New Strategies for PPP Loan Forgiveness
Webinar Provides Guidance on Changing Rules and PPP Legislative Updates
Since coronavirus forced businesses to close and others to shift to remote operations in mid-March, leaders have been forced to shift and pivot their operations and strategies so quickly that it can seem impossible to keep up sometimes. Three rounds of coronavirus relief acts have been passed, and whether more funding is on the way or not, guidance from the $2.2 trillion CARES Act continues to evolve.
The Paycheck Protection Program, the hallmark legislation contained within the CARES Act, made more than $600 billion available to small businesses nationwide. In Kansas, more than 50,000 businesses received PPP loans averaging $20,000. As the conversation about PPP has shifted from getting funds to getting funds forgiven, there are many questions about the loan forgiveness application, documentation, and ongoing funding needs.
On June 6, 2020, Adams Brown professionals James Bailey, CPA and Austin Coyan, CPA, CFE gave webinar participants answers to frequently asked questions about PPP loan forgiveness and updated guidance. Our recap below goes in order of the topics that were covered in the webinar.
Safe Harbor Methods for PPP Loans
Austin began with the Small Business Administration’s safe harbor thresholds. He explained that PPP loans under $2 million didn’t require additional documentation to prove economic need, whereas loans above $2 million did require information to support why the loan was needed and that there are resources in place to ensure business continuity.
The $2 million threshold is important because the SBA has issued a similar threshold for audit requirements of PPP loans. What this means is that PPP loans above $2 million are more likely to be audited by the SBA. Regardless of loan size, SBA audits can happen up to six years from when the loan was issued. Since the statute of limitations is much longer, documentation becomes even more important.
Austin pointed out that the PPP loan application has a checkbox where borrowers are required to indicate whether the loan is more than or less than $2 million. This sort of operates as a red flag that essentially makes it easier for auditors to identify larger PPP loans.
Paid or Incurred Expenses
From there, Austin moved on to another area that has been getting a lot of attention in recent days. When PPP loan guidance was first issued, PPP expenses needed to clear the bank within eight weeks of the loan being disbursed. As the PPP loan forgiveness application was released, he said, the wording changed.
The interpretation now for paid or incurred expenses is that borrowers don’t have to necessarily pay out the check and have the check clear the bank. The expenses have to be incurred during that eight-week coverage period. From a payroll perspective, as long as an employee worked and incurred income within the eight-week, or 56-day period, the business will get credit for the payroll expenses under the PPP loan. This provision will be helpful for Kansas employers paying out unemployment since unemployment is only paid out on a quarterly basis.
The same concept of incurred expenses goes for non-payroll, too. Austin gave an example of utilities.
For payroll and non-payroll incurred expenses, they must be paid by the due date of the invoice or on the next payroll cycle. The point is, the expense cannot be incurred, remain unpaid, and still credited toward the PPP loan.
By definition, an owner employee is someone who owns part of the corporation, whether it’s a one percent stake or a 51 percent stake. There hasn’t been any threshold determination from the SBA at this point.
Owner employees are going to be limited to the lesser of 2020 paid wages over the eight-week covered period, limited to $15,385 or annualized wages from 2019. To figure annualized wages for 2019, look at Box 3 of the W-2. Divide that number by 52, and multiply by 8. The result is the eight-week average payroll for 2019, and for owner employees, the lesser of these two numbers – 2020 paid wages or 2019 annualized wages – is what will be used in determining allowable PPP payroll expenses.
Bonuses do count, but the total wages must keep in line with the PPP limitations above. Health insurance and retirement contributions paid by corporations do not count toward the limitations. They are considered to be standalone expenses in this case.
Partnerships and Sole Proprietors
Self-employed income reported on Schedule C is subject to the same payroll and income limitations as outlined above for corporations. However, health insurance and retirement contributions are not added in, since those are considered part of self-employment income.
Full-Time Equivalency Calculations
When PPP was first introduced, there was very clear guidance that borrowers could not let full-time equivalents drop without also lowering the amount of PPP loan eligible for forgiveness. Part of the new guidance is that FTEs are based off a full 40-hour workweek, instead of the presumed 35-hour workweek. This means an easier calculation.
