Newsletter from

Steve Richardson & Company

Certified Public Accountants

July 23, 2020

PPP Loan Forgiveness: Part 5
Contact Your US Senator

 

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Dear Clients and Friends:

Jane and I take our children and grandchildren (all sixteen of us) each summer to enjoy a week in the mountains of Highlands, North Carolina. This trip is one of the annual highlights for our family.

We started our annual family trek to Highlands 44 years ago when we were a newlywed couple, in our twenties. Now, our sixteen-member family starts planning next-year’s trip in October. The logistics of transportation, housing, and feeding a family of sixteen is daunting but fun. The planning itself can be ‘entertaining’ with give and take; stubbornness will occasionally bubble up (the children inherited a stubborn streak from their mother). A suitable summer ‘cabin’ must be secured by no later than November.

The Highlands trip, including the planning, in our family, is a year-round event. Ryder, my 7-year-old grandson, has now become an active agent in planning the Highlands trip. Ryder issued a Highlands video on YouTube to make his planning points known to the family; check it out:

Our trip to the mountains by Ryder Richardson

I’m off work for a week. Wow, do things change in a week!!

The PPP Loans, if under $150,000, may become grants! There is a bipartisan bill (S.4117 – Paycheck Protection Small Business Forgiveness Act) making its way through the Senate.

The highlights:

• Specifically, the bill provides for forgiveness of a Paycheck Protection Program loan that is not more than $150,000 if the borrower submits a one-page form to the lender. This would relieve many small business owners of the current, complex PPP loan forgiveness process, allowing them to keep their focus on their businesses.
• Further, it prohibits any enforcement or other action against a lender relating to loan origination, forgiveness, or guarantee based on the lender’s reliance on certifications or documentation submitted by a loan applicant or recipient.

Here’s how you can help! Whether or not you are a business owner, it is important that you let your senators know that this bill is important to you and small businesses in your community and throughout the country. Follow this link to contact your United States senators.

My scholarly interpretation of this important legal development is, “I need to leave town more often!”

Thanks to all of you! I have fun writing these little missives. I hope you enjoy them.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

July 11, 2020

Revive Alabama: COVID-19 Cash Grants for Alabama Small Businesses

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Dear Clients and Friends:

This newsletter is of particular interest to our small business clients in Alabama. If your small business is in another state, similar opportunities may be available to you.

The CARES Act continues to offer financial assistance to small businesses impacted by the COVID-19 outbreak. In prior newsletters we have discussed extensively the Paycheck Protection Program (PPP) Loan and Economic Impact Disaster Loan (EIDL). In addition to these programs, the CARES Act funded programs administered at the state level, as well.

More Financial Assistance for Small Businesses
For Alabama small businesses, the Alabama Department of Revenue is administering Governor Kay Ivey’s Revive Alabama Small Business Grant Program. A small business, for the purposes of this grant, has less than 20 full-time equivalent (FTE) employees; in this case, the FTE calculation is based on 30 weekly paid hours. $100 million of the state’s CARES Act funding is designated for providing cash grants of up to $15,000 to reimburse Alabama small businesses for business interruption expenses that have not otherwise been reimbursed through the CARES Act or other sources.

Act Quickly: Grants Are Awarded First-Come-First-Served
The application program opens July 16, 2020 at noon and is open through midnight on July 25, 2020. I can guarantee you that funds will run out quickly, well before this short one-and-a-half week application window ends!

For Expenses Not Covered by Other CARES Act Program Funds Received
Eligible expenses include expenses incurred due to the interruption of business during the COVID-19 pandemic. This includes but may not be limited to:

• Mortgage Interest.
• Rent.
• Payroll costs (including earnings from self-employment).
• Utilities.
• Personal Protective Equipment (PPE)

No double-dipping! The amount requested from Revive Alabama for COVID-19 business interruption expenses must be reduced by the amount received or expected to be received from the federal Paycheck Protection (PPP) Loan, Economic Injury Disaster Loan, Pandemic Unemployment Assistance (PUA), or insurance payments. This calculation will be made as part of the application process.

