounts.pdf).

What about if the “partner” was an S corporation or other entity other than an individual that rendered services for the partnership?







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Loan Increases For Seasonal EmployersInterim Final Rule Issued May 13

If a seasonal employer received a PPP loan before the alternative criterion for determining the maximum loan amount for seasonal employers became available, can the loan amount be increased based on a revised calculation using the alternative criterion?

Yes. If a seasonal employer received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, and would be eligible for a higher maximum loan amount under the alternative criterion, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to SBA, or after the date the initial SBA Form 1502 report was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase.





SBA FORM 1502




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PPP Loan Forgiveness Rules





How Much you Can Borrow?

“The 2.5x Test”

How Much Can Be Forgiven?

“The 8 Week Expense Test”

What You Can Use the Funds For From Feb 15th Through June 30th

(No limitations after June 30 under present law)

2.5 Times Monthly Average Payroll Costs for the prior 12 months.

Payroll Costs include:• salary, wage, commission, or similar

compensation• payment of cash tip or the equivalent• payment for vacation, parental,

family, medical or sick leave• allowance for dismissal or separation

(severance pay)• payment required for the provisions

of group health care benefits, including insurance premiums

• payment of any retirement benefit• payment of state or local tax

assessed on the compensation of employees

1. Payroll Costs including those shown in left column

2. Payment of interest on mortgage obligations incurred prior to February 15th, 2020

3. Rent obligations for leases entered into prior to February 15th, 2020

4. Utilities (including payment for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020)

5. The amount that can be forgiven is reduced by the $10,000 EIDL grant

1. Payroll Costs including those items shown in left column

2. Payments of interest on any mortgage obligation (but not principal payments)

3. Rent

4. Utilities

5. Interest on any debt obligations that were incurred prior to February 15th, 2020

• Expenses allowed, but do not reduce indebtedness.

(1) Interest on non-mortgage debt obligations even if incurred prior to February 15th, 2020

(2) Interest payments on mortgage debts or where the rate was increased after February 14, 2020.

(3) Rent obligations entered into or increased after February 15, 2020.

Paycheck Protection Program Loans




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Paycheck Protection Program Loans –Loan Forgiveness

• An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments madeduring the covered period:

• payroll costs (including allowable health insurance, retirement plan contributions and state payroll taxes)

• payment of interest on mortgage obligations incurred prior to February 15th, 2020

• rent obligations for leases entered into prior to February 15th, 2020

• utility payments (defined in CARES Act as electricity, gas, water, transportation, telephone, or internet access)

• Interim Final Rules published by the SBA provide that in order for the full forgiveness to apply, at least 75% of the loan must be used for payroll costs.

• What method of accounting applies when the CARES act uses the language “costs incurred and payments made during the covered period?”




40Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 5.15.2020 (Gassman / Ketron) The PPP Questions We Are Most Often Asked


“The 2.5x Test”






• 2019 IRS Form 1040 Schedule C line 31 net profit amount of the independent contractor or sole proprietor – but no exceeding $100,000 per annum ($8,333 per month x 2.5 = $20,833).

PLUS

For expenses for non-owner employees (but not for expenses that benefit owner):• 2019 IRS Form 941 Taxable Medicare

wages & tips (line 5c- column 1) from each quarter

• Any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips

• 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14)

• Retirement contributions (Form 1040 Schedule C line 19)

• state and local taxes assessed on employee compensation

1. Owner compensation replacement, calculated based on 2019 net profit-not exceeding $$1,923 per week ($100,000 divided by 52 = $1,923. $1,923 x 8 =$15,385.)


3. Payment of interest on business mortgage obligations incurredprior to February 15th, 2020 to the extent deductible on Schedule C.

4. Rent obligations for leases entered into prior to February 15th, 2020 to extent deductible on Schedule C.

5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule.

1. Owner compensation replacement, calculated based on 2019 net profit.

2. Employee payroll costs if you have employees, but not exceeding 2019 levels.

3. Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation, but not exceeding2019 levels.

4. Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness) , but not exceeding 2019 levels. .

5. Business rent payments, but not exceeding 2019 levels.

6. Business utility payments, but not exceeding 2019 levels.

PPP Loans for Independent Contractors and Sole Proprietors




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SBA Regulations on Independent Contractors and Sole Proprietors –How Much Will be Forgiven?

The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period [the

eight weeks following the date of the loan] on:

1. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight

weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners),

including:

• health care expenses

• retirement contributions, and

• state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);

2. Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts

limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent

amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act

(FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under

section 7004 of FFCRA;

3. Payments of interest on mortgage obligations on real or personal property incurred before February 15,

2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);

4. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on

Form 1040 Schedule C (business rent payments); and

5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible

on Form 1040 Schedule C (business utility payments).







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• Again, Independent Contractors and Sole Proprietors are treated as if they

paid themselves an amount equal to 8/52nds of their 2019 Form 1040

Schedule C Line 31 Net Profit Amount, which equals 73.85% of the loan

amount given (not including any loan amount for employees of the contractor),

regardless of whether they actually paid themselves or not.

• Independent Contractors and Sole Proprietors with no employees cannot have

full loan amount forgiven due to this limitation as discussed in later slides.







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Paycheck Protection Program Loans –Loan Forgiveness

• An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments madeduring the covered period:

• Payroll costs are defined to include the following:

• salary, wage, commission, or similar compensation

• payment of cash tip or the equivalent

• payment for vacation, parental, family, medical or sick leave

• allowance for dismissal or separation (severance pay)

• payment required for the provisions of group health care benefits, including insurance premiums

• payment of any retirement benefit

• payment of state or local tax assessed on the compensation of employees

There does not seem to be a limitation that would prevent increasing salaries or wages for those making less than $100,000 annually, or adding family members to payroll to reasonably compensate them for work performed to increase payroll costs.







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Loan Forgiveness - Payroll CostsMeet the Alternative Payroll Covered Period

• Payroll expenses need not be both “paid and incurred” during the exact 8 week period (56 days) that begins on the day that first loan proceeds are received.

• Based upon the new Application instructions, payroll that is funded during (or shortly after) the 8 week testing period can qualify for forgiveness as long as the payroll is handled in a conventional fashion, but the language quoted below is directly from the Loan Forgiveness Application instructions and should be closely followed:

Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

• There appears to be no further relief provided with respect to the start date of the 8 week Covered Period for businesses that are subject to shut down orders.





PPP Loan Forgiveness Application – SBA FORM 3508(From Application/Instructions)




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Loan Forgiveness – The Alternative Payroll Covered Period

• The Application allows the Borrower the option to choose between the “Covered Period,” which is the 56 day period immediately following the day of receipt of the first loan money, or an “Alternative Payroll Covered Period,” which aligns with the payroll schedule of the Borrower if it is bi-weekly or more frequently.

• If elected, the Alternative Payroll Covered Period begins on the first day of the Borrower’s first pay period following the date that the Borrower received the first PPP funds, and will end on the 56th day thereafter.

• A Borrower that elects into the Alternative Payroll Covered Period must also account for the other items considered as “payroll costs,” being employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation during the same period of time.

• Borrowers that elect the Alternative Payroll Covered Period cannot use such period for nonpayroll cost tracking, and must therefore keep track of rent, interest and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount), subject to the “paid after incurred in the normal course of business” rule.









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• The new Loan Forgiveness Application can be read to allow for contributions to retirement programs that are incurred OR paid during the Covered Period to count in the determination of total payroll costs and forgiveness.

• Assuming that this is correct (and we see no reason why it should not be), then retirement plan contributions actually made during the Covered Period or Alternative Payroll Covered Period (the applicable 8 weeks) will be included in payroll costs and subject to forgiveness, regardless of what year those contributions are attributed to.

• The above interpretation comes from the bottom of page 1 of the Application, which provides that the Borrower should "Enter total eligible payroll costs incurred or paid (emphasis added) during the Covered Period or Alternative Payroll Covered Period." at Line 1.

• As an example, a client that contributes $200,000 a year to a defined benefit pension plan that has not yet been funded for 2019 or 2020 will be able to contribute as much as $400,000 to the plan during the 8 week period to receive $400,000 of forgiveness that might otherwise not be available if other expenses are not sufficient for full forgiveness of the PPP loan.

• If the employer should have non-tax qualified "retirement plans", such as those known as Top Hat Plans and/or Rabbi Trusts, the payroll costs appear to also include payments to these types of plans since the statute just references “retirement plans” and not qualified plans.

• Our advice for many—pay now and decide whether to include all in in forgiveness application later, unless this causes n issue with the necessity requirement. Many will contribute, and then borrow out under new CARES Act rules.

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Paycheck Protection Program Loan Forgiveness –What Retirement Plan Contributions Count?







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Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947)

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• It is of course possible that the SBA will prevent this planning opportunity in future guidance that may be given.

• Clients should be advised that there is some risk that forgiveness may not ultimately be determined in this very liberal manner and may only apply to part of these payments that is calculated in some other manner, such as those amounts attributed on a pro-rata basis to 8 weeks of actual pension contributions (8/52nd's of total 2020 employer plan contributions).

• If further guidance is not received prior to approaching the close of the 8 week period, the employer will have to decide whether they want to contribute such significant funds to their retirement plan with the possibility that it may not all qualify for forgiveness.

• If the employer is going to fund the plan at that level for the 2020 year anyway, then putting the funds in during the 8 week period has no downside risk and allows for the possibility that it might all qualify as compensation for the forgiveness calculation

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Comparison of Maximum Contributions

Defined

Contribution

Defined

Benefit

Maximum Contribution

for a Cash Balance Plan

Employee age 60 $62,000 $254,000 $261,000

Employee age 55 $62,000 $194,000 $203,000

Employee age 50 $62,000 $148,000 $158,000

Employee age 45 $56,000 $113,000 $123,000

Employee age 40 $56,000 $ 87,000 $96,000

Anticipates 401(k) plan catch-up contributions.