Along with that method, employers would take the hours the employee works, and divide by 40. If the result is 40 or above, that equals one FTE employee. If the result is below 40, round to the nearest 0.1. Add the two together, and that is the number of FTEs. A simplified method is permissible. With the simplified method, if the employee works 40 hours or more, it’s one FTE. If the employee works less than 40 hours, it’s 0.5 FTE. These are known as the average methods, full or half, respectively.
There are exceptions to the FTE requirement if the position was not filled and the employee:
- rejected a good faith re-employment offer,
- was fired with cause,
- voluntarily resigned, or
- requested reduced hours.
In either case, documentation is key. Work with your HR department or an HR professional to make sure that all the required documentation is in place for loan forgiveness applications, and possibly an audit down the road.
Another safe harbor exemption for FTEs is if the employer had a reduction in FTEs from February 15, 2020, through April 26, 2020, but restores FTEs by June 30, 2020, the employer can still qualify for maximum PPP loan forgiveness.
Alternate Payroll Covered Period
As Austin mentioned before, the regular covered period is 56 days, or eight weeks, from the time the PPP loan is disbursed. The alternate payroll covered period allows employers that have bi-weekly or more frequent payroll to shift their 56-day period to coincide with the payroll cycle.
The alternate payroll covered period is one strategy to maximize PPP loan forgiveness, especially if the business was having trouble hitting the required 75% threshold for payroll expenses. Keep in mind, Austin cautioned, that once this strategy is used, it shifts all payroll expenses to that alternate period – but non-payroll expenses will follow the normal covered period. This can create some confusion because there would be two different measuring dates for expenses.
Required documentation, from payroll records, invoices, utility bills, and more needs to be maintained for six years from the time the loan was forgiven or paid off, whichever happens last. Keep a retention schedule for applicable records, Austin said, and talk with the lender about their specific requirements for documentation, too.
Although there is currently no formal guidance on when the PPP loan forgiveness application needs to be submitted, Austin is hearing 60 days from when funds run out. From the point when the bank receives the forgiveness application, they have 60 days to either approve or reject it. After that, the SBA has 90 days to review the loan forgiveness application
PPP Legislative Update
In the second half of the webinar, James Bailey gave participants an update with where the PPP Flexibility Act was in Congress. At the time of the recording, the Act was stalled in the Senate.
James covered five areas where the PPP Flexibility Act, in its draft form, differs from the original PPP.
- Covered period
- Payroll/non-payroll expense mandate
- Loan forgiveness reduction for FTE
- Loan terms
- Payroll tax deferment
The draft bill, as it stood in that version, would extend the covered period from eight weeks to 24 weeks, putting the end of the forgivable loan period at about year-end. This is very helpful for businesses in hard-hit industries that need extra time to use the funds.
Another update is that the current 75/25 split for payroll and non-payroll expenses would be relaxed. In the PPP Flexibility Act, only 60% of PPP funds need to be used on payroll expenses. This is another area beneficial to small businesses that were struggling to meet the 75% threshold for qualified payroll expenses.
Third, James said there are a few things that employers need to do to decrease the baseline FTE count. When extending an offer of re-employment to furloughed or laid-off workers, ensure the offer is in writing under current law, and if the offer is rejected, it needs to be in writing, too. Then, submit that report to the state unemployment office within 30 days.
Under the proposal, not only is the time frame to get back to FTE count extended from eight weeks to 24, employers unable to restore full employment capacity need only prove they were unable to hire back the previous employee or demonstrate an inability to hire a similarly qualified employee by year-end. This is important in industries where attracting qualified talent just can’t be done in an eight-week period.
Loan terms are also supposed to be extended from two years to five, as long as the borrower and lender mutually agree to modify the loan term. And finally, with regard to payroll tax deferment, the current law states that certain payroll tax expenses that would otherwise be deductible would not be deductible if PPP loan proceeds are used to pay them. However, James explained, the proposed legislation relaxes that rule and would permit borrowers to deduct costs like healthcare or retirement on their annual federal taxes, even if PPP loan funds were used.
If the changing rules and regulations are becoming too much to keep up with, consider outsourcing all or part of the process. Adams Brown is handling loan forgiveness applications for numerous clients and can provide information on these services to interested businesses.