Start Now and Be Prepared
We as tax preparers cannot apply for this grant on your behalf. The burden for filing is on you, the small business owner. We are, however, permitted to assist with information needed to establish your online My Alabama Taxes (MAT) account if you do not already have one.

Read the Revive Alabama Resources
Detailed information is available on the Alabama Department of Revenue’s website:

• Revive Alabama: COVID-19 Cash Grants for Alabama Small Businesses
• Frequently Asked Questions about the Revive Alabama Small Business Grant Program

Register for a MAT account
The grant program is only accepting applications through the MAT portal; no applications will be processed by mail or email. Although the grant application portal does not open until July 16th, you should immediately confirm that you have established a secure MAT Account. Each small business applicant must have a MAT account. May businesses will already have one in place, but others will need to apply as soon as possible.

Review your eligible expenses in advance
As funds will be claimed quickly. Before July 16th, identify your eligible, unreimbursed expenses. Taking time to organize and update your accounting records for this purpose is critical. With an opportunity like this, time is of the essence!

Sincerely,

Steve Richardson, CPA

Newsletter from Steve Richardson & Company Certified Public Accountants .

Keeping Up With the Net Operating Loss Rules When a trade or business’s deductible expenses exceed its income, a net operating loss (NOL) generally occurs. When filing your 2019 income tax return, you might find that your business has an NOL — and you may be able to turn it to your tax advantage. But the rules applying to NOLs have changed and changed again. Let’s review. Pre-TCJA Before 2017’s Tax Cuts and Jobs Act (TCJA), when a business incurred an NOL, the loss could be carried back up to two years. Any remaining amount could then be carried forward up to 20 years. A carryback generates an immediate tax refund, boosting cash flow. A carryforward allows the company to apply the NOL to future years when its tax rate may be higher. Post-TCJA The changes made under the TCJA to the tax treatment of NOLs generally weren’t favorable to taxpayers. According to those rules, for NOLs arising in tax years ending after December 31, 2017, most businesses couldn’t carry back a qualifying NOL. This was especially detrimental to trades or businesses that had been operating for only a few years. They tend to generate NOLs in those early years and greatly benefit from the cash-flow boost of a carryback. On the plus side, the TCJA allowed NOLs to be carried forward indefinitely, as opposed to the previous 20-year limit. For NOLs arising in tax years beginning after December 31, 2017, the TCJA also stipulated that an NOL carryforward generally can’t be used to shelter more than 80% of taxable income in the carryforward year. (Under previous law, generally up to 100% could be sheltered.) COVID-19 response The NOL rules were changed yet again under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For NOLs arising in tax years beginning in 2018 through 2020, taxpayers are now eligible to carry back the NOLs to the previous five tax years. You may be able to file amended returns for carryback years to receive a tax refund now. The CARES Act also modifies the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can now potentially claim an NOL deduction equal to 100% of taxable income (rather than the 80% limitation under the TCJA) for prior-year NOLs carried forward into those years. For tax years beginning after 2020, taxpayers may be eligible for a 100% deduction for carryforwards of NOLs arising in tax years before 2018 plus a deduction equal to the lesser of 1) 100% of NOL carryforwards from post-2017 tax years, or 2) 80% of remaining taxable income (if any) after deducting NOL carryforwards from pre-2018 tax years. Complicated rules The NOL rules have always been complicated and multiple law changes have complicated them further. It’s also possible there could be more tax law changes this year affecting NOLs. Please contact us for further clarification and more information. Charitable Giving in a Time of Crisis The novel coronavirus (COVID-19) pandemic has created much financial stress, but the crisis has also generated an intense need for charitable action. If you’re able to continue donating during this difficult period, the Coronavirus Aid, Relief, and Economic Security (CARES) Act may make it a little easier for you to do so, whether you’re a small or large donor. Tax benefits From an income tax perspective, the CARES Act has expanded charitable contribution deductions. Individual taxpayers who don’t itemize can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces adjusted gross income (AGI). You can take this in addition to your standard deduction. For larger donors, the CARES Act has eased the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. There’s no requirement that your contributions be related to COVID-19. Careful steps To be able to claim a donation deduction, whatever the size, you need to ensure you’re giving to a qualified charity. You can check a charity’s eligibility to receive tax-deductible contributions by visiting the IRS’s Tax-Exempt Organization Search. If you’re making a large gift, it’s a good idea to do additional research on the charities you’re considering so you can make sure they use their funds efficiently and effectively. The IRS tool provides access to detailed financial information about charitable organizations, such as Form 990 information returns and IRS determination letters. Even if a charity is financially sound when you make a gift, there’s no guarantee it won’t suffer financial distress, file for bankruptcy protection or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for a purpose unrelated to the mission that inspired you to give in the first place. One way to manage these risks is to restrict the use of your gift. For example, you might limit the use to assisting a specific constituency or funding medical research. These restrictions can be documented in a written gift or endowment fund agreement. Generous impact Indeed, charitable giving is more important than ever. Contact our firm for help allocating funds for a donation and understanding the tax impact of your generosity.

