UPDATE:Paycheck Protection Program (PPP) Loan Forgiveness – Part 2

Tuesday, May 5, 2020

Presented by:Caroline Banzali, PartnerPauline Dumas, Principal

Disclaimer - This presentation is intended to provide a high-level overview of the current provisions but does not purport to be a comprehensive guide. Since the CARES Act’s enactment on March 27, 2020, the SBA and the US Treasury have issued numerous FAQs and other commentary intended to serve as guidance as to how the PPP will be administered, some of which includes language that was not in the CARES Act itself. To the extent the law or its interpretation changes, the contents of this presentation could be rendered incorrect or inappropriate. Accordingly, it is imperative that any PPP Borrower consult with a Tax Advisor to stay abreast of applicable provisions.

This webinar provides key considerations for approved and funded PPP Borrowers:

• What are authorized uses and how much is eligible for forgiveness?• Eligible costs, generally• What are authorized costs for self-employed individuals without employees?• “Incurred and paid” during the Covered Period

• How do I calculate my PPP loan forgiveness amount?• Tax Implications

• Will I be taxed on the amount of my PPP loan that is forgiven?• Do I still get to take tax deductions for eligible costs paid for with PPP loan funds that are

forgiven?• PPP Borrower Certifications – What are my obligations?

• What is required to demonstrate “economic need”?• What if my certifications are not met?• Will I be audited?

• Applying for PPP Loan Forgiveness• SBA guidance• Lender guidance

Your PPP Loan has been Funded – What now?

The amount of PPP Loan Forgiveness may be up to the full principal amount of the PPP Loan and any accrued interest, so long as the Borrower maintains salary and employee counts at pre-COVID-19 levels, and all of the Loan proceeds are used for Authorized Purposes incurred and paid during the eight-week covered periodbeginning on the date the lender makes the first disbursement of PPP Loan Funds to the borrower:1. At least 75% must be for US payroll costs:

• Cash compensation portion of salaries, wages, commissions, and tips up to annualized $100,000 per employee, partners in partnerships, or self-employment income for sole proprietors (NOTE: payments to independent contractors are NOT payroll costs)

• Employer contributions for employees (but not owners) group retirement plans, health care coverage including insurance premiums, employee benefits for vacation, parental, family, medical and sick leave (except FFCRA)

• Employer-paid state/local (but not federal) employment taxes2. No more than 25% may be for authorized non-payroll costs in respect of obligations entered into

before Feb. 15, 2020:• Mortgage interest payments on obligations secured by real or personal property (i.e., no

prepayment or principal)• Rent payments on leases • Utility payments (e.g., electricity, water, telephone, internet, fuel for business vehicles)

PPP Loan Forgiveness – Eligible Costs

PPP Loan Forgiveness – Costs NOT Eligible for Forgiveness

The following are NOT authorized purposes and are NOT ELIGIBLE for PPP Loan Forgiveness:

1. Costs other than those used for authorized purposes2. Authorized costs incurred outside the covered period or in excess of the 25% cap on authorized non-

payroll costs3. Employer paid federal payroll taxes (e.g., FICA, Medicare) 4. Salaries/wages eligible for tax credit under the Families First Coronavirus Response Act (FFCRA) –

e.g., Emergency Paid Sick Leave (EPSL), Emergency Family Medical Leave Act (EFMLA)5. PPP Loan proceeds that were used to refinance Economic Injury Disaster Loan (EIDL) borrowed prior

to January 31, 2020 or EIDL advance authorized under the CARES Act

NOTE: Any EIDL grants of up to $10,000, which do not need to be repaid, will REDUCE the amount of PPP Loan Forgiveness.

The SBA issued guidance on April 20, 2020, stating that a self-employed individual’s eligible PPP costs consist of the following:• “Owner compensation replacement” of up to an annualized $100,000 of 2019 Form 1040 Schedule C net income (excluding

income earned as a partner in a partnership)• If Schedule C net income was over $100,000, then the maximum is $15,385 for the covered period (i.e., $100,000

divided by 52 weeks, equals $1,923, multiplied by 8 weeks)• If Schedule C net income was zero, then you would not be eligible to obtain a PPP loan

• Other costs on obligations entered into prior to Feb. 15, 2020, incurred and paid during the covered period, the type of which were claimed as a deduction on the borrower’s 2019 Form 1040 Schedule C:

