Best Practices for PPP Loan Proceeds and Allowable Expenses in Oil & Gas
Adams Brown Partners with KIOGA for Industry Update Webinar
On Monday, May 4, 2020, Adams Brown partnered with the Kansas Independent Oil and Gas Association (KIOGA) to provide our clients and the KIOGA community with updates on how to navigate the final pieces of the Paycheck Protection Program. During the webinar, panelists reviewed employee and HR perspectives that oil and gas companies need to be aware of, PPP documentation requirements, and loan forgiveness and allowable expense guidelines.
Team members Jess Camp, Director of Human Resources, Brett Henry, CPA and Partner, and Nicole Koelsch, CPA, Principal, and Oil & Gas industry leader each discussed different aspects of the CARES Act and Paycheck Protection Program loan funding.
Employee and HR Perspectives: Jess Camp
Since many oil and gas operators don’t have in-house HR personnel, it’s important to lean on the expertise of advisors when it comes to the various employment issues that will arise with the CARES Act and the Families First Coronavirus Response Act (FFCRA).
Paid Leave Requirements
First, recall that there are paid leave requirements laid out in the FFCRA, both for emergency paid sick leave and expanded sick options. If there isn’t work to be done, then paid sick leave won’t apply to laid-off employees. For employees that are still actively at work, there are a few requirements that oil and gas operators must abide by.
The first is that an employee rights poster must be put up at the worksite. Second, emergency paid sick leave is for anyone with an absence related to COVID-19. There are six scenarios where an employee can use the paid sick leave, which is up to 80 hours of paid time. Whatever time the employer pays for this emergency paid sick leave can be deducted on the next payroll or remittance against payroll taxes.
Next, the expanded FMLA is now a big topic, especially for employers with less than 50 employees. Some employers believe that if they have less than 50 full-time equivalent employees, they are automatically exempt from expanded FMLA, and that is not exactly the case. There are three exceptions that small employers can potentially qualify for, but they would need to talk through the scenarios with an advisor.
Documentation with employee and HR issues is critical now that the IRS is involved. Because the expanded leave requirements result in tax credits for the employer, the IRS is going to take extra steps to make sure that employers are in compliance. For example, if an employee needs to self-quarantine because he or she has to care for someone who tested positive for COVID-19, and the paid leave kicks in, there are certain documentation requirements that employers must follow.
Also, be vigilant when reviewing unemployment claims for employees. Don’t get on the wrong side of unemployment fraud, even by accident.
Jess then discussed the differences between furloughs and layoffs in terms of benefits eligibility and other triggers that these events could cause. For example, laying off employees is a COBRA triggering event and could also require unused PTO to be paid out. But employees would be fully eligible for unemployment compensation, whereas with a furlough they are at most partially eligible for unemployment. In either case, employers need to be mindful of the correct forms to use and to ensure that employees get the right notifications.
Another scenario that could arise is what to do if employees don’t want to return to work when business picks back up again. There is a major concern in the oil and gas industry that qualified workers who are laid off may never return. However, if an employee is told that there is available work, and they refuse, instead preferring to stay on unemployment, the employer can report it to the state. This should be a last step, as it’s better to communicate frequently and openly with employees at all stages of this process. Make sure they know what the expectations are and if there are return dates for employees to be aware of.
Using PPP Money
Most oil and gas producers in the webinar had already applied for and received PPP funding. Even though employees aren’t actively working, PPP loan recipients may still pay their employees. In doing so, this will deactivate unemployment benefits. Producers need to clearly communicate this to their employees so their claims to the state are accurate.
After the first eight weeks of receiving PPP funding, when the timeframe for forgivable loan expenses expires, employees can still go back on unemployment if needed. This break from unemployment is actually a benefit to employees because it gives them access to the remaining eligible benefit weeks.
It’s common for oil and gas producers to cut benefits during lean times. Whether there are flex plans, 401(k)s, HSAs, or health plans it’s important to talk with your providers about recent changes in the CARES Act. Employers can temporarily eliminate the hours requirement for most benefits to eliminate the need COBRA benefits, as an example. You should also consider what to do with health insurance premiums when the employee isn’t receiving a paycheck.
PPP Loan Forgiveness and Documentation: Brett Henry, CPA
One of the tough decisions that oil and gas producers must make right now is what to do with the PPP loan funds: use as much as possible on payroll during the first eight weeks, or allow the rest of the funds to turn into a low-interest loan. Brett advised that every situation is different and for some, it may make more sense to allow more of the funds to revert to the loan format.
Next, Brett reviewed the new guidelines for EIDL funding. Instead of a $10,000 advance, the new amount is based on $1,000 per employee. The advance is also tied in with the forgivable portion of the PPP loan, so employers need to be very cautious about what they’re applying for and how they’re using the funding.
PPP Loan Forgiveness
The amount of the PPP loan that is forgiven takes into consideration payroll costs and employer-paid health insurance, retirement, and state unemployment expenses. The forgivable amount also includes mortgage interest, both real and personal property and rent expenses, as well as personal property or equipment and utilities. There is further guidance on Schedule C.
The loan proceeds on the forgiveness are not taxable; however, expenses paid using forgiven loan proceeds are not deductible at this time. The AICPA is fighting this, and Congress can reverse the IRS’s decision. This is still undetermined as to how it’s going to play out.
Tracking PPP Funds
There are some situations where tracking the expenses in a spreadsheet will be enough; in others, it makes more sense to use a separate bank account. If using a separate bank account from which to pay payroll and payroll taxes, Brett’s word of caution is to look out for the deductions coming out of payroll that would not qualify for forgiveness. For instance, the employer-paid FICA and Medicare taxes.
Additionally, loans over $2 million will trigger an SBA review where additional documentation will be required.
Best Practices for PPP Allowable Expenses: Nicole Koelsch, CPA
Even though there aren’t any concrete guidelines on how to document PPP loan proceeds or a detailed look at how forgiveness will be calculated, Nicole provided a set of best practices that oil and gas producers can use for documentation and loan forgiveness.
Based on what we know today, allowable expenses will be accounted for using the cash basis of accounting, not the accrual basis. That means that an allowable expense needs to have a check written and cleared the bank prior to the last day of the eight-week forgiveness period.
Rent is defined as the expense paid for office space or for equipment and equipment leases. An operating lease would qualify as a rent expense as long as there’s a signed rental agreement in place prior to February 15, 2020.
Specific to the oil and gas industry, paying rent for saltwater disposal is not interpreted as an allowable expense under PPP forgivable guidelines, since the rent expense is reimbursed by interest holders. However, producers that can break these costs out to interest holders can use the deduction against their own PPP loan.
Nicole then outlined a scenario in which an oil and gas producer owns the building for the business and receives rent from the business on a monthly basis. Based on what we know today, this rent expense would qualify as forgivable. In this case, keep a copy of the signed lease agreement with a copy of the invoice for the rent expense that month showing the rental agreement in place. It’s also a good idea to keep a copy of the check and the canceled check, which shows when it cleared the bank.
Utility costs include expenses like gas, water, electric, phone, and internet. It’s recommended to keep a copy of all utility bills, the check, and the canceled check. Similar to saltwater disposal, lease operators that pay for utility costs at each well, then bill the amounts to interest holders for reimbursement, cannot claim these as a forgivable expense under PPP. But, if they can separate out the utility costs for each interest holder, then they can use those amounts in their own PPP loan forgiveness calculations.
Interest on Mortgage Debt
This is defined as payment of interest on any covered mortgage debt that’s been in existence before February 15, 2020. It does not include prepayment or the principal mortgage debt. It’s good practice to keep a copy of the billing showing the breakout of the interest in the principal payment, as well as copies of the check and canceled check, or a copy of the bank statement if it’s automatically deducted.
Rent, utilities, and mortgage interest are part of the 25 percent of non-payroll forgivable funds.
Eligible insurance costs allowed under the PPP loan is for health-related benefits under a group plan. It is the employer-only portion of the benefits paid, and no other type of insurance payments are allowed with the use of PPP funds. Insurance costs count toward the 75 percent minimum payroll limit.
What happens if the non-payroll costs exceed the 25 percent maximum of the total loan amount, and/or the payroll costs are reduced? The goal is to maximize loan forgiveness, so it’s best to project out payroll costs as well as non-payroll eligible costs for the eight-week period in which PPP loan funds can be spent. That will at least help to identify the percentages of non-payroll costs so there’s more time to strategically plan.
Business Interruption Insurance
Typically, viruses are not covered under most business interruption insurance policies; however, it’s recommended to reach out to the insurance provider and start the conversation anyway. Let them determine if there’s a plausible cause to file a claim. It may ultimately be denied, but let them determine that.
Webinar attendees asked questions about the timeline to use funds, the role of guaranteed payments in payroll, documentation, self-funded insurance plans, the calculation of loan forgiveness for meeting a partial payroll threshold, how full-time equivalents are determined, and much more. The full-length webinar answers these and other questions, and Adams Brown’s COVID-19 Resource Center has articles and other webinar recordings addressing employment, funding, and other issues.
This is an evolving situation and while we don’t have all the answers, we can provide guidance on how to proceed based on best practices and knowledge of the oil and gas industry. Whether during times of growth or crisis, having an advisor to turn to for questions is invaluable.