Newsletter from

Steve Richardson & Company

Certified Public Accountants

May 11, 2020

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Dear Clients and Friends:

In my last newsletter, Gina got onto me about over-simplifying the FTE discussion. This newsletter will try to rectify that deficiency.

I can guarantee you that my understanding of the CARES ACT and the related Rules and Regulations is limited and flawed. New information is released every day! Whatever is said here is subject to rapid change.

A Full Time Equivalent (FTE) Employee
As defined by the SBA, a full time equivalent employee is:

• A full-time employee is one who works 30 hours per week or more. This is equal to one FTE for each fulltime employee.
• The aggregate of employees who work less than 30 hours per week whose hours, when added together, total at least 30 hours per week. You can add part-time employees’ hours together to get blocks of 30 hours; each block of 30 hours is equal to an FTE.
• Temporary employees, independent contractors (Form 1099) and leased employees are not considered in the FTE calculations.

The SBA, in an effort to get guidance to the public as quickly as possible, borrowed its definition of FTEs from the Internal Revenue Code, Section 4980H.

This defines an FTE. It’s not hard or tricky. It is, however, precise!

FTEs are Important!
If you have a reduction in FTEs, you will need to reduce your eligible costs as follows:

• Divide your average number of FTEs during the 8-week covered period by the lesser of:
  • The average FTEs from 02-15-2019 to 06-30-2019, or
  • The average FTEs from 01-01-2020 to 02-29-2020
• Subtract 1 from the above calculation. If you have had a reduction in FTEs, this will be a negative number.
• Multiply your eligible costs by the result above and reduce your eligible costs by this number.

There are two ways to calculate the ‘baseline’ FTEs (also correctly called “denominators”). These calculations are in the above bullet points.

• Calculation number 1: The average FTEs from 02-15-2019 to 06-30-2019, or
• Calculation number 2: The average FTEs from 01-01-2020 to 02-29-2020

For example, in a bi-weekly payroll, calculation number 1:

For example, in a bi-weekly payroll, calculation number 2:

Like the above table says, choose the lower denominator or baseline FTE number.

Finally, calculate your 8-week disbursement period FTEs:

The FTE Reduction Calculation
If your 8-week FTEs fall below your baseline FTEs, you will need to do an FTE reduction calculation.

The following shows an example of how this is to be calculated.

Change the facts only slightly, the outcome could be substantially different.

Budget!
I strongly recommend that you set an FTE budget and run these calculations in advance!

Even if you do have a portion of your PPP Loan unforgiven due to an FTE calculation, there may be an out. However, the “out” only works if you have an FTE budget, run the calculations, and know in advance that you have a problem. You can exempt yourself from the FTE reduction if:

• On April 26, 2020, you had a reduction in FTEs as comparted to the number of FTEs on February 15, 2020; and,
• You restore your FTE number back to February 15, 2020 levels not later than June 30, 2020.

A failure to budget FTEs, in this case, is a plan to fail.