• Mortgage interest payments on obligations secured by real or personal property (i.e., no prepayment or principal)• Rent payments on leases • Utility payments (e.g., power, water, telephone, internet, fuel for business vehicles)

HOWEVER, in the same publication, the SBA included the following language which seems to indicate that PPP Loan Forgiveness for self-employed individuals would be limited to $15,385, and that “home office” expenses may not be PPP eligible costs [emphasis added]:

“For individuals with self-employment income who file a Schedule C,… it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act. For example, many such individuals operate out of either their homes, vehicles, or sheds and thus do not incur qualifying mortgage interest, rent, or utility payments. As a result, most of their receipts will constitute net income. Allowing such self-employed individual to treat the full amount of a PPP loan as net income would result in a windfall.”

What are eligible costs for Self-Employed Individuals?

How do I calculate my PPP Loan Forgiveness amount?

Step 1• Track total eligible costs incurred and paid during the 8-week period following the

loan funding

Step 2

• Calculate payroll costs for forgiveness floor• 75% of eligible costs are to be used on payroll• If less than 75%, the forgiveness is reduced by the amount under 75%

Step 3• Calculate any % decrease in FTEs from 8-week covered period

Step 4• Calculate any reduction in payroll > 25% of prior quarter

Step 5• Calculate any adjustment because FTEEs and salary/wages were restored by June 30 • If “restore” criteria are met, steps 3 and 4 are ignored.

Tax Implications

Will I be taxed on the amount of my PPP loan that is forgiven?

To the extent your PPP Loan is forgiven, it will NOT constitute “cancellation of debt” (COD) taxable income for US Federal income tax purposes. HOWEVER, it may be taxable income for State income/franchise tax purposes depending on state law conformity.

• Certain states have “rolling conformity” or “static conformity” to the US federal Internal Revenue Code (IRC) – e.g., California conforms with U.S. IRC as of Jan. 1, 2015

• Certain states do not conform at all, instead enacting their own income/franchise tax rules that may or may not line up with the U.S. IRC

• Be sure to consult with your Tax Advisor

Do I still get to take tax deductions for eligible costs paid for with PPP loan funds that are forgiven?

IRS Notice 2020-32 issued on April 30, 2020, provides that no US federal income tax deductionis allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of PPP loan proceeds.

Certification of “economic need” – What does it mean?The Certifications made by the PPP Applicant at the time of application must have been made in good faith based on current facts and circumstances, and will be required to be re-certified as part of the Loan Forgiveness process, including:

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”

On April 23, 2020, the SBA published FAQ #31, which provides in part:

“[A]ll borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application…. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification….”

Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certifications in good faith.” [Emphasis added]

On April 28, 2020, the SBA published FAQ #37, clarifying that FAQ #31 applies to private companies as well.

What happens if my Certifications are not met?In addition to the Certification regarding “economic need”, PPP borrowers also certified that “the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.”

Knowingly making any Certifications in less than good faith, including using PPP Loan Funds for unauthorized purposes can lead to dire consequences, including but not limited to:

• Renders the loan ineligible for forgiveness • Conversion to a recourse liability – i.e., The Fed can seek repayment of the Loan from not only the

borrower, but also its owners, shareholders, members, and partners• Civil and/or criminal fraud charges• Other federally prosecutable offenses

Will I be “audited”?• On the morning of April 28, 2020, US Treas. Sec. Steven Mnunchin announced on

CNBC that the government will perform a full audit on any company that borrowed more than $2M of PPP funds, and that borrowers with smaller loan amounts could be subject to spot checks.

• On April 29, 2020, the SBA issued FAQ #39, confirming that it will review all loans in excess of $2M as well as other loans “as appropriate.” Additional guidance implementing the review procedure will be issued by the SBA.

In order to obtain partial or full PPP Loan Forgiveness, you must submit a request to the lender servicing your loan after June 30, 2020. Request should include:• Borrower Certifications;• Confirmation of payroll costs incurred and paid during the covered period (e.g., payroll registers, IRS

Form 941; and state quarterly wage unemployment insurance tax forms (or equivalent payroll processor records).

• Documentation verifying the number of full-time equivalent employees and pay rates• Documentation of invoices and payments on eligible mortgage interest, rent, and utility obligations• For self-employed individuals, copy of 2019 Form 1040 Schedule C• Additional documentation that may reasonably be requested by the lender in support of the above

The lender is obligated to do the following: • Collect paperwork from the borrower in connection with the forgiveness request and make an

application to the SBA for forgiveness• The lender must make a decision on the forgiveness within 60 days

Applying for PPP Loan Forgiveness

Meticulous accounting and documentation of how PPP Loan Funds are spent is imperative in order for a borrower to provide the requisite documentation to the lender (and ultimately the SBA) in support of its Loan Forgiveness Request.

