Newsletter from
Steve Richardson & Company
Certified Public Accountants
April 20, 2020
New PPP Loan Funding and the Loan Forgiveness
Dear Clients and Friends:
Many of us have received the Paycheck Protection Program (PPP) Loan. Those of us who have not, do not despair: there is another round of funding expected from Congress.
A Potential Problem With the New Funding
There is a potential problem with this second round of funding!
The first round of PPP Loans issued are widely reported to have been “misused.” Misused is a polite code word for ‘fraud and theft.’ When you toss $349,000,000,000 into a loan fund that is, by design, intended to get to small businesses quickly, fraud and theft are inevitable.
As lenders well know, if it is not too widespread, fraud and theft can be a simple cost of doing business. The real problem seems to be that some of our major national and regional banks may have willingly facilitated the “misuse” of these relief funds. I will not name any names here; that’s not my job. If you want to know, read a few of our national newspapers.
The culpable banks have been mentioned in the media. The news reports that these banks are, ‘playing favorites’, ‘limiting access to the PPP Loan program’, and ‘disregarding SBA rules’ to maximize bank profits over service delivery to small businesses. I suspect that the problems with these large banks run deeper.
Proverbs
I have a few proverbs reasonably well known to my clients and friends. One of these proverbs is this:
Forgiveness!
The PPP Loan is a loan. (Notice there is a period at the end of that sentence!) This is a LOAN! It’s a loan until it is forgiven. Pay attention! You do not know this stuff as well as you may think. I know I didn’t and don’t. There is a big hiccup!
The loan forgiveness requires very specific behavior! The forgiveness requirements are not obvious! Pay attention! There is stuff here we need to learn.
8 Weeks
The loan must be used within an 8-week time frame beginning on the day that the loan hits your bank account. Do not press your timeline. I suggest that you complete your spending plans in 7-weeks, 7-and-a-half at most.
75% Must Be Spent On Wages
Again, I suggest that you spend more than 75% on wages and try not to cut too fine a line on the definition of wages. Wages, in the CARES ACT, has a precise definition. There are a few simple rules:
- If it goes on a W-2 (in Box 1 “Wages”), the CARES ACT will treat this as ‘wages’.
- If it goes on a Form 1099 for a contractor it is not wages!!! If you have a question about this, we are happy to help.
The CARES ACT will allow other items to be wages:
- Employer-paid Social Security and Medicare taxes are ‘wages’.
- Employer-paid health insurance: this does not include the portion that is paid by the employees.
- Employer-paid portion of certain retirement plans: 401k plans, SIMPLE IRA, SEP IRA.
Correction from original newsletter! Employer-paid Social Security, Medicare, and federal unemployment taxes are not CARES ACT wages for PPP Loan forgiveness purposes. I just assumed that since these employer taxes are CARES ACT wages for the purpose of getting the PPP Loan that they would be part of the loan forgiveness calculation.
Again, I urge caution. Be well above 75%. Complete the spending within the required 8-week period of time. Be super cautious: I recommend that 100% of the PPP Loan be spent on wages within the required time frame. This means that there will be fewer questions to ask upon forgiveness time.
75% Must Be Spent On Wages – THE HICCUP!!
There is a big hiccup in the 75% spent on wages rule!
The employee head-count must be the same or higher than the number of employees showing on your PPP Loan Application!!
The employee head-count
The employee head-count is a very big deal! If you spend 75% of your PPP Loan on employees, within the 8-weeks as required, and fail your employee head-count, your loan will not be forgiven!!
If you fail your employee head-count, your loan will not be forgiven!
The solution is simple: Do not fail your employee head-count!
What are the head-count rules?
Here begins the problem: the SBA hasn’t told us the rules. We really don’t know.
Here’s what I think the rules are:
The number of employees shown on the PPP Loan Application, at least with the underwriters we have worked with, is reconciled to the number of W-2s issued in 2019.
The Problem!
The rules to count employees necessary to get the PPP Loan and the rules to have the loan forgiven are not the same!
The CARES ACTS created the PPP Loan for the single purpose of keeping people off unemployment. Who gets unemployment and who gets a W-2, are subject to different rules. Getting the loan approved and having the loan forgiven are, likewise, going to be subject to different definitions of ‘who is an employee’.
We will be required to do some sort of ‘full-time’ equivalence (FTE) calculation to find out who is an ‘employee’ for purposes of loan forgiveness. This is a different definition of an ‘employee’ from that which was used to obtain the loan and will cause a lot of PPP Loans to be unforgiven.
My Advice
Make sure that, at the end of your 8-week spending period and again, at the end of June, that you have the same number of employees (or more) and that they are paid the same wages (or more) than they were paid prior to the COVID-19 crisis.
I am the first to admit that my advice is over-cautious. CPAs are cautious creatures.
You Can Spend Up to 25% of the PPP Loan On Select Overhead:
- For the mortgage on business property, but only for the interest portion
- And the mortgage had to be in place on February 15, 2020.
- For business property rent or lease
- Must have a current lease document in effect prior to February 15, 2020
- No advanced or pre-payments are allowed
- And, for business utilities.
Conclusion
These are the rules as I understand them today. I promise that next week, my understanding will be different. You can 100% guarantee significant changes are coming as these rules evolve.
I recommend caution and more caution! I recommend using more than 75% on wages. I recommend that you pay close attention to the employee head-count. I recommend that 100% of the loan be expended well within the 8-week time prior allowed.
If you need advice, please email me at: SteveR@srcocpa.com
Sincerely,
Steve Richardson, CPA