Keep Compensation Steady
If individual employee’s compensation is reduced by more than 25% you will need to reduce your eligible cost calculation.

• Determine each employee’s average pay for the first quarter of 2020 and the 8-week covered period.
• For each employee with a reduction greater than 25% of the first quarter 2020 pay, determine the reduction in excess of 25%
• Reduce your eligible costs by the sum of each employee’s excess reduction in wages over the 25%.
• Only count employees who earn less than $100,000 during 2019.

This is not complex math. This calculation does lend itself well to an eligible costs budget spreadsheet. If you are reducing employee compensation, you may want to call me.

Even here there is an exception (a get-out-of-jail-free card): You are exempt from the reduced individual employee compensation reduction if:

• On April 26, 2020, an employee had a reduction in pay compared to their pay on February 15, 2020, and
• You restore their pay back to February 15, 2020 levels not later than June 30, 2020.

What Do You Need to Be Doing?
Calculate you FTEs for your two baseline periods.

Document all eligible costs:

• Payroll records
• Cancelled checks
• Payment receipts
• Account transcripts, and
• Other documentation to verify payments

Make budgets to steer you clear all the way to a 100% loan forgiveness.

Budgets are essential to your success.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

 

May 8, 2020

PPP Loan Forgiveness, Part 3 

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Dear Clients and Friends:

Where does one go on vacation in a time of pandemic? Todd decided that he needed some time off; that I can understand. We have all been working crazy hours, Todd more than most, helping our clients and friends navigate the business and employee benefits related to the CARES ACT.

With Todd out of the office, I think that, maybe, I can escape the brutal proofreading and fact checking; no such luck. Apparently arrangements were made for Gina to do the proofreading in Todd’s absence. Gina has no mercy!

Following is my second draft.

Okay, now I’m on to my third draft. Gina say’s I’m over simplifying the FTEs. I think Gina is correct. The FTEs are too important to skim over. I will follow-up this newsletter with one devoted to FTEs and the entire loan forgiveness process.

PPP Loan Forgiveness Issues
I’ve run across a few PPP Loan forgiveness issues that must be carefully considered if you are to achieve any level of loan forgiveness. Planning and budgeting will be crucial.

Also, I want to address a few income tax issues related to loan forgiveness. If you do not understand what I am trying to say, ask me!

1. PPP Loan forgiveness requires a formal letter to your lender requesting forgiveness. It is not automatic.
2. CARES ACT Wages, for purposes of loan forgiveness, must consider Full Time Equivalent (FTE) employees.
3. If your PPP Loan application had employees whose wages were capped at $100,000, there is a wage limit calculation on forgiveness.
4. It may be impossible for self-employed individuals to qualify for Loan forgiveness without creative cost and expense planning.
5. There are tax issues of the PPP Loan forgiveness.

These important issues must be considered to make sure that you enjoy the maximum PPP Loan forgiveness. If you need help or advice, ask me! (Or, ask Todd; he actually knows more than I do!)

Formally Request PPP Loan Forgiveness in Writing Before June 30, 2020
A formal letter to your lender requesting forgiveness is required!

A client, being diligent, took the initiative to talk with an SBA official about loan forgiveness. I have since verified this information. It is accurate!

Before any loan forgiveness is possible, the borrower (that would be you) is required to request loan forgiveness in writing. On or before June 30, 2020, you must issue to your lender a formal letter requesting forgiveness. The June 30th date is, for some reason, important to the loan forgiveness letter.

Absent a written request for loan forgiveness, the SBA, according to two different SBA officials, will not forgive the PPP Loan. This is hidden in SBA Regulations and, frankly, most bankers are not aware of this requirement. The SBA has told me that this will be enforced!

Steps to Take
Soon after the 8-week period within which you will need to disburse the PPP Loan proceeds, (which could be well after June 30th for some), reissue the letter as a cover letter with the required documentation to demonstrate compliance with the forgiveness provisions of the loan. The required documentation for your loan forgiveness request should include documents showing: 75% (or more) of the loan proceeds were expended on wages, the number of full-time equivalent employees and pay rates to equal or exceed the base period FTEs (see below), expenditures on eligible mortgage interest, lease, and utility payments.