Please note: The above numbers are approximations. Actual results will vary based on

actual census data, plan assumptions and plan experience.

The presenters would like to thank Stephen Evers at Ascensus TPA Solutions for providing us with this slide.

Permanency Requirement – A defined benefit or cash balance plan must be “permanent”, which normally means that it will be in place at least five years, unless there are circumstances beyond the reasonable control of the Employer.







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Question: The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

Answer: No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits including:

1. employer contributions to defined-benefit or defined-contribution retirement plans;

2. payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and

3. payment of state and local taxes assessed on compensation of employees.

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“The 2.5x Test”






• 2019 IRS Form 1040 Schedule C line 31 net profit amount of the independent contractor or sole proprietor – but no exceeding $100,000 per annum ($8,333 per month x 2.5 = $20,833).

PLUS

For expenses for non-owner employees (but not for expenses that benefit owner):• 2019 IRS Form 941 Taxable Medicare

wages & tips (line 5c- column 1) from each quarter

• Any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips

• 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14)

• Retirement contributions (Form 1040 Schedule C line 19)

• state and local taxes assessed on employee compensation

1. Owner compensation replacement, calculated based on 2019 net profit-not exceeding $$1,923 per week ($100,000 divided by 52 = $1,923. $1,923 x 8 =$15,385.)


3. Payment of interest on business mortgage obligations incurredprior to February 15th, 2020 to the extent deductible on Schedule C.

4. Rent obligations for leases entered into prior to February 15th, 2020 to extent deductible on Schedule C.

5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule.

1. Owner compensation replacement, calculated based on 2019 net profit.

2. Employee payroll costs if you have employees, but not exceeding 2019 levels.

3. Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation, but not exceeding2019 levels.

4. Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness) , but not exceeding 2019 levels. .

5. Business rent payments, but not exceeding 2019 levels.

6. Business utility payments, but not exceeding 2019 levels.

PPP Loans for Independent Contractors and Sole Proprietors




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The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period [the

eight weeks following the date of the loan] on:

1. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight

weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners),

including:

• health care expenses

• retirement contributions, and

• state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);

2. Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts

limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent

amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act

(FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under

section 7004 of FFCRA;

3. Payments of interest on mortgage obligations on real or personal property incurred before February 15,

2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);

4. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on

Form 1040 Schedule C (business rent payments); and

5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible

on Form 1040 Schedule C (business utility payments).







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• Again, Independent Contractors and Sole Proprietors are treated as if they

paid themselves an amount equal to 8/52nds of their 2019 Form 1040

Schedule C Line 31 Net Profit Amount, which equals 73.85% of the loan

amount given (not including any loan amount for employees of the contractor),

regardless of whether they actually paid themselves or not.

• Independent Contractors and Sole Proprietors with no employees cannot have

full loan amount forgiven due to this limitation as discussed in later slides.







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Vulnerability Still Lingers for Independent Contractors, Proprietors and Partners in Partnerships

• The Application and instructions confirm prior guidance that self-employed

individuals (sole proprietors; including independent contractors and individuals

who are general partners in a partnership) will not be allowed to include the costs

of their own health insurance or retirement plan contributions in the determination

of total eligible payroll costs for purposes of forgiveness.

• It also appears that those amounts should not have been included in the

application for the funds in the first place and those entities that did include those

amounts in the application for PPP funds may need to consider paying those

amounts back as soon as possible, although the previous guidance was not clear

on whether expenses paid for health insurance and pension contributions for

working partners would result in forgiveness.

• The newly issued instructions for what is known as “PPP Schedule A” provide that

the “Payroll” will include total amounts paid by the Borrower for “employee health

insurance…[and] employer contributions to employee retirement plans…[and]

state and local taxes assessed on employee compensation…” (emphasis added).

• Partners in a partnership are not considered to be “employees” for tax purposes,

even though shareholders of S Corporations and C Corporations are employees.







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Vulnerability Still Lingers for Independent Contractors, Proprietors and Partners in Partnerships

• The instructions for Line 9 of the Application provide for the inclusion of “any

amounts paid to owners (owner-employees, a self-employed individual, or general

partners).

• This amount is capped at $15,385 (the 8 week equivalent of $100,000 per year)

for each individual,” and reference is made to the April 14, 2020 Interim Final

Rule, which indicates that partnerships would include health insurance and

retirement plan expenses for “employees” in determining the amount that can be

borrowed.

• Earlier guidance did include definite prohibition for sole proprietors, and some

commentators believed the same would apply to any self-employed individual,

including partners in a partnership.

• As noted above, a sole shareholder in an S corporation can include his or her full

benefit costs (health insurance and retirement plan contributions) for the loan and

forgiveness, while an individual taxed as a Schedule C taxpayer is discriminated

against and will not be allowed to receive these benefits within the PPP structure.

There is still hope that this might be modified, but the SBA did not do so in this

release of the Loan Forgiveness Application.











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Flexibility Provided for Payments of Interest, Rent and Utilities in Normal Course of Business

• Expenses for interest, rent and utilities, as defined in the rules, will be forgivable if

incurred during the Covered Period and paid, to some extent, in the normal course of

business thereafter.

• The instructions provide as follows:

An eligible non-payroll cost must be paid during the Covered Period or incurred

during the Covered Period and paid on or before the next regular billing date, even

if the billing date is after the Covered Period. Eligible non-payroll costs cannot

exceed 25% of the total forgiveness amount. Count nonpayroll costs that were both

paid and incurred only once.

• Tony Nitti, the Tax Geek, writing on his amazing Forbes Blog, reads the above language

to mean that Borrowers can be in arrears on interest, rent and utilities incurred before the

8 week period begins, and thus receive forgiveness both for those amounts incurred

before and during the 8 week period, if paid pursuant to the rule set forth in the language

above. This may be possible, but may also be prevented by subsequent guidance.









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What About Prepayments of Business Rent orLease Payments?

• On page 2 of the Application, the explanation for Line 2 (business mortgage

interest payments) specifically adds a final sentence that reads: "Do not include

prepayments" (emphasis added).

• However, there is no prohibition against prepaying rent or lease amounts in

the explanation for Line 3---was this intended or an oversight?

• Example, would payment of the next 6 months of rent count toward the 25% limit?

• It appears that the answer may be yes (at least until we get even more guidance to

correct the guidance already issued).

• Based upon the above, Borrowers who do not have sufficient non-payroll expenses

to maximize forgiveness may wish to prepay rent during the 8 week period in case

the amount of the prepayment can be forgiven.

• Again, there is little downside risk since the rent is going to be paid anyway at

some near point in time.









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Focus on Meaning for Interest, Rent and Utility Payments• Does rent include payment for Common Area Maintenance Expenses, leasehold

improvements paid for by a tenant, or sales tax paid on rent?

• Does rent include amounts paid on auto and equipment leases?

• Does rent include payments made to related parties?

• What about rent paid on a lease that is a finance lease and really an installment purchase or

amortized loan for income tax purposes? Did the borrower treat the “lease” as a Section

179 or 168(k) acquisition?

• The following is from the SBA Interim Final Rules on Independent Contractors and Sole

Proprietors:

Mortgage interest payments (but not mortgage prepayments or principal payments) on

any business mortgage obligation on real or personal property (e.g., the interest on your

mortgage for the warehouse you purchased to store business equipment or the interest

on an auto loan for a vehicle you use to perform your business), business rent payments

(e.g., the warehouse where you store business equipment or the vehicle you use to

perform your business)…







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Focus on Meaning for Interest, Rent and Utility Payments

• Can you increase rent or interest under leases and notes in effect on February 15, 2020 if the "obligation" to pay interest or rent at below fair market value existed on February 15?

• What if rent or interest payments are paid monthly or in arrears? How does this fit into the words “costs incurred and payments made?"

• What is a mortgage? Is it restricted to a lien on real estate? What about a "mortgage“ on equipment or furniture?







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Focus on Meaning for Interest, Rent and Utility Payments

• Do utilities include gasoline for cars?

• Do utilities include garbage charges?

• Do utilities include cable, including Netflix?

The following is from the SBA Interim Final Rules on Independent Contractors and Sole Proprietors:

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







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12 months prior to date of loan

For non-contractor proprietors, this can be 2019 or the fiscal year ending before the loan application.

For independent contractors, this must be 2019.

Date of Loan8 Weeks After Date of Loan (No longer strictly enforced)

Application Deadline - June 30, 2020

2 years after date of loan –Due date of loaned amounts not forgiven

Measurement Period for Average Monthly Payroll Costs

Measurement Period for Loan Forgiveness

Paycheck Protection Program Loan Timeline







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Paycheck Protection Program Loans –Loan Forgiveness, Cont’d

• In order to receive the forgiveness, the employer must submit an application to the lender which includes the following:

• Documentation verifying the number of full time equivalent (FTE) employees on the payroll and their pay rates which includes payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings.

• Documentation, including cancelled checks, payment receipts, transcripts of accounts of other documents verifying payments on mortgage, lease, and utility obligations.

• A certification that the documentation is true and correct and that the amount for which forgiveness is requested was used to retain employees, make payments on mortgage obligations, rent, and utilities.

• Any other documentation that the Administrator deems necessary.

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Paycheck Protection Program Loans – Loan Forgiveness Documentation for Sole Proprietors and Independent Contractors

In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness you should submit:

1. If you have employees, Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions).

2. Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.

3. The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period. The Administrator, in consultation with the Secretary, determined that for purposes of loan forgiveness it is appropriate to require self-employed individuals to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocate to the owner during the covered period.

