Jun 7, 2020
by Mary Piasta, Haeuser Valluzzo & Piasta LLP
What’s important about the passage of HR 7010 an act to amend the CARES Act? Some businesses would say increased clarity over the payroll protection program (PPP), while others would point out continuing ambiguities, leaving room for further legislative efforts and SBA guidance. HR 7010 was signed into law on June 5, 2020 amending prior legislation regarding PPP. Attorney Mary Piasta of Haeuser, Valluzzo & Piasta LLP and Nate Lamar, CPA, of Pisenti & Brinker LLP, have some insights for businesses as they traverse these waters. The following provides:
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First, it extends the “Covered period” from 8 to 24 weeks. Borrowers can elect to use the original 8-week covered period if they find it more beneficial than 24 weeks. Some ambiguity remains surrounding how the extended covered period may affect allowable compensation limits.
Second, it reduces the 75% payroll costs threshold to 60%, but with a major caveat. Under the previous rules, payroll costs below the 75% threshold reduced loan forgiveness in proportion to payroll costs. The new 60% threshold is now something of a cliff. If the 60% payroll threshold is not reached, 100% of the loan will not be forgiven. Senator Rubio mentioned in a press conference that the SBA should issue guidance to effectively restore the “sliding scale” model of the original 75% threshold, but there are no guarantees that will happen.
Third, it increases the 2-year repayment period to 5 years. Technically, this would only apply to loans initiated after passage of the bill, however the bill includes a provision that would allow lenders to renegotiate the terms of existing loans. The interest rate remains at 1%.
Fourth, it allows for extended deferral of interest and principal payments on non-forgiven loan amounts beyond the initial 6-month period to the date the lender receives the forgiveness amount from the SBA. This will often be longer than six months for most borrowers, especially considering the extended 24-week covered period.
Fifth, it extends full-time equivalent restoration deadline to December 31, 2020. Under previous rules, forgiveness is reduced for any reduction in full-time equivalent (FTE) employees as of June 30, 2020. This change moves that date to the end of 2020, as many businesses cannot operate at full capacity due to state or local ordinances preventing them from doing so. There is currently no requirement to maintain a workforce through the end of the year, only to restore FTE workforce by December 31, 2020.
As with many things the devil is in the details. The PPP reform is no exception. With lengthy application process, you can expect increasing scrutiny when it comes to forgiveness underscoring ample reason to coordinate with appropriate advisors.
The June 5, 2020 PPP reform also raises many questions with respect to full time equivalent limits. To recap, the reform clarifies thatthe following scenarios will not have a negative impact on loan forgiveness, if well substantiated and documented:
a. Unable to rehire employees who were furloughed or laid off, OR
b. Unable to rehire similarly qualified employees, OR
c. Unable to return to the pre-COVID level of business activity by December 31, 2020
There are a few things to note on these FTE limitations. Current guidance suggests that employers will not be penalized under this limitation if employees are terminated for cause, leave a position voluntarily, or refuse an offer of rehire. Employees who meet one of these criteria can be excluded from the FTE limitation calculation.
There is a potentially very touchy requirement regarding employees who refuse a rehire offer. In order to exclude such an employee from the limitation, the employer must report the employee’s refusal to the state unemployment office, effectively making the employee ineligible for unemployment benefits. This puts employers in a very undesirable situation, potentially choosing between loan forgiveness and what might otherwise be a good relationship with the employee. We hope additional guidance will be issued that will remove this requirement, but for now we are stuck with it, and this should be carefully considered by those who find themselves in this situation.
In the world of PPP forgiveness, an area bounding with continuous modifications by various governmental bodies, there are best practices. Of course, documentation is key. Document everything. Keep meticulous records of how loan proceeds are spent. If possible, keep the PPP funds in a separate bank account from other operating funds. If your company offers a furloughed employee their job back, do it in writing. If they refuse the job, try to get that in writing as well. There are a lot of unanswered questions about how forgiveness is really going to work, but ultimately quality documentation will be your business’s best asset.
One other point worth mentioning is that the IRS issued a statement invoking tax law (IRC §265) effectively disallowing business deductions paid with forgiven loan amounts. Any expenses paid with forgiven loan proceeds cannot be claimed as a deduction on a tax return. The PPP loan was advertised as tax-free money, which is true to the extent that forgiven loan proceeds do not trigger taxable income (under normal circumstances, cancellation of debt results in taxable income). However, since expenses paid with forgiven loan amounts are currently not deductible, the results could be very unfortunate for some businesses’ bottom line. . This is an area where consulting with a licensed tax professional will be of utmost importance.
Lastly, it is worth mentioning if a business has not received a PPP loan and wants to, funds are still available. Check with your banker to see if you qualify.
Question – Can businesses use money beyond the 8 weeks? Does it matter on what? So do they only get 8 weeks of payroll per employee.
Answer – Forgivable expenses are limited to qualifying payroll expenses, rent, utilities, and mortgage interest. As of yesterday, at least 60% of loan proceeds must be spent on payroll costs to achieve full forgiveness.
