PPP Loan Forgiveness, Part 3 

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Newsletter from

Steve Richardson & Company

Certified Public Accountants

 

May 8, 2020

PPP Loan Forgiveness, Part 3 


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 meI 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

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