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Step One: Measure expenses that apply to reduce the indebtedness during the eight weeks following the first disbursement of the loan.

Step Two: Reduce the above amount if any employee’s compensation during the eight week period is reduced by more than 25% as compared to the most recent full quarter that the employee was employed.

Step Three: Reduce the above amount if you have a reduction in the total number of employees during the covered period as compared to the elected prior period.

Step Four: Divide total Payroll Costs by .75 to determine whether at least 75% of the potential forgiveness amount was used for payroll costs.

The lesser of (1) Steps 1-3 Amount or (2) Step 4 Amount = Loan Forgiveness

Reduction of Forgiveness If Reduced Employee Hours or Compensation Beyond Permissible Thresholds









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The 75% Rule

Language in Interim Final Rule:

However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the Act's overarching focus on keeping workers paid and employed. Further, the Administrator and the Secretary believe that applying this threshold to loan forgiveness is consistent with the structure of the Act, which provides a loan amount 75 percent of which is equivalent to eight weeks of payroll (8 weeks/2.5 months = 56 days/76 days = 74 percent rounded up to 75 percent). Limiting non-payroll costs to 25 percent of the forgiveness amount will align these elements of the program, and will also help to ensure that the finite appropriations available for PPP loan forgiveness are directed toward payroll protection. SBA will issue additional guidance on loan forgiveness.







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The 75% Rule

Example:

$100,000 Loan Amount

$70,000 spent on payroll costs during the eight week period and $30,000 spent on non-payroll costs.

Forgiveness is equal to $70,000 payroll costs + $23,333 (non-payroll costs limited to 25% of forgivable amount) = $93,333.

$23,333/$93,333 = 25%

To determine forgivable portion of non-payroll costs, divide payroll costs by 3.

The Loan Forgiveness Application applies the above test by dividing total payroll costs by .75 which reaches the same result as described above.







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Special Considerations for Independent Contractorsand Proprietors

• The monthly average of $100,000 of annual compensation is $8,333 which would result in a maximum loan of $20,833 ($8,333 * 2.5 = $20,833).

• The allowable costs for “owner compensation replacement” cannot exceed 8/52 of 2019 income limited to $100,000. $100,000 times (8/52) = 15,385

• $20,833 – $15,385 = $5,448 of funds that have to be spent elsewhere.

• SBA Rule that not more than 25% of forgiveness amount can be attributable to non payroll costs presents an issue for independent contractors and sole proprietors with no employees. $15,385/$20,833 = 73.85%

• $15,385 / 0.75 = $20,513 maximum loan forgiveness according to Loan Forgiveness Application.

• $20,833- $20,513 = $319.67 that may have to be repaid.

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Paycheck Protection Program Loans –Loan Forgiveness – Reduction of the Total Number of

Employees

Average monthly FTE Employees in 8 week period beginning on date of loan origination

Average monthly FTE Employees from (1) Feb 15, 2019 – June 30, 2019 or (2) Jan 1, 2020 - Feb 29, 2020.

• If a business receiving a loan reduces the number of employees employed during the eight week covered period then the amount eligible for forgiveness is also reduced.

FTE = Full-Time Equivalent Employees calculated based on ratio of total paid hours during a period over number of working hours in period.

For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.

A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.

It is unclear if you count owners as employees for purposes of the above calculation.















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Paycheck Protection Program Loans –Loan Forgiveness – Reduction of the Total Number of

Employees

Example - $100,000 Loan Amount with $70,000 spent on payroll costs and $30,000 spent on non-payroll costs.

FTE Employees during eight week period = 15

FTE Employees during elected prior period = 20

Loan is further reduced by 25%.

(15/20) x $100,000 = $70,000 of loan forgiveness.

Application of 75% Rule - $70,000 / 0.75 = $93,333

Loan Forgiveness is equal to $70,000 which is the lesser of (1) $70,000 or (2) $93,333.







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40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Questions 40 – 42 published May 3, 2020.

Paycheck Protection Program – Recent

Developments (SBA FAQs Guidance as of

May 6, 2020)







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Paycheck Protection ProgramLoan Forgiveness – Reduction of the Total Number of

Employees De minimis Exceptions

1. Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee

2. Any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.







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Paycheck Protection Program Loans –Loan Forgiveness – Rehire Exception

• The full forgiveness can apply if the reduction occurs between February 15, 2020 through April 26th, 2020 and the employer eliminates the reduction in the number of employees or salary/wage reduction prior to June 30, 2020.

• The Application provides the following guidance:

A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels.

Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met:

(1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and

(2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.













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Paycheck Protection Program Loan Forgiveness –Reduction of Compensation By More Than 25%

The CARES Act statutory language:

(A) The amount of loan forgiveness under this section shall be reduced by the amount ofany reduction in total salary or wages of any employee described in subparagraph(B) during the covered period [Eight Week Period] that is in excess of 25 percent ofthe total salary or wages of the employee during the most recent full quarter duringwhich the employee was employed before the covered period.

(B) An employee described in this subparagraph is any employee who did not receive,during any single pay period during 2019, wages or salary at an annualized rate ofpay in an amount more than $100,000.

The Loan Forgiveness Application applies the above test using an average annual salaryor hourly wage during the applicable 8 week period as compared to the average annualsalary or hourly wage during the first quarter of 2020.

See Loan Forgiveness Calculations on next slide.







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Step 1. Determine if pay was reduced more than 25%.

a. Enter average annual salary or hourly wage during Covered Period or Alternative PayrollCovered Period: ______________.

b. Enter average annual salary or hourly wage between January 1, 2020 and March 31,2020: ______________.

c. Divide the value entered in 1.a. by 1.b.: ______________. If 1.c. is 0.75 or more, enterzero in the column above box 3 for that employee; otherwise proceed to Step 2.

Step 2. Determine if the Salary/Hourly Wage Reduction Safe Harbor is met.

a. Enter the annual salary or hourly wage as of February 15, 2020: ______________.

b. Enter the average annual salary or hourly wage between February 15, 2020 and April 26,2020: ______________. If 2.b. is equal to or greater than 2.a., skip to Step 3. Otherwise,proceed to 2.c.

c. Enter the average annual salary or hourly wage as of June 30, 2020: ______________.

If 2.c. is equal to or greater than 2.a., the Salary/Hourly Wage Reduction Safe Harbor hasbeen met – enter zero in the column above box 3 for that employee. Otherwise proceed toStep 3.







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Step 3. Determine the Salary/Hourly Wage Reduction.

a. Multiply the amount entered in 1.b. by 0.75: ______________.

b. Subtract the amount entered in 1.a. from 3.a.: ______________.

If the employee is an hourly worker, compute the total dollar amount of the reduction thatexceeds 25% as follows:

c. Enter the average number of hours worked per week between January 1, 2020 and March31, 2020: ______________.

d. Multiply the amount entered in 3.b. by the amount entered in 3.c. ______________.

Multiply this amount by 8: ______________. Enter this value in the column above box 3 forthat employee.

If the employee is a salaried worker, compute the total dollar amount of the reduction thatexceeds 25% as follows:

e. Multiply the amount entered in 3.b. by 8: ______________. Divide this amount by 52:______________. Enter this value in the column above box 3 for that employee.









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Paycheck Protection Program Loans –Loan Forgiveness – Rehire Exception







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C&L Value Advisors, LLC

Kevin A. Cameron, CPA [email protected]

813-286-7373

Paycheck Protection Loan Forgiveness Expense TrackerEnter data in the light blue cells only

What date did your loan fund (money was released to you?) 4/17/2020 This is the start of your 8 week period

This is the end date you use for measuring loan forgiveness: 6/12/2020 This is the end of your 8 week period

Enter the amount of loan received 175,000.00$

DESCRIPTION

DATE

EXPENSE

INCURRED

DATE

EXPENSE

PAID TOTAL

GROSS

PAYROLL

HEALTH

INSURANCE

STATE

PAYROLL

TAXES

RETIREMENT

PLAN

CONTRIBUTIO

NS

INTEREST

ON

MORTGAGE

S IN PLACE

BEFORE

02/15/2020

INTEREST

ON OTHER

LOANS IN

PLACE

BEFORE

02/15/2020 RENT UTILITIES

SUPPORTING

DOCUMENTS

ATTACHED Yes

or No

Payroll, period ending 04/24 4/24/2020 4/25/2020 30,000.00 30,000.00 yes

Teco 4/26/2020 4/30/2020 1,200.00 1,200.00 yes

Verizon 4/26/2020 4/30/2020 750.00 750.00 yes

Aetna 4/30/2020 5/1/2020 3,500.00 3,500.00 yes

SUTA tax 4/24/2020 4/30/2020 300.00 300.00 yes

401k matching contribution 4/24/2020 5/1/2020 1,200.00 1,200.00 yes

Sample Bank mortgage interest 4/26/2020 4/27/2020 1,500.00 1,500.00 yes

Sample Bank loan interest 4/28/2020 4/29/2020 1,200.00 1,200.00 yes

Sample Lessor 5/1/2020 5/4/2020 9,000.00 9,000.00 yes

Payroll, period ending 05/08 5/8/2020 5/9/2020 31,000.00 31,000.00 yes

0.00

Totals 171,210.00 130,500.00 7,000.00 1,290.00 5,220.00 2,950.00 2,350.00 18,000.00 3,900.00

Enter gross pay to ANY individual in excess of $15,385 for

period:

Bob Sample (Gross salary $20,000 for 8-week period) 4,615.00 4,615.00

Mary Sample (Gross salary $22,000 for 8-week period) 6,615.00 6,615.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

Adjusted Totals 159,980.00 119,270.00

PPP LOAN EXPENSE TRACKER AND FORGIVENESS CALCULATOR







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SBA Gives PPP Borrowers Good News - Forgiveness Application Issues And Answersby Alan Gassman Contributor

Forbes Post - May 16, 2020

On Friday, May 15th, the SBA issued the Loan Forgiveness Application that will be used by PPP borrowers to determine and report how much of their PPP loan will be forgiven.

Most readers know that the Payroll Protection Program loans are extended based upon 2½ months of payroll, health insurance and retirement plan expenses, and are forgiven based generally on the same expenses plus certain interest, rent and utility expenditures that are made in the first eight weeks following the date that the first loan proceeds are received, subject to dozens of rules, many of which are ambiguous or uncertain.

The Application and Instructions are not without issues, but they resolve a number of calculations and substantive questions that we have been hoping to have answered. Business owners and their advisors have been spending significant time determining how these rules can help their businesses to survive, and what gray areas or loopholes might help to make up for the borrower unfriendly aspects of the program.


Forbes Post - May 16, 2020 | SBA Gives PPP Borrowers Good News – Forgiveness Application Issues and Answers, Cont’d

The most notable items addressed in the Application and Instructions are as follows:

1. Payroll Paid After the Eighth Week. Payroll expenses do not have to be both “paid and incurred” in the exact eight week period (56 days) that begins on the day that the first loan proceeds are received.

By the language of the CARES Act, and the regulations and FAQs issued by the SBA, only payroll that was actually paid during the eight weeks for services actually rendered by employees, plus applicable PTO used during that eight weeks, were going to be forgiven.

This was going to cause a significant hardship, and accounting nightmares for the majority of businesses, which pay their workers in arrears.

The Application allows the borrower to choose to use the 56-day period following the receipt of the first loan money, which is referred to as the “Covered Period,” or to select the “Alternative Payroll Covered Period,” to coincide with the payroll schedule of the borrower, if it is bi-weekly or more frequently.

The Alternative Payroll Covered Period, if elected, will begin on the first day of the borrower’s first pay period following the date that they receive their first PPP loan dollars, and will end on the 56th day thereafter. This assumes that all borrowers pay their employees in full on the last day of each pay period.

Employers who pay their employees after the last day of the pay period may still lose the forgiveness of payroll that is paid in arrears beyond the last day of the last pay period that is within the 56 days, and should therefore adjust their procedures accordingly.

Employers who pay monthly should adjust their procedures to pay every two weeks so that they can qualify to use the Alternative Payroll Covered Period.


A borrower that elects to use the Alternative Payroll Covered Period must also account for employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation during the same period of time, but will keep track of rent, interest and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount), subject to the rule described in Section 3 below.

No Further Relief in Sight. Treasury Secretary Mnuchen was asked by a news commentator on Friday whether there will be some sort of extension added for businesses, like restaurants, that are still shut down for the eight weeks after receiving their loan, and he indicated that there was nothing planned to help ameliorate this problem. Our favorite restaurant in Clearwater was closed for good last week, possibly in part because of this strict requirement.

2. Rent and Interest on Non-Real Estate Secured Loans and Leases. Rent and interest paid on leases of non-real estate business assets, and interest paid on loans that are secured by non-real estate “mortgages,” which are normally referred to as “Security Agreements,” will qualify for forgiveness, if they are based upon loans and leases that were in effect on February 15, 2020.

Planning Idea. It is unknown whether below market value loans or leases could be modified after February 15th to reflect fair market value interest or rent. Many borrowers will amend related party loan and lease agreements to reflect fair market value, pay fair market value during the eight weeks, and then wait for further guidance before filing the Forgiveness Application in order to determine whether the forgiveness will apply to the rate of interest or rent that was applicable under the agreement that was in effect on February 15, 2020, or whether the higher fair market value amounts paid during the eight week period can be counted.



3. Interest Rent and Utilities Paid in Arrears. Interest, rent and “utilities” that are incurred during the eight week repayment measurement period and paid shortly thereafter in the normal course of business will also qualify to be forgiven.

This provision of the Application reads as follows:

An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

The above language will not apply to health insurance or retirement plan contributions, because they are considered to be “payroll costs” under the applicable terminology.

4. The 75% Rule Is Not An “All Or Nothing” Requirement. There has been much confusion over whether this rule being imposed by the SBA, which indicates that forgiveness will be limited if 75% of the amounts loan amount is not spent on payroll, health insurance and pension expenses.

Some individuals, and the New York Times last week, thought that this meant that if the borrower only spent, for example, 74% of the PPP loan money on payroll, health insurance and pension expenses, there would be no forgiveness whatsoever.

The rule makes it clear that the borrower can first determine its payroll, health insurance and retirement plan expenses (which we will call the “Payroll Amount”) and then the sum of the other forgivable expenses (“rent, utilities, and interest”) cannot exceed 33 1/3% of the Payroll Amount.

For example, if the loan is $100,000, and only $70,000 is spent on payroll, health insurance and retirement plan expenses, then 33 1/3rd% of $70,000 is $23,333, and the maximum amount forgiven based on interest rent and utilities will be $23,333, so that the total loan forgiveness would be $93,333.



The language in the Instructions that confirms this states that “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.”

5. Reduction Ratios for Reduced Workforce and Compensation. The Application indicates how to apply the related calculations with respect to reduction of what is forgiven when there is a reduction in workforce or large salary reductions for non-highly compensated employees. One clarification is that the amounts otherwise forgiven for rent, interest and utilities are also reduced if there is a reduction in the number of employees under the test.

A short video on how the rules work for employers who have fewer employees than before during the eight week period, or who reduce a non-highly compensated employee’s wages by more than 25% is available on request if you e-mail [email protected] and put “video” in the re line.

6. When Does the Eight Week Period Start? The eight week forgiveness period begins when the first PPP monies are received. A business that borrowed $100,000 on May 1st, and gets another $50,000 on May 14th, will have to track the expenses for the eight weeks beginning May 1st. The Instructions do not indicate what occurs if the second or third tranche of a loan is received after the eight week period ends. Hopefully, we will receive more guidance on this.

It is noteworthy that the present SBA guidance indicates that entities taxed as partnerships that did not receive loan amounts based upon the compensation paid to partners, and also seasonal businesses that did not receive an extra loan amount based upon the later released seasonal business rules, can now apply for additional PPP loan amounts. There is no guidance on what might be forgiven if the additional loan amount received after the eight week period

has expired.




7. When Are Pension Expenses “Paid and Incurred? The Instructions indicate that the total “amount paid by [the] Borrower for employer contributions to employee retirement plans” will be entered in the calculation worksheet, and we now know that this will be based upon the above-referenced “Covered Period” or the “Alternative Payroll Covered Period,” but that there is no indication as to whether the amount that is “paid by Borrower” can include contributions attributable to an entire year, or even 2019 and 2020 combined.

We hope that subsequent regulations or FAQs will confirm that normal and ongoing expenses for health insurance and retirement plans can be included for the full eight weeks in which they are incurred, as long as they are paid within the normal course of business. It is possible that funding a pension plan for all of 2019 or all of 2020 (or even both) will qualify for forgiveness based upon the present regulations, and that non-tax qualified “retirement plans”, such as those known as “Top Hat Plans” and “Rabbi Trusts” may be used for this as well. As retirement plan expert Larry Starr of Qualified Plan Consultants, Inc. in West Springfield, Massachusetts ([email protected]) points out, it is mathematically possible, for example, that a one person/100% owner of an S corporation that has a high contribution defined benefit plan (say, $250,000 annual contribution) could fully meet the 100% reimbursement all by itself if our understanding that all monies contributed to the plan during the eight weeks is included without any requirements to pro-rate or allocate to a particular year or period. Larry is available to answer questions about PPP program loans and retirement plans, and is the Senior Advisor to the Government Affairs Committee at the American Society of Pension Professionals and Actuaries / American Retirement Association (ASPPA/ARA).

8. Independent Contractors, Proprietors and Partners in Partnerships May Be Left Out in the Cold. The Application and Instructions confirm an apparent intent to not permit independent contractors, proprietors, or individuals who are partners in a partnership to receive the benefit of forgiveness for the costs of their own health insurance and retirement plan contributions. We had hoped that businesses that are operated as partnerships for tax purposes would be treated the same as those taxed as S corporations or C corporations, but this will apparently not be the case, as a surprise and disappointment to many. The newly issued Instructions for what is known as “PPP Schedule A” provide that the “Payroll” will include total amounts paid by the Borrower for “employee health insurance…[and] employer contributions to employee retirement plans…[and] state and local taxes assessed on employee compensation…”




The Instructions for Line 9 provides for the inclusion of “any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight week equivalent of $100,000 per year) for each individual,” and reference is made to the April 14, 2020 Interim Final Rule, which indicates at FAQ #4 that partnerships would include health insurance and retirement plan expenses for “employees” in determining the amount that can be borrowed, but this guidance does not indicate whether such items would be limited to monies paid for employee health insurance and retirement plans (as opposed to being paid for partners who work for a partnership) with respect to forgiveness.

This was not a surprise to Larry Starr, who has been notifying people for weeks that the decision of the SBA to NOT allow self-employeds (which appear to include both sole proprietors and partners in a general partnership) is dramatically unfair to such entities. As noted in Number 7 above, a sole shareholder in an S corporation will get to include his full benefit costs (health insurance and retirement plan contributions) for the loan and forgiveness, while the individual who elected to be treated as unincorporated is discriminated against and will not be allowed to receive these benefits within the PPP structure. There is still hope that this might be modified, but the SBA did not do so in this release of the reimbursement form.

We will obviously be studying these and other issues relating to PPP loans, as impacted by this new primarily borrower friendly development and provide a further post soon.

For a more comprehensive white paper that we are preparing on the subject, please feel free to send me an email ([email protected]) and put “Secret Decoder Ring” in the subject line.