Make your presentation clear. Organize the data and do the math for the banker. Make the bank’s job easy!

The requirement for a written request is important. Do not miss this critical step!

I understand why the SBA is making this required. The ‘why’ of it does not matter. The requirement is all that does matter. Do not miss this critical step! If you are curious as to why this odd-duck requirement is being enforced, ask me.

CARES ACT Wages
By now I trust all of you understand the correct definition of CARES ACT Wages. If not, refer to prior newsletters or call me. The other critical component of wages is FTEs.

How are Full Time Equivalent employees (FTE) computed?
Neither the CARES ACT nor the SBA offered guidance on how one calculates FTEs. What the CARES ACT did was refer to the Internal Revenue Code (my area of expertise) in Section 4980H.

By that definition, a full-time employee is an individual who works an average of at least 30 hours per week. A full-time equivalent employee is determined by adding the hours of part-time employees on a monthly basis and dividing by 120 [IRC Section 4980H]. Until guidance is received otherwise, we suggest using this computation to determine the FTEs for those employees who work fewer than 30 hours per week. Employees working at least 30 hours per week are counted as full-time employees.

There are two steps for this calculation:
Step 1: What was your FTE count prior to COVID-19? Your FTEs can be calculated on the basis of:

• 2019 reported full time hours, or
• 2020 pre-COVID-19 basis: employee hours paid from January 1, 2020 to February 15, 2020

Step 2: What was your FTE count during the 8-week period in which you must use your PPP Loan proceeds?

I recommend that you do a side-by-side calculation to demonstrate that you have the same FTEs during the 8-week loan period as you did compared to the base period (tax year 2019 or the pre COVID-19, 2020 period).

The Keys to Success!

1. Recordkeeping: Keeping excellent hourly records is the key to successfully jumping through this forgiveness hoop. Good, reliable hourly employment records will make planning and budgeting easier.
2. Budgeting: Make a budget for wages and FTEs to ensure full compliance with the terms of forgiveness. A budget is simply a tool to ensure success. Do not be surprised by a failure to gain loan forgiveness!

If you do not know how to make such a budget ask me! I will expand on this topic with a more detailed newsletter on FTEs and the loan forgiveness process in general.

Wages Capped at $100,000
For employees in your PPP Loan application with wages capped at $100,000, forgiveness period wages are limited to $1,923 per week for the 8-week loan distribution period. The math is simple: $100,000, divided by 52 weeks is $1,923 a week.

Wages paid in excess of that amount are allowed but must come from other funds and are not a part of the loan forgiveness calculations.

Potential Loan Forgiveness Issues for Some Self-Employed Individuals
An unanticipated math quirk may make it impossible for certain self-employed individuals to qualify for any loan forgiveness!

Self-employed individuals, who report on IRS from Schedule “C”, can be people such as:

• Physicians
• Real estate agents
• Computer geeks and programmers
• This, of course, could be a very long list.

It is not unusual for self-employed individuals to have no wages other than what is paid to themselves. This creates a math problem making the 75% wages requirement difficult. Following SBA guidelines can trap a self-employed individual at 69% of wage calculation. I’ve run across this problem often!

Allow me to illustrate the problem for a self-employed married couple and one of many potential solutions.

Will hiring your spouse work? I hope so. I know that if one follows the SBA guidelines to the letter, no self-employed person will get any loan relief. In my opinion, such a plan, as outlined above, is a good idea. The SBA may think I’m wrong.

This is not the only solution to the issue of being trapped to a maximum 69% of a required 75% CARES ACT wage for a self-employed individual. Somehow wages must be boosted past the 75% required minimum. The only way to do that is to hire someone. Hiring someone means that W-2s must be issued. Frankly, W-2s and payroll taxes are complicated.

If you are self-employed and have a PPP Loan, you really need to call me. This gets complicated fast.