To that end, proper controls, accounting, and documentation should be implemented and maintained regarding disbursement of PPP Loan Funds at least through the eight-week covered period, especially if PPP Loan Funds are commingled with other operating funds:

Proper Documentation: Keeping track of how PPP loan proceeds are spent

• Spend only for the authorized uses (e.g., payroll, mortgage interest, rent, utilities)

• Document spending allocation and disbursement decisions• Consider holding PPP Loan Funds in an account separate from other

operating funds to pay for authorized uses• Consider adding detail to your accounting system to track these costs

separately, including creating a cost center or class code with COVID

Squar Milner advises both PPP borrowers and lenders and can provide you with support.

• Assist you in staying abreast of applicable provisions governing the administration of your obligations and opportunities regarding your PPP Loan and Forgiveness

• Preparation of estimated PPP Loan Forgiveness modeling calculations to assist with fund allocation and spending decisions

• Weekly Cash Flow Planning – Assist with budgeting and spending plan to balance operational needs with maximization of PPP Loan Forgiveness amount

• Assist with preparation and review of supporting documentation of use of funds during the covered period for purposes of PPP Loan Forgiveness application• FTEE headcount• Determination of eligible payroll costs per pay period• Identification of eligible non-payroll costs incurred and paid during the covered period

Squar Milner CARES Stimulus Support Services: PPP Loan Forgiveness

FAQ’s

Frequently Asked Questions:

Q: How do I calculate FTEE?

A: Full-Time Employee: an employee who is employed on average at least 30 hours per week

• Full-Time-Equivalent (FTE) Employee: a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee

Example: Two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee

Frequently Asked Questions:

Q: My pay period ends after the covered 8 week period? How can I get that last payroll included in my loan forgiveness?

A: Expenses must be incurred and paid during covered period and therefore, if payment for any payroll costs are after the Covered Period, it would not be eligible for forgiveness.

Example: Pay period is semi-monthly so the last pay period is 6/15, however covered period ends on 6/8.

Recommendation: Consider a special payroll run to align with last day of Covered Period.

Frequently Asked Questions:

Q: Can I prepay rent (or any covered expenses)?

A: Expenses must be incurred and paid during covered period so you cannot prepay any expenses and have it eligible for forgiveness. For most, May and June rent payments can be paid using PPP Loan proceeds.

Recommendation: If you’ve negotiated rent abatement or deferral with your landlord, consider asking for the arrangement after June.

Frequently Asked Questions:

Q: Can I give employee bonuses during the covered period?

A: As long as bonuses are for expenses incurred and paid during covered period, it would be eligible. Bonus payments for 2019 performance paid during covered period is technically not eligible. Bonuses for hazard pay, additional shift premiums or performance in covered period, would be eligible.

However, keep in mind the cap on eligible payroll costs of annualized $100,000, so PPP eligible gross wages paid to an employee during the Covered Period, including bonuses, may not exceed $1,923 per week or $15,385 for the eight-week period.

Frequently Asked Questions:

Q: I have not paid my 2019 pension contribution. Can I pay it during the covered period and is it eligible for forgiveness?

A: Expenses must be incurred and paid during covered period and therefore contributions for 2019 pension would not be a covered expense.

Frequently Asked Questions:

Q: Can I defer payroll taxes if I got approved for a PPP Loan ?

A: Yes. Employers who have received a PPP loan may defer deposit and payment of the employer's share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan.

Q&A

Contact InformationIn addition to your Squar Milner Tax Advisor, please contact the following professionals with any additional questions or if you wish to discuss further:

Caroline BanzaliPartner, Tax Servicescbanzali@squarmilner.com

Pauline DumasPrincipal, Consulting Servicespdumas@squarmilner.com

IRS 230 Circular DisclosureTo comply with the requirements imposed by the Department of the Treasury and current Internal Revenue Service rules and standards, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein. If this communication (or any attachments) is provided in any manner to a party other than the intended recipient taxpayer, that party cannot use or rely upon any advice and should seek advice based on his or her own particular circumstances from an independent tax advisor.