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HHS Provider Relief Fund –

$20 Billion Disbursement







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HHS Provider Relief Funds Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

To prevent, prepare for, and respond to coronavirus, and shall reimburse the provider only for health care related expenses or lost revenues attributable to coronavirus.

The Funds cannot be used for the following:

1. Reimbursement for expenses or losses that have been reimbursed from other sources.

2. Executive pay exceeding a rate in excess of Executive Level II.

3. Lobbying

4. Abortions

5. Confidentiality/Non-Disclosure Agreements

6. Unpaid Federal Taxes

7. See other materials for additional items.

1. Payroll costs during business disruptions or substantial slowdowns

2. Providing paid sick leave to employees unable to work due to the direct effect of COVID-19

3. Mortgage payments

4. Rent

5. Meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains

6. Repaying obligations other than those listed above that cannot be met due to revenue losses

1. Payroll costs including health care benefits, medical, or family leave, and retirement benefits

2. Providing paid sick leave for any illness

3. Mortgage interest payments, but not principal

4. Rent

5. Interest on other debt but not principal

6. Utilities

Permitted Use of Funds

Note that funds cannot be used for duplicative purposes







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In the first relief payment HHS paid medical practices and businesses approximately 6.19% of their

2019 Medicare revenues, and requires that these funds be used to pay for expenses or to recoup lost

profits of practices that have provide treatment for Covid-19 patients or patients who may have

Covid-19 after January 31st 2020 by providing diagnosis, testing or care. "HHS broadly views every

patient as a possible case of COVID-19"

Those practices that received such payments on or before 5 pm EST Friday April 24th can now apply

by Wednesday at noon EST each week to be batched for a second payment that is intended to have all

practices share in $50 billion dollars in proportion to total revenues, including non Medicare revenues.

This is based upon the following:

1. The total business or practice revenues, including Medicare and revenues from other sources for

medical care services for 2018 divided by 2.5 trillion dollars, which is the total amount of revenues

reported by medical practice taxpayers in 2018.

2. The percentage in 1 above is multiplied by $50 billion dollars.

3. If the resulting number is less than what was received already in the 6.19% payment then the

practice or business receives nothing.

Medical Practices and Businesses - -

Get Your Share of the Next $20 Billion







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If the resulting amount exceeds what was received already, then the business or practice will receive the lesser of

(a) the resulting number or

(b) the amount by which the total of the previous payment and this second payment exceed the sum of

(I) Lost revenues of the business or practice for March and April 2020.

(2) Any Increased expenses resulting from COVID-19

As with the first payment, any amounts received must be used for one or more of the following uncertain uses:

to prevent, prepare for and respond to corona virus and that the payment shall reimburse the recipient only for health care related expenses or lost revenue that are attributable to corona virus. If a recipient does not have lost revenues or increased expenses due to COVID-19 equal to the amount received a recipient must return the funds.

For more information go to hhs.gov/providerrrelief or call 866 569 3522.

Medical Practices and Businesses - -

Get Your Share of the Next $20 Billion




tel:8665693522




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A. HHS Provider Relief

1. Part One - - 6.19% / First $30 Billion most practices received.

2. Part Two - - Next $20 Billion based on your percent of 2018

$2.5 Trillion - - Apply by each Wednesday at noon.

3. More to come - - CARES Act Part Two – Another $100 Billion coming -

No guidance yet.

B. Economic Injury Disaster Loan (“EIDL”)

The “Automatic $10,000” Direct from SBA and possibly more

C. Payroll Protection Program (“PPP”)

Based on 2.5 times last year’s payroll - - must spend on certain things to be

forgiven over 8 weeks from receipts

Three Primary Loan and Grant Programs







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$50 billion of the Provider Relief Fund is allocated for general distribution to Medicare facilities and providers impacted by COVID-19, based on eligible providers' net patient revenue. The initial $30 billion was distributed between April 10 and April 17, and the remaining $20 billion is being distributed beginning Friday, April 24.

• To expedite providers getting money as quickly as possible, $30 billion was distributed immediately, proportionate to providers' share of Medicare fee-for-service reimbursements in 2019. On Friday, April 10, $26 billion was delivered to bank accounts. The remaining $4 billion of the expedited $30 billion distribution was sent on April 17.

• This simple formula used the data on-hand to get the money out the door as quickly as possible. The Administration was transparent and upfront additional funds would be going out quickly to help providers with a relatively small share of their revenue coming from Medicare fee-for-service, such as children's hospitals.

• HHS will begin distribution of the remaining $20 billion of the general distribution to these providers on April 24 to augment their allocation so that the whole $50 billion general distribution is allocated proportional to providers' share of net patient revenue.

HHS Provider Relief Fund – Information from HHS

Website on allocation of additional $20 Billion







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• On April 24, a portion of providers will automatically be sent an advance payment based off the revenue data they submit in CMS cost reports. Providers without adequate cost report data on file will need to submit their revenue information to the General Distribution Portal for additional general distribution funds. (Link -https://covid19.linkhealth.com/docusign/#/step/1)

• Providers who receive their money automatically will still need to submit their revenue information so that it can be verified via the General Distribution Portal. (Link -https://covid19.linkhealth.com/docusign/#/step/1)

• Payments will go out weekly, on a rolling basis, as information is validated, with the first wave being delivered at the end of this week (April 24, 2020).

• Providers who receive funds from the general distribution have to sign an attestation confirming receipt of funds and agree to the terms and conditions of payment and confirm the CMS cost report. (Link to sign the attestation and accept the Terms and Conditions - https://covid19.linkhealth.com/#/step/1)






https://covid19.linkhealth.com/docusign/#/step/1

https://covid19.linkhealth.com/docusign/#/step/1

https://covid19.linkhealth.com/#/step/1




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• The Terms and Conditions also include other measures to help prevent fraud and misuse of the funds. All recipients will be required to submit documents sufficient to ensure that these funds were used for healthcare-related expenses or lost revenue attributable to coronavirus. There will be significant anti-fraud and auditing work done by HHS, including the work of the Office of the Inspector General.

• President Trump is committed to ending surprise bills for patients. As part of this commitment, as a condition to receiving these funds, providers must agree not to seek collection of out-of-pocket payments from a presumptive or actual COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider.









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Terms and Conditions – Relief Fund Payment from $20 Billion General Distribution

HHS.govCARES Act Provider Relief Fund







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The Provider Relief Fund Application Portal is collecting four pieces of information for use in allocating remaining General Distribution funds:

1) a provider’s “Gross Receipts or Sales” or “Program Service Revenue” as

submitted on its federal income tax return;

2) the provider’s estimated revenue losses in March 2020 and April 2020 due to

COVID;

3) a copy of the provider’s most recently filed federal income tax return;

4) a listing of the TINs any of the provider’s subsidiary organizations that have

received relief funds but that DO NOT file separate tax returns.

Provider Relief Fund Application







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How do I estimate lost revenue in March or April?

You may use a reasonable method of estimating the revenue during March and April compared to the same period had COVID-19 not appeared. For example, if you have a budget prepared without taking into account the impact of COVID-19, the estimated lost revenue could be the difference between your budgeted revenue and actual revenue. It would also be reasonable to compare the revenues to the same period last year.

Why are you asking me for Gross Receipts or Sales?

We are asking for Gross Receipts because it is a measure of revenues you received during the applicable filing period.

Why are you asking me to estimate my revenue?

We realize that a final revenue number may not be available until a certain time after the end of April. As the program seeks to provide liquidity support to the healthcare system in a timely manner we are using estimated revenues.

General Distribution Portal FAQs for the Provider

Relief Fund Application







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Which types of providers are eligible to receive a General Distribution Provider Relief

Payment? (Added 5/6/2020)

To be eligible for a General Distribution payment, providers must have billed Medicare on a fee

for- service basis (Parts A or B) in Calendar Year 2019. Additionally, under the Terms and

Conditions associated with payment, these providers are eligible only if they provide or

provided after January 31, 2020, diagnoses, testing or care for individuals with possible or

actual cases of COVID-19. HHS broadly views every patient as a possible case of COVID-19.

All providers retaining funds must sign an attestation and accept the terms and conditions

associated with payment. Providers must also submit tax documents and financial loss estimates

if they wish to be eligible for additional funds.


Relief Fund Application (5-6-2020 UPDATES)







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What should a provider do if a General Distribution payment is greater than expected or

received in error? (Added 5/6/2020)

Providers that have been allocated a payment must sign an attestation confirming receipt of

the funds and agree to the Terms and Conditions within 30 days of payment. Generally, if a

provider does not have or anticipate having COVID-related lost revenues or increased

expenses equal to or in excess of the relief payments received, they should return the funds.

If a provider believes it was overpaid or may have received a payment in error, it should

reject the entire General Distribution payment and submit the appropriate revenue

documents through the General Distribution portal to facilitate HHS determining their

correct payment. If a provider believes they are underpaid, they should accept the payment

and submit their revenues in the provider portal to determine their correct payment.









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Does HHS intend to recoup any payments made to providers not tied to specific claims for

reimbursement, such as the General Distribution payments? (Added 5/6/2020)

The Provider Relief Fund and the Terms and Conditions require that recipients be able to

demonstrate that lost revenues and increased expenses attributable to COVID-19, excluding

expenses and losses that have been reimbursed from other sources or that other sources are

obligated to reimburse, exceed total payments from the Relief Fund. Generally, HHS does

not intend to recoup funds as long as a provider’s lost revenue and increased expenses

exceed the amount of Provider Relief funding a provider has received. HHS reserves the right

to audit Relief Fund recipients in the future to ensure that this requirement is met and collect

any Relief Fund amounts that were made in error or exceed lost revenue or increased

expenses due to COVID-19. Failure to comply with other Terms and Conditions may also be

grounds for recoupment.









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What is the definition of individuals with possible or actual cases of COVID-19? (Added

5/6/2020)

Unless the payment is associated with specific claims for reimbursement for COVID-19

testing or treatment provided on or after February 4, 2020 to uninsured patients, under the

Terms and Conditions associated with payment, providers are eligible only if they provide or

provided after January 31, 2020, diagnoses, testing or care for individuals with possible or

actual cases of COVID-19.

HHS broadly views every patient as a possible case of COVID-19.

Not every possible case of COVID-19 is a presumptive case of COVID 19. For clarification as

it relates to presumptive COVID 19 cases, refer to the Frequently Asked Question that defines

a presumptive case of COVID-19.









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What oversight and enforcement mechanisms will HHS use to ensure providers meet

the Terms and Conditions of the Provider Relief Fund payments? (Added 5/6/2020)

Failure by a provider that received a payment from the Provider Relief Fund to comply

with any term or condition can subject the provider to recoupment of some or all of the

payment. Per the Terms and Conditions, all recipients will be required to submit

documents to substantiate that these funds were used for increased healthcare-related

expenses or lost revenue attributable to coronavirus, and that those expenses or losses

were not reimbursed from other sources and other sources were not obligated to reimburse

them. HHS will have significant anti-fraud monitoring of the funds distributed, and the

Office of Inspector General will provide oversight as required in the CARES ACT to

ensure that Federal dollars are used appropriately.









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Do the Terms and Conditions for the General, Rural or High Impact Distributions require

attesting to a ban on balance billing for all patients and/or all care, because “HHS broadly

views every patient as a possible case of COVID-19”? (Added 5/6/2020)

No. As set forth in the Terms and Conditions, the prohibition on balance billing applies to “all

care for a presumptive or actual case of COVID-19.”

The Terms and Conditions provision related to balance billing suggests that providers that

provide out-of-network care to an insured, presumptive or actual COVID-19 patient can bill

the patient’s insurer any amount, as long as they don’t bill the patient directly. Is that

correct? (Added 5/6/2020)

The Terms and Conditions do not impose any limitations on the ability of a provider to submit

a claim for payment to the patient’s insurance company. However, an out-of-network provider

delivering COVID-19-related care to an insured patient may not seek to collect from the

patient out-of-pocket expenses, including deductibles, copayments, or balance billing, in an

amount greater than what the patient would have otherwise been required to pay if the care

had been provided by an in-network provider.









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The Terms and Conditions associated with the two General Distribution payments

and the Rural and High Impact payments require that “for all care for a presumptive

or actual case of COVID-19, Recipient certifies that it will not seek to collect from the

patient out-of-pocket expenses in an amount greater than what the patient would

have otherwise been required to pay if the care had been provided by an in-network

Recipient.” How does HHS define a presumptive case of COVID-19? (Added

5/6/2020)

A presumptive case of COVID-19 is a case where a patient’s medical record

documentation supports a diagnosis of COVID-19, even if the patient does not have a

positive in vitro diagnostic test result in his or her medical record.









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How will a provider know the in-network rates to be able to comply with the

requirement to bill a presumptive or actual COVID-19 patient for cost-sharing at the

in-network rate? (Added 5/6/2020)

Providers accepting the Provider Relief Fund payment should submit a claim to the

patient’s health insurer for their services. Most health insurers have publicly stated

their commitment to reimbursing out-of-network providers that treat health plan

members for COVID-19-related care at the insurer’s prevailing in-network rate. But if

the health insurer is not willing to do so, the out-of-network provider may seek to collect

from the patient out-of-pocket expenses, including deductibles, copayments, or balance

billing, in an amount that is no greater than what the patient would have otherwise been

required to pay if the care had been provided by an in-network provider.









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If a hospital receives a Provider Relief Fund payment under the General, Rural or High

Impact Distribution and the hospital contracts with an independently contracted provider

(e.g., anesthesiologist or laboratory), is that independently contracted provider banned from

balance billing for care provided to a “presumptive or actual COVID-19 patient”? (Added

5/6/2020)

Yes, if the independently contracted provider also attested to receiving a payment from the

Provider Relief Fund.









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How can I return a General Distribution payment I received under the Provider Relief

Fund? (Added 5/6/2020)

Providers may return their General Distribution payment by going into the attestation portal

within 30 days of receiving payment and indicating they are rejecting the funds. The CARES

Act Provider Relief Fund Payment Attestation Portal will guide providers through the

attestation process to reject the funds.

As explained in the attestation portal, to return the money, the provider would need to contact

their financial institution and ask the institution to refuse the received Automated

Clearinghouse (ACH) credit by initiating an ACH return using the ACH return code of “R23

- Credit Entry Refused by Receiver." If a provider received the money via ACH they must

return the money via ACH. If a provider was paid via paper check, after rejecting the

payment in the attestation portal, the provider should destroy the check if not deposited or

mail a paper check to UnitedHealth Group with notification of their request to return the

funds.









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What are the reporting requirements for providers attesting to receipt of Provider

Relief Fund payments and when will reporting begin? (Added 5/6/2020)

All providers receiving Provider Relief Fund payments will be required to comply with

the reporting requirements described in the Terms and Conditions and specified in

future directions issued by the Secretary. The specific reporting obligations imposed on

providers receiving $150,000 or more from any Act primarily making appropriations

for the coronavirus response and related activities, which is a statutory requirement,

begins for the calendar quarter ending June 30. The Secretary may request additional

reports prior to that date. HHS will provide guidance in the future about the type of

documentation we expect recipients to submit. Additional guidance will be posted at

https://www.hhs.gov/provider-relief/index.html.









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HHS Provider Relief Funds Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

To prevent, prepare for, and respond to coronavirus, and shall reimburse the provider only for health care related expenses or lost revenues attributable to coronavirus.

The Funds cannot be used for the following:

1. Reimbursement for expenses or losses that have been reimbursed from other sources.

2. Executive pay exceeding a rate in excess of Executive Level II.

3. Lobbying

4. Abortions

5. Confidentiality/Non-Disclosure Agreements

6. Unpaid Federal Taxes

7. See other materials for additional items.

1. Payroll costs during business disruptions or substantial slowdowns

2. Providing paid sick leave to employees unable to work due to the direct effect of COVID-19

3. Mortgage payments

4. Rent

5. Meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains

6. Repaying obligations other than those listed above that cannot be met due to revenue losses

1. Payroll costs including health care benefits, medical, or family leave, and retirement benefits

2. Providing paid sick leave for any illness

3. Mortgage interest payments, but not principal

4. Rent

5. Interest on other debt but not principal

6. Utilities

Permitted Use of Funds

Note that funds cannot be used for duplicative purposes







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SBA NOTICE – EIDL Now

Provides Relief Only to U.S.

Agricultural Businesses







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Notice: New Eligibility for Economic Injury

Disaster Loan and Advance

In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories were able to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue. This loan advance will not have to be repaid. SBA will begin accepting new Economic Injury Disaster Loan (EIDL) and EIDL Advance applications on a limited basis only to provide relief to U.S. agricultural businesses.

The new eligibility is made possible as a result of the latest round of funds appropriated by Congress in response to the COVID-19 pandemic.

Agricultural businesses includes those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries (as defined by section 18(b) of the Small Business Act (15 U.S.C. 647(b)).







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Notice: New Eligibility for Economic Injury

Disaster Loan and Advance

SBA is encouraging all eligible agricultural businesses with 500 or fewer employees wishing to apply to begin preparing their business financial information needed for their application.

At this time, only agricultural business applications will be accepted due to limitations in funding availability and the unprecedented submission of applications already received.

Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis. For agricultural businesses that submitted an EIDL application through the streamlined application portal prior to the legislative change, SBA will process these applications without the need for re-applying.







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What is “Substantial Economic Injury” for Purposes of EIDL Qualification?

SBA EIDL website and the application for EIDLs provide the following guidance on the words “substantial economic injury”:

The Applicant must establish that the claimed economic injury is substantial and is a direct result of the declared disaster.

Substantial economic injury generally means a decrease in income from operations or working capital with the result that the business is unable to meet its obligations and pay ordinary and necessary operating expenses in the normal course of business.







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(a) If your business is located in a declared disaster area, and suffered substantial economic injury as a direct result of a declared disaster, you are eligible to apply for an economic injury disaster loan.

(1) Substantial economic injury is such that a business concern is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses.

(2) Loss of anticipated profits or a drop in sales is not considered substantial economic injury for this purpose.

What is “Substantial Economic Injury” for Purposes of EIDL Qualification?







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IRS Notice 20-32 –

Non-Deductibility of Expenses

Paid with PPP Funds That Are

Later Forgiven







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Notice 2020-32

PURPOSE

This notice provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.

BACKGROUND

I. Paycheck Protection Program The Paycheck Protection Program was established by section 1102 of the CARES Act. Under the

Paycheck Protection Program, a recipient of a covered loan may use the proceeds to pay (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on any other existing debt obligations. See section 7(a)(36)(F) of the Small Business Act (describing allowable uses of a covered loan). See also Q&A 2.r. in Part III of the







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Notice 2020-32, Cont’d

interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20814 (April 15, 2020).