There Are Tax Issues of the PPP Loan Forgiveness
A PPP Loan, which is forgiven, does not create taxable income. In most cases, any forgiven loan will create taxable income. The CARES ACT made sure that a forgiven PPP Loan will not create taxable income. That is good news.

There is a not-so-good part of that news for businesses and self-employed individuals. It is long-standing IRS policy that expenses paid with tax free or tax exempt income are not tax deductible. If your PPP Loan is forgiven, then:

1. The wages paid with the PPP Loan are not tax deductible
2. The business mortgage interest, rents, or utilities paid with these loans are not tax deductible.
3. No expenses paid with the PPP Loan will be tax deductible.

This is a minor problem. The loss of a tax deduction will cost far less than an unforgiven loan.

This is not great news, but it’s not terrible news either. It’s just tax law at work.

Conclusion
The loan forgiveness is not automatic; be careful.

Stay healthy and safe.

Call me if you need help; we are here for you!

Feel free to share my newsletters with whomever you will. Any and all are welcome to subscribe to our newsletter.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 27, 2020

PPP Loan &
the Minister’s Housing Allowance (part 2)

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Dear Clients and Friends:

The SBA has made it official: the minister’s housing allowance is a part of wages for purposes of the PPP Loan application.

See the following link to the US Treasury Department’s website, Paycheck Protection Program Loans Frequently Asked Questions (as of April 26, 2020), and look at Question 32:

32. Question: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

Answer: Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.

One Issue Still Remains
There is no flat statement that the minister’s housing allowance is also a part of wages for purposes of PPP Loan forgiveness, although I strongly suspect that we will have clarity on this issue soon. Based on the above response to Question 32, the SBA/US Treasury may believe that this issue is fully resolved.

Even without clarity on forgiveness, with a bit of planning, the forgiveness related to the minister’s housing allowance can be made a non-issue. During the eight weeks of the PPP Loan spending cycle, do not pay housing. Convert all housing to normal wages. Subsequent third- and fourth-quarter tax planning can make the related tax issues more manageable.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 22, 2020

PPP Loan Forgiveness 

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Dear Clients and Friends:

My Mistake!
I made a mistake in my last 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. Wrong!

My first mistake was in assuming! When the government writes the rules, it is against the rules to assume anything.

Every day my understanding of the PPP Loan forgiveness rules evolves.

Housing Allowance
My understanding of housing allowance as a part of the CARES ACT is also evolving.

I’ve made compelling arguments that minister’s Section 107 housing allowances are ‘wages’ for purposes of the CARES ACT.

Did I really win?
I actually won that argument with a loan underwriter – once! But he told me, in no uncertain terms, that it may be wages for the PPP Loan but, it is, not wages for the PPP Loan forgiveness. Apparently there is a more definitive list of CARES ACT wages for the loan forgiveness than there is for the loan application.

The bottom-line: housing allowance is not CARES ACT “wages” for PPP Loan forgiveness. That is unlikely to change before June 30, 2020.

Amy
Amy Foster proofread this short memo; Amy is my trusted colleague and cohort. In her sage voice, she said, “Wait until tomorrow to mail this out; you know it will all be different by then.”

She has a point.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 20, 2020

New PPP Loan Funding and the Loan Forgiveness 

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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:

1. If it goes on a W-2 (in Box 1 “Wages”), the CARES ACT will treat this as ‘wages’.
2. 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:

1. Employer-paid Social Security and Medicare taxes are ‘wages’.
2. Employer-paid health insurance: this does not include the portion that is paid by the employees.
3. 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

Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 6, 2020

SBA Wages & Minister’s Housing Allowance 

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Dear Clients and Friends:

We are already getting some SBA push back on Minister’s Housing Allowance. This push back is not uniform. The SBA is, itself, not sure of the rules.

Attached, by reference to the following link, is a letter making the case that ministerial housing allowance is a valid part of wages.

https://srcocpa.sharefile.com/d-s4130d57f2834ba69

I believe that the housing allowance is a legitimate part of “other similar compensation” and my letter makes that case.

