Guide to Getting Your PPP Loan Forgiveness Application Accepted- Round 2

In case you missed it the first time…

Below is a transcript as well:

Amanda: Hi, we’d like to welcome everyone to today’s webinar, the Guide to Getting Your PPP Loan Forgiveness Application Accepted. We know that there’s a lot of questions around this today. So a little bit of housekeeping, we’re going to run through as much information as we can. Because there’s so much and because it’s constantly changing, we have a feeling we’re going to still have a lot of questions at the end. So you can go ahead, if you have any questions, you can type them right here in the section, your go-to webinar panel. At the end, we’re going to look at them and get to as many of them as we can. And if we don’t get a chance to answer your question, someone from the Smolin team will get back to you with an answer to that once it’s over.

Today, we have with us, we have Nick Gutzmer. Nick is a licensed certified public accountant in Florida and a licensed certified valuation analyst. We also have as our moderator, we have Henry Rinder. Henry is a licensed certified public accountant in New Jersey and New York with more than 30 years of public accounting experience. And we also have Dan Kruesi. Dan is a licensed certified public accountant and has been practicing public accounting for over 20 years. And with that, I will pass things along to Henry to get started.

Henry Rinder: Thank you, Amanda. We are delighted to be back. This is a very hot topic. I’m pleasantly delighted that we have so many people attending again, although we had a webinar on this topic previously. And needless to say, we will go over some topics that we have addressed in the prior webinar, but this is such a fluid changing area where new things are happening practically every day. I’m delighted to have Nick and Dan, who have been staying on top of this issue for our clients and for our staff. They are our superstars in this space. So they will give you the news on what’s happening right now and they will also refresh your memory as to how this space actually works, the space of PPP loan forgiveness. We’re going to tee off with Nick, who’ll cover the first three items on the agenda, and then this will be followed with Dan following up on the two items at the bottom of the agenda. And without any further ado, I’ll turn it over to Nick.

Nick Gutzmer: Thanks, Henry. And good afternoon, everyone. So as you see here, we’re going to touch on a little bit about the applications that are out there. There’s three main applications now. One has been added since the last time we spoke, the 3508S. This form is going to be available only for borrowers that had under 50,000. So it will be your sole proprietors, your very small businesses. And the reason this form came out, it was to super streamline this process for them. I guess that’s why they put the S there. And it’s going to allow the people that are applying, using this form, they just have to submit proof of expenses. There’s no considerations of FTE reductions. There’s no salary and wage reductions that they have to go through, but they are still going to have to provide to the bank the support. They actually certify on the application that they have provided evidence of their payroll costs or their non-payroll costs as proof of forgiveness.

The next form out there is the 3508EZ. And this form has three main criteria utilizing it. The first one is that you’re a sole proprietor. While this form came out before the S form without there, so sole proprietors won’t really use this. The other two items are, first of all, one, you did not have a salary and wage reduction, which prevents you from using this form. But that salary wage reduction, which we’ll go onto a little bit more later is really, you couldn’t reduce your wages by more than 25%. So the first 25% was okay. After that, it became a problem. And then the other two issues you have to contend with is either that you did not have a reduction in your full-time equivalence, or you’re unable to operate at the same levels due to state, local and federal regulations that restricted your business either from having capacity limits or just a full shutdown in cases of restaurants and gyms.

And if you’re not able to use the S or the EZ form, you pretty much are turning to the 3508. That’s where everyone else is going to fall in. This form is much larger and requires much more information. Where the other two forms, the S is really just, you tell them how much you want forgiven and you have to support it, the EZ breaks it down a little bit more to the main categories, but then with the regular 3508 form, you’re breaking everything down even more granular. You’re separating it from employees that are under 100,000 a year typically, employees that are over 100,000 based on 2019. And so there’s a lot more there. And from that, you have to have consideration of your salary and wage reduction and your full-time equivalent. So those two items right there really put on an increased burden for the borrower to support those items and the numbers on the form.

And then the last form you see on here, the 3509, this form was newly announced, probably about a month ago. And this form is going to be for borrowers that received two million or more. And what this form is looking to address is whether or not you really had a need for this loan. So we saw before with Shake Shack and a lot of these other big public companies that due to some of the loopholes of the program, they were applying for PPP loans, well, then they returned them because they didn’t want to go through that spotlight. But here, even for now our medium-sized businesses that receive two million or more, SBA is going to evaluate whether or not you had funding available or certain business circumstances that made this loan necessary for you to get through the PPP crisis. So Amanda, if you want to go to the next slide, that about covers that one.

So once you decide on what form you want to utilize or you’re going to be able to utilize, we should work through the forgiveness form itself. Just to retouch on this, you have to spend at least 60% or more on payroll costs. That’s the minimum that you can spend on payroll to get full forgiveness. You could obviously spend up to 100%. And we’ve found with a lot of our clients, we have been focusing heavily on payroll because it tends to be the easiest numbers to support, especially if you’re using an outside payroll company, they’re giving you great reports that you can utilize and submit to the bank. They’re independent so the bank can place a little bit more reliance on those as well. It’s not so much of like, “Hey, I paid these guys this much,” and you did your payroll in-house, so they might want some more documentation. But for a payroll company, they’re not going to pay your employees unless they get the money from you first. So there’s a little bit more of a reliance on them being independent.

Secondly, you can spend up to 40% of your loan on non-payroll costs. Those are rent expenses, utilities, such as gas, water heating, internet, things like that. And then also, any interest associated with a mortgage or other personal property financing. Another area that has been heavily discussed and can get quite complicated is the compensation limits. It’s pretty simple for employees. If you’re using the eight-week period, they’re going to be limited to compensation of 15,385. And if you’re utilