Payroll Protection Program Updates for the Oil & Gas Industry
Year End Tax Planning is Paramount
Back in June, Congress extended the Payroll Protection Program covered period from eight weeks to 24 weeks. With this extension, many questions surrounding the loan forgiveness process remained unanswered. Since then, the SBA has released several versions of the loan forgiveness application. There is the standard Form 3508, the 3508EZ, and the 3508S.
An employer must submit their loan application within 10 months of the last day of their covered period.
Which form should oil & gas business owners use?
- Form 3508 – This is the original form and the longest of the forms. Use this form if you have a reduction in (Full-time Equivalents) FTEs and/or reduced wages.
- Form 3508EZ – This is for any employer that did not reduce FTE or wages but whose loan is over $50,000.
- Form 3508S – This is for any employer whose loan was under $50,000. You will have to provide all supporting documentation to support the funds were used in accordance with the program.
Once you submit your loan forgiveness application, your lender has 60 days to determine your eligibility for forgiveness regarding the entire amount of the loan and communicate their decision to the SBA. The SBA then has 90 days to respond to the bank on whether they agree with the lender’s forgiveness decision. Your lender should then communicate to you the forgiven amount at the end of this process.
If your loan is not fully forgiven, you’ll need to repay the unforgiven principal of the loan as well as any accrued interest on the loan for the unforgiven piece. The rate of interest is 1%.
Refresher: What Qualifies for Forgiveness?
Below is a quick refresher on what qualifies for forgiveness and includes some of the clarifications that have come out in the past few months.
- Under the new rules, at least 60% must be used to cover payroll costs, leaving 40% of the covered cost to consist of the nonpayroll costs (rent, utilities, mortgage interest) for the loan to be fully forgiven.
- Even though you may have spent your loan proceeds following the 60%/40% rule, you may not qualify for full forgiveness if you reduced your workforce or reduced salaries and wages.
- A reduction in workforce occurs when your FTEs per month during the covered period dropped below the average number of FTEs per month during the look back period. The two lookback period options are January 1, 2020, through February 29, 2020, OR February 15, 2019, through June 30, 2019.
- The simplified method of calculating FTEs involves taking an average number of hours worked each week by employee.
- If your FTEs do happen to fall below the average during your covered period versus either of the two lookback periods, you can choose which lookback period would give you a more favorable result.
- An FTE is anyone that works 40 hours or more. If an employee drops below 40 hours, then they would no longer be considered full-time according to the PPP loan forgiveness guidelines.
- Below are the safe harbor rules for a reduction in workforce. The main takeaway here is that if any of the scenarios below apply, you must make sure to document.
- An employee left and you as the employer in good faith tried to replace the former employee or offered their job back and they declined
- An employee was fired for cause
- An employee voluntarily resigned
- An employee requested a reduction in hours
- A reduction in the workforce due to compliance with Health & Human Services, CDC, or Occupational Safety and Health Administration
- You have until December 31, 2020, to restore FTEs.
- A reduction in wages is a 25% or greater decrease in compensation for an employee from the quarter before the start of the covered period. If you received your PPP loan proceeds in Q2 of 2020, your lookback period would be wages paid in Q1 of 2020.
- There is a limit or cap on how much an employee can be paid in each covered period. That cap is on $100,000 of compensation which would equate to $15,385 for an eight-week period and $46,154 for a 24-week period. For the owner of a company, the owner cap under the 24-week period is different from the employee cap. The owner cap is $20,833. Do note, however, that owner-employees are limited to their 2019 wage over 2.5-month factor. Also, if you exceed your 8 week period to the 24-week period and do not use the full 24-week period, you will have to prorate the $100,000 over the course of how many weeks you used for payroll purposes. For example, if you exceeded your covered period and only needed to use 2 more weeks within the 24-week covered period, therefore, fully using your loan proceeds in 10 weeks your payroll cap would be $19,230.77 ($100,000/52 weeks x 10 weeks).
- Clarification surrounding non-payroll cost and rules surrounding related party rent: You are only able to deduct related party rent to the extent that that is a mortgage on the party, and it is limited to the amount of interest paid on the property during the covered period. For example, you own the building that your companies operate out of and your company pays you personally for rent. You don’t have a mortgage on the property so, therefore, no rent payments paid to you are eligible as nonpayroll cost.
- Tax ramifications: when forgiven, the loan is considered taxable income. The Senate and House have said this was not the intent; however, that is what the IRS has stated. The House included language in the HEROES Act that passed the House but never passed the Senate so that has not been enacted into law to overturn the IRS. This makes tax planning vital for you.
- If you are buying or selling a business that has a PPP loan, contact your Adams Brown advisor on this situation. There are three factors that trigger an issue with a PPP loan during a business transaction: a 20% equity change, 50% of the fair market value of assets disposed, or merging of a company.
This is where we stand as of the publish date included in this article. Much discussion has occurred on automatic forgiveness for loans under $150,000 and a second draw on the PPP loan program. However, no laws have passed on either of these two hot topics, likely because of political debate and the presidential election.
This year has been a wild ride in the oil and gas industry and beyond. Since every situation is unique, make sure to consult with your Adams Brown advisor on any questions you may have.