This letter is a part of the “2019 Payroll Summary Report” to reconcile your wages to your W-2s and is to be a part of your loan application.

The CARE Act does not address a minister’s housing allowance. Those types of issues are too detailed for this early stage of the process. Typically issues such as the housing allowance are addressed in SBA regulations which can take months to years to develop. The SBA may eventually pass rules and guidelines addressing such matters, the CARES Act only defines the Paycheck Protection Program in broad terms as: Salaries, wages, tips, commissions and “other similar compensation”.

Sincerely,

Steve Richardson, CPA

Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 5, 2020

Timely! SBA Releases Third Version of
Paycheck Protection Program Loan (PPPL)
Application Rules

 

Dear Clients and Friends:

A new PPP loan application
We have a 3^rd draft of the PPP Loan application rules. These will likely be the ‘mostly’ final rules. I suspect a tweak here and there, but what we have now will be the rules and procedures that will be followed throughout this SBA Program.

Not bad news!
To the best of my knowledge, no PPP Loans have been processed by the SBA. These final rules put all applications back to the same starting point.

I believe that this progression from 1^st, 2^nd and now to the 3^rd and, hopefully, final application is a deliberate progression by the SBA. This program was sprung on the SBA with blinding speed; they were not prepared. The SBA, for many reasons, ill-prepared though they were, needed to be doing something to ease business fears.

These prior applications did help SBA customers organize their data as the SBA prepared for the onslaught of PPP Loan applications.

Online applications
The biggest news is that the PPP Loan applications will be made through your banks, but will be filed online via internet access.

Not all good news
A new starting point for all borrowers fails to take into account several important factors:

1. Not all banks will have their web-based PPP Loan portals open immediately; the bigger banks will be open first simply because their IT departments are more robust.
2. Not all banks and lenders are SBA-approved and, consequently, will not be able to make SBA Loans.
3. Many banks that are SBA-approved will not process PPP Loans for new customers.
4. And banks can legally play favorites. Their best and biggest customers will get preferential treatment.
5. For the SBA, the PPP Loans are still first-come, first-served.

Documentation – Part 1
In addition to the application, we now know in more detail the documentation that the SBA and lenders will require. I strongly advise that you provide all the suggested documentation with the application. If required documentation is missing or hard to understand, the banks have many thousands of applications behind yours. If your application is set aside for lack of appropriate documentation, it could be months before it finds its way back in the queue again. By then, it may be too late.

Documentation – Part 2
PPP Loan documentation will be uploaded by internet portal directly to the bank.

The required documents are:

• 2019 IRS Form 940
• 2019 IRS Forms 941: all four quarters
• 2019 state unemployment tax forms: all four quarters
• 2019 IRS Forms W-2 with supporting IRS Forms W-3
• 2019 Payroll summary with corresponding bank statements*
  • Required data:
    • Number of full-time employees as of December 31, 2019
    • Number of full-time employees as of February 15, 2020
    • Documentation for health insurance premiums paid
    • Documentation for employer retirement contributions paid
• List of all employees with compensation in excess of $100,000*
• Breakdown of payroll benefits*
• *Note: for new businesses, provide payroll data using the time period from January 1, 2020 to February 29, 2020.
• Miscellaneous documentation
  • Include our Authorized Representative letter
    • Without that letter, we will not be given access to that portal
    • We will likely draft a new Authorized Representative letter on Monday.
  • Other documentation in support of your application that is:
    • Requested by the bank or SBA, or
    • Determined by you to be helpful to your application

No deviations
Do not deviate from the above list. The more work required of bankers and underwriters, the more likely the application will simply be tossed aside. Try to give the bank exactly what they ask for.

If you must!
If, for whatever reason, you must deviate from the exact documentation requested by the SBA, write and upload a short but clear explanation as to why.

These are scary times
Please stay safe!

This virus is real. It is dangerous. It will continue to kill. It will kill a lot of people before things get better.

These loans will not mean a thing if our friends and loved one start to die.

Hunker down! Stay down! And, be safe!

Sincerely,

Steve Richardson, CPA