Under section 1106(b) of the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan (covered loan forgiveness) in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date (each, an eligible section 1106 expense): (1) payroll costs, (2) any payment of interest on any covered mortgage obligation, (3) any payment on any covered rent obligation, and (4) any covered utility payment. See section 1106(a) (defining the terms “covered period”, “covered mortgage obligation,” “covered rent obligation,” “covered utility payment,” and “payroll costs”), (b) (regarding eligibility for covered loan forgiveness), and (g) (regarding covered loan forgiveness decisions). However, section 1106(d) of the CARES Act provides that the amount of the covered loan forgiveness is reduced if, during the covered period, (1) the average number of full-time equivalent employees of the recipient is reduced as compared to the number of full-time employees in a specified base period, or (2) the salary or wages of certain employees is reduced by more than 25 percent as compared to the last full quarter before the covered period. In addition, pursuant to an interim final rule issued by the Small Business Administration, no more than 25 percent of the amount forgiven can be attributable to non-payroll costs. See Q&A 2.o. in Part III of the interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20813-20814 (April 15, 2020).







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Section 1106(i) of the CARES Act addresses certain Federal income tax consequences resulting from covered loan forgiveness. Specifically, that subsection provides that, for purposes of the Code, any amount that (but for that subsection) would be includible in gross income of the recipient by reason of forgiveness described in section 1106(b) “shall be excluded from gross income.” Thus, section 1106(i) of the CARES Act operates to exclude from the gross income of a recipient any category of income that may arise from covered loan forgiveness, regardless of whether such income would be (1) properly characterized as income from the discharge of indebtedness under section 61(a)(11) of the Code, or (2) otherwise includible in gross income under section 61 of the Code.

II. Deductibility of Eligible Section 1106 Expenses

Neither section 1106(i) of the CARES Act nor any other provision of the CARES Act addresses whether deductions otherwise allowable under the Code for payments of eligible section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven under section 1106(b) of the CARES Act as a result of the payment of those expenses. This Notice addresses the effect of covered loan forgiveness on the deductibility of payments of eligible section 1106 expenses.







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Notice 2020-32, Cont’dIII. Summary of Relevant Law

Section 161 of the Code provides that, in computing taxable income under section 63 of the Code, there shall be allowed as deductions the items specified in part VI, subchapter B, chapter 1 of the Code (for example, sections 162 and 163). However, section 161 of the Code provides that the allowance of these deductions is subject to the exceptions provided in part IX, subchapter B, chapter 1 of the Code. These exceptions include section 265 of the Code. See also section 261.

In general, section 162 of the Code provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction under section 162 of the Code generally is appropriate. Section 163(a) of the Code provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

However, section 265(a)(1) of the Code and §1.265-1 of the Income Tax Regulations provide that no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction to such taxpayer that is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued)







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wholly exempt from the taxes imposed by subtitle A of the Code. See generally section 265(a)(1); §1.265-1. The term “class of exempt income” means any class of income (whether or not any amount of income of such class is received or accrued) that is either wholly excluded from gross income under any provision of subtitle A of the Code or wholly exempt from the taxes imposed by subtitle A of the Code under the provisions of any other law. See §1.265-1(b)(1). The purpose of section 265 of the Code is to prevent a double tax benefit.

Section 265(a)(1) of the Code applies to otherwise deductible expenses incurred for the purpose of earning or otherwise producing tax-exempt income. It also applies where tax exempt income is earmarked for a specific purpose and deductions are incurred in carrying out that purpose. In such event, it is proper to conclude that some or all of the deductions are allocable to the tax-exempt income. See Christian v. United States, 201 F. Supp. 155 (E.D. La. 1962) (school teacher was denied deductions for expenses incurred for a literary research trip to England because the expenses were allocable to a tax-exempt gift and fellowship grant); Banks v. Commissioner, 17 T.C. 1386 (1952) (certain educational expenses paid by the Veterans' Administration that were exempt from income tax, were not deductible); Heffelfinger v. Commissioner, 5 T.C. 985 (1945), (Canadian income taxes on income exempt from U.S. tax are not deductible in computing U.S. taxable income); and Rev. Rul. 74-140, 1974-1 C.B. 50, (the portion of a state income tax paid by a taxpayer that is allocable to the cost-of-living allowance, a class of income wholly exempt under section 912, is nondeductible under section 265).







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In Manocchio v. Commissioner, 78 T.C. 989 (1982), a taxpayer attended a flight training course that maintained and improved skills required in the taxpayer's trade or business. As a veteran, the taxpayer was entitled to an educational assistance allowance from the Veterans' Administration pursuant to 38 U.S.C. section 1677 (1976) equal to 90 percent of the costs incurred. Because the payments received were exempt from taxation under 38 U.S.C. section 310(a) (1976), the taxpayer did not report them as income. The taxpayer did, however, deduct the entire cost of the flight training course, including the portion that had been reimbursed by the Veterans' Administration. In a reviewed opinion, the court held that the reimbursed flight-training expenses were nondeductible under section 265(a)(1) of the Code.

NON-DEDUCTIBILITY OF PAYMENTS TO THE EXTENT INCOME RESULTING FROM LOAN FORGIVENESS IS EXCLUDED UNDER SECTION 1106(i) OF THE CARES ACT

To the extent that section 1106(i) of the CARES Act operates to exclude from gross income the amount of a covered loan forgiven under section 1106(b) of the CARES Act, the application of section 1106(i) results in a “class of exempt income” under §1.2651(b)(1) of the Regulations. Accordingly, section 265(a)(1) of the Code disallows any otherwise allowable deduction under any provision of the Code, including sections 162 and 163, for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because such payment is allocable to tax-exempt income. Consistent with the purpose of section 265, this treatment prevents a double tax benefit







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This conclusion is consistent with prior guidance of the IRS that addresses the application of section 265(a) to otherwise deductible payments. In particular, Rev. Rul. 83-3, 1983-1 C.B. 72, provides that, where tax exempt income is earmarked for a specific purpose, and deductions are incurred in carrying out that purpose, section 265(a) applies because such deductions are allocable to the tax-exempt income. In accordance with the analysis set forth in Rev. Rul. 83-3, the direct link between (1) the amount of tax exempt covered loan forgiveness that a recipient receives pursuant to section 1106 of the CARES Act, and (2) an equivalent amount of the otherwise deductible payments made by a recipient for eligible section 1106 expenses, constitutes a sufficient connection for section 265(a) to apply to disallow deductions for such payments under any provision of the Code, including sections 162 and 163, to the extent of the income excluded under section 1106(i) of the CARES Act.

The deductibility of payments of eligible section 1106 expenses that result in loan forgiveness under section 1106(b) of the CARES Act is also subject to disallowance under case law and published rulings that deny deductions for otherwise deductible payments for which the taxpayer receives reimbursement. See, e.g., Burnett v. Commissioner, 356 F.2d 755, 759-60 (5th Cir. 1966); Wolfers v. Commissioner, 69 T.C. 975 (1978); Charles Baloian Co. v. Commissioner, 68 T.C. 620 (1977); Rev. Rul. 80348, 1980-2 C.B. 31; Rev. Rul. 80-173, 1980-2 C.B. 60.







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CONTACT INFORMATION

The principal authors of this notice are Sarah Daya and Patrick Clinton of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding the application of sections 161, 162, 163, and 261 please contact Ms. Daya at (202) 317-4891 (not a toll-free call); for further information regarding the application of section 265, please contact Mr. Clinton at (202) 317-7005 (not a toll-free call).







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AICPA Does Not AgreePublished May 1, 2020

In an email sent to their members, the AICPA expressed their disagreement with the Treasury's interpretation of the statute, specifically stating the following:

According to guidance the IRS released last night, PPP loan recipients whose loans are forgiven cannot deduct related expenses that are normally deductible. This guidance does not align with what we are hearing from Congress about the intent of the CARES Act and the PPP, and we are looking at all possible options for addressing this issue –including seeking a legislative solution, if necessary.

In a Journal of Accountancy Article, Chris Hesse, CPA, chair of the AICPA Tax Executive Committee stated that “In effect, the IRS guidance means that the taxability provision [Section 1106(i)] has no meaning. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?”

In the same article, Edward Karl, CPA, AICPA vice president–Tax Policy & Advocacy stated that “We’re hopeful that we’ll see movement on the legislative front early next week.”




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House Ways and Means Committee and Senate Finance

Committee Comments on IRS Notice 2020-32

• Senate Finance Committee Chair, Chuck Grassley, indicated that the Internal Revenue Service’s position in IRS Notice 2020-32 is contrary to the intent of the Paycheck Protection Program.

• Chair of the House, Ways and Means Committee, Richard E. Neal, spokesperson indicated that future legislation would reverse the Internal Revenue Service’s position in Notice 2020-32.







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Bankrupt Entities and PPP

• Since the CARES Act was passed, the SBA has required participating lenders to use an SBA-created loan application that would disqualify any small business in bankruptcy from receiving a PPP Loan.

• There is nothing in the CARES Act, however, that prohibits debtors in bankruptcy from receiving PPP Loans.

• SBA Interim Final Rule Language:

• If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.







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In re Hidalgo County Emergency Service Foundation

• Challenged the aforementioned SBA-imposed ban against extending PPP loans to bankrupt companies on the ground that it exceeded the SBA’s statutory authority and was in violation of section 525(a) of the Bankruptcy Code.

• Section 525(a) prohibits a governmental unit from denying “a license, permit, charter, franchise, or other similar grant” to a debtor in bankruptcy

• The “Court finds and concludes that the Plaintiff would suffer immediate and irreparable harm without issuance of a temporary restraining order.”

• “Issuance of this temporary restraining order is in the public interest. The continued gainful employment of the Debtor’s approximately 250 employees benefits the public interest as a whole. The Debtor’s business as a “front line” health care provider is vitally important even in normal times, and even more so now for victims of COVID-19 in South Texas.”

• The Court, however, “make[s] no ruling on whether or not Hidalgo County EMS otherwise qualifies for a PPP loan.”

Was this binding on just this borrower or all borrowers?