According to the rules currently in place, borrowers are allowed to use loan proceeds for qualified expenses incurred OR paid during the covered period. That is to say that qualified expenses incurred before and paid during the covered period are eligible for forgiveness, as are qualified expenses incurred during and paid after the covered period. Expenses incurred during and paid after the covered period are limited to the billing cycle immediately following the covered period to qualify for forgiveness. Expenses incurred during the covered period but paid after the next billing cycle will not qualify for forgiveness.
Question – Is it still only useable for 8 weeks of payroll per employee, but it could be anywhere within the 24 week window; or can one pay the same employees for more than 8 weeks up to the full 24 weeks?
Answer – It seems the intent is to make it useable within the 24 weeks You can now take up to 24 weeks to spend the money, rather than the initial eight weeks. That said, it is not yet clear if compensation limits will increase due to the extended covered period. Our current understanding suggests that you can continue to pay employees as long as the money lasts, subject to the full-time equivalent (FTE) equivalent limits.
Question – can a business use the entire loan to pay the same employees for something like 11-12 weeks?
Answer – The payroll costs threshold is a limit on non-payroll expenses, so yes, 100% of the loan proceeds can be used for payroll expenses and still achieve full forgiveness, subject to FTE limitations. Businesses now have 24 weeks to spend the loan proceeds.
Question – What does this mean for the small businesses who aim to pay salaries to owners and have them forgiven?
Answer – Business owners are subject to their own unique limitations and it depends in large part upon the form of the business (LLC or an S-Corp). There are limits of: 1) an annualized cap - $100k per year (8/52 times $100,000 or $15,385), and 2) 2019 income, if the amount is less. The latter rule came out very late in the game, after many business owners had already paid themselves far in excess of this limitation. To make matters worse, the rules are different for owners of an S-corp and owners of an LLC.
Question – Can my business partner and I can pay ourselves as we usually take partner distributions on a monthly basis?
Answer – Partners in an LLC can pay themselves via distributions or guaranteed payments, subject to the annualized $100k and 2019 self-employment income limitation described above, as partners in a partnership are technically not allowed to take wages. Expenses for health benefits and retirement plan contributions are not eligible expenses for partners in an LLC. Health benefits and retirement plan contributions are potentially forgivable expenses for S-corp owners, however there is much uncertainty surrounding how much an owner can contribute to a retirement plan and still achieve forgiveness.
Question – Can a business use up more of PPP by paying the January thru April 401k contributions now?
Answer – As of now, there is not clear guidance that says a business can do this, but there isn’t any guidance that says they can’t either. Retirement is included in the definition of allowable benefits, however it is not clear exactly how much is allowed. Benefits do not appear to be part of the $100k annualized cap, but it is possible they will be. The “incurred or paid” rule would also suggest that these expenses would be forgivable if paid during the covered period. That said, many experts are cautioning against changing standard business practices of a company to utilize PPP funds that might otherwise go unspent. Hopefully with the extended 24-week covered period, it will be easier to utilize all loan proceeds.
Businesses desiring forgiveness should take heed of landmines. Section 1105 titled Loan Forgiveness details such “an eligible recipient shall be eligible for forgiveness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period.” While this is the text of Section 1105, the law is complex including hundreds of pages of SBA guidance, much of which contradicts the law.
Interested businesses may be interested in the text:(d) placing limits on the amount of forgiveness. “In general, the amount of loan forgiveness under this section for an eligible recipient shall not exceed the sum of: (A) the total payroll costs incurred by the eligible recipient during the covered period; and(B) the amount of payments made during the covered period on debt obligations that were incurred before the covered period. Again this text differs from SBA guidance.
To be forgiven there is an application process. Contemplated in subdivision e, the application requires the business to submit to the lender that originated the covered loan an application, which “shall include documentation verifying” the number of full-time equivalent employees on payroll and pay rates for the periods with the payroll tax filings to the state and fed; income tax filings and unemployment insurance filings; as well as financial statements verifying payment on debt obligations incurred before the covered time period. And of course, “(4) any other documentation the Administrator determines necessary.”
This catchall allows lenders the ability to seek information, but on the other hand puts businesses at a disadvantage knowing what sort of “other documentation” may be required to maximize their chances for being approved for forgiveness. What’s a business’s best proactive step? With critical monies at issue, businesses should lean on their tax advisors and partner with them to provide the information necessary to maximize chances at forgiveness.
As with many things, the devil is in the details. PPP reform is no exception. With a lengthy application process, the expectation of increased scrutiny when it comes to forgiveness underscores ample reason to coordinate with appropriate advisors. The SBA has reserved the right to inspect all loan applications, client documentation regardless of loan amount. And as with all pieces written by professionals, this article is for informational purposes only, unintended to provide advice, including tax advice of any kind.
This information is a collaborative effort of lawyer, Mary Piasta of Haeuser, Valluzzo & Piasta LLP and Nate Lamar, CPA, of Pisenti & Brinker LLP.
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