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In re Hidalgo County Emergency Service Foundation

• The Court also finds that:

• Hidalgo County EMS is authorized to submit a PPP loan application to any lender with the words “or presently involved in any bankruptcy” stricken from the SBA’s form, and, if Hidalgo County EMS satisfies all the other conditions in question #1 to the loan application form, mark the box answering question #1 “no.”

• Question 1 asks: “Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?“

• To the extent any bank requires Hidalgo County EMS to execute any other forms, applications, or other documents for a PPP loan that include any language about whether Hidalgo County EMS or any owner of Hidalgo County EMS is involved in any bankruptcy, Hidalgo County EMS is authorized to strike the portion of such language about involvement in any bankruptcy and the Restrained Parties shall process the forms, applications, or other documents without any consideration of the involvement of Hidalgo County EMS or any owner of Hidalgo County EMS in any bankruptcy.

• The Restrained Parties shall not make or condition the approval of any PPP loan guaranty to the Debtor contingent on the Debtor or any owner of the Debtor not being “presently involved in any bankruptcy.”







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Excerpts from In re Hildago:







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PPP LOAN FORGIVENESS UNDER NEWLY RELEASED PPP LOAN FORGIVENESS

APPLICATION PROVIDES GREAT NEWS FOR BORROWERS AND MANY QUESTIONS

WHAT WE KNOW NOW AND HOW TO PREPARE FOR THIS

Tuesday, May 19, 20203 PM to 4:30 PM ET

(90 minutes)

Alan Gassman

[email protected]

Brandon Ketron

[email protected]

NOT-SO-FREE WEBINAR



Copyright © 2020 Gassman, Crotty & Denicolo, P.A. (5.6.2020 – Gassman / Ketron) Medical Practices - “How the Next $20 Billion Is Working and More”

183

Wednesday, May 20, 2020

9:00 a.m. – 9:15 a.m. ET

(15 minutes)

WEEKLY UPDATE

FOR MEDICAL PRACTICES



Copyright © 2020 Gassman, Crotty & Denicolo, P.A. | 4.30.2020 Lion Street –Planning Update: More, Faster and Better Discussion of Planning in the Age of the Coronavirus(Gassman)184

Thursday, May 21, 2020

12:30 p.m. – 1:00 p.m. / EDT

(30 minutes)

REAL ESTATE TAX PLANNING

FOR THE ASTUTE REAL ESTATE

INVESTOR/DEVELOPER

Brandon Ketron

[email protected]

John Beck

[email protected]






(90 minutes)

NOT-SO-FREE WEBINAR



Kevin [email protected]

Planning for IRAs and Retirement Plans After the SECURE Act and the CARES Act -

How the Landscape Has Changed


(90 minutes)

NOT-SO-FREE WEBINAR


Christopher [email protected]

John [email protected]




(90 minutes)

NOT-SO-FREE WEBINAR



Kevin [email protected]



Replay Of Saturday, May 16, 2020

Friday, May 22, 2019

12:30 p.m. – 1:00 p.m. / EDT

(30 minutes)

CORNFLAKES AND ESTATE

PLANNING MISTAKES

Presented by:

Ken Crotty

[email protected]


Copyright © 2020 Gassman, Crotty & Denicolo, P.A. | 4.30.2020 Lion Street –Planning Update: More, Faster and Better Discussion of Planning in the Age of the Coronavirus(Gassman)189


9:00 a.m. – 9:30 a.m. / EDT

(30 minutes)

TEA FOR TWO AND TWO FOR TBE-

ALL ABOUT TBE (TENANCY BY THE ENTIRETIES FOR MARRIED FLORIDIANS)

Presented by:

Ken Crotty

[email protected]


Copyright © 2020 Gassman, Crotty & Denicolo, P.A. | 4.30.2020 Lion Street –Planning Update: More, Faster and Better Discussion of Planning in the Age of the Coronavirus(Gassman)

Thursday, May 21,

2020

Brandon Ketron and John Beck present:

Real Estate Tax Planning For The Astute Real Estate

Investor/Developer


Saturday, May 23,

2020

Kenneth J. Crotty presents:

Tea for Two and Two for TBE- All About TBE (Tenancy by the

Entireties for Married Floridians)


Thursday, May 28,

2020


What Clients Need To Know About Bankruptcy


Saturday, May 30,

2020


Creditor Protection For Physicians


Thursday, June 4,

2020

Brandon Ketron presents:

Section 199A And Related Income Tax Planning


Saturday, June 6,

2020


Planning For The Single Physician



190

Copyright © 2020 Gassman, Crotty & Denicolo, P.A. | 4.30.2020 Lion Street –Planning Update: More, Faster and Better Discussion of Planning in the Age of the Coronavirus(Gassman)


Thursday, June 11,

2020


Planning for S Corporations

The Basics, Tricks and Traps


Thursday, June 18,

2020


Understanding Charitable Remainder Trusts

Add New Tools to Your Belt


Thursday, June 25,

2020


SCRAT




Gift Tax Return Tips and Traps




LLC Drafting Tune Ups and Checklist


Thursday, July 16,

2020


Inheritance Trust Implementation and Planning

From 12:30 PM to 1 PM ET

Thursday, July 23,

2020


Estate Tax Return Tips and Traps


191

For more information, email:[email protected] 192

Time Topic Speaker Topic Speaker

8:00-8:10 Greeting Dean and Director

8:10-9:20Current Developments of importance to estate

planners.Howard Zaritsky None

9:20-10:20 Current Developments (continued) Howard Zaritsky None

10:20-10:35

Break Break

10:35-11:35

To Gift Or Not To Gift: Balancing Income and Transfer Tax Benefits For Couples Worth

Between $12 Million to $22 Million Jeff Chadwick

Rescue Planning For Existing CLATs Where Lower Asset Values Will Deplete Principal Reducing Or

Eliminating Estate Plan Benefits

Notre Dame Advisory Board

11:35-12:35

Avoiding The Estate Planning “Blue Screen Of Death” With Competent And Ethical Practices

(Ethics)Gerry Beyer

Defensive Practices Because Nothing Is Safe: How Practitioners

Can Be Safer And Reduce Malpractice Risks (Ethics)

Sandy Glazier Howard Zaritsky

Marty Shenkman

12:35-1:50 Luncheon

1:50-2:50Turning Off Grantor Trust Status: Mechanics, Tax Implications, Effect On Entities, Abusive

Transactions, And State Law ObstaclesDavid Kirk

Estate Planning To Obtain The Best Economic Outcome For Beneficiaries of IRA And

Retirement Assets

Steve Trytten

2:50-3:50 Michael GordonCreative Planning With Charitable

Remainder Trusts: You Will Flip When You See This

Michael MulliganJohn Grzybek

3:50-4:05 break break

4:05-5:35

Perspectives On Planning For Personal Property: Collectibles, Philanthropy, Auction

Houses, Income Taxes, And The Next Generation

Kim KaminAdd OthersShenkman, Moderator

None

Agenda

Thursday, October 29, 2020(Wednesday)

3:30 pm to 5:30 pm

A Comprehensive Review of the SECURE Act And How To Draft For What Is Still Not Clear.

Christopher Denicolo

Time Topic Speaker Topic SpeakerTrack A Track B

8:00-9:00

Designing Trusts For Multi-Generations: Key Trust Language That Allows Flexibility, Still Be

Effective And Accomplishes A Settlor’s Objectives

David HerzigAn Estate Planning Roadmap for 2020 and

2021Marty Shenkman

9:00-10:00Bob Keebler

Foreign v. Domestic: Which Jurisdiction Is Right For Your Client Considering Asset

ProtectionGideon Rothchild

10:00-10:15 Break

10:15-11:15Life Insurance Best Interest Pressures And Evaluation Other Factors Advisors Need To

Consider

Rebecca RyanBarry Flagg


The Land of Oz: A Hard And Candid Look At Opportunity Zone Tax Incentives: Would You Make The Investment If There Were No Tax

Incentives?

Jay Darby

11:15-12:15Todd Petit


I Have A Lot of Investment Expenses: What Is And What Is Not Deductible

Louis Harrison

12:15-1:15 Luncheon Luncheon

1:15-2:15Navigating Common Trustee Liability Exposures

And Defensive Steps To Take In Advance

Stacy SingerTom Abendreth

The Income Tax Impact Of The New Transfer For Value Regulations: What Is No Longer A

Safe Harbor For Transfers Of A Life Insurance Policy

Stuart KohnAdam Garber

2:15-3:15Securing Client Data And Teleworking: Ethical

Concerns and Practical Tips (Ethics)Karin Prangley

The Mine Fields Of The Lawyer As A Fiduciary: Do You Know How To Navigate

Them? (Ethics)Paul Hood

3:15-3:30 Break Break

3:30-4:30Variations On A Theme: The Uniform Trust

Code In The Midwest And States Considering Its Adoption

Susan BartBDITs and BDOTs: The Basics, Concerns To

Evaluate And Best PracticesAnita Sarafa

4:30-5:30Basis Planning And Income Tax Deferral While A

Client Is Living Or For Appreciated Assets Owned By Trusts Not Exposed To Estate Tax

George Karibjanian

Defined Value and Price Adjustment Clauses: Background, How to Mitigate the Need to Use Them, and How to Handle an

IRS Audit

Chris Siegle

Agenda

Friday, October 30, 2020* Ethics credits are tentative, depending on the accrediting bodies for each state.

PPP Rules After the Release of the

Forgiveness Application and


Presented by:

Tuesday, May 19, 2020

9 AM – 9:30 AM ET

(30 minutes)

Alan Gassman

[email protected]

Brandon Ketron

[email protected]

Kevin Cameron

[email protected]

(w/ Special Guest)




Documents

PPP Rules After the Release of the Forgiveness Application ... · 05/05/2020 · Time Topic Speaker Topic Speaker 8:00-8:10 Greeting Dean and Director 8:10-9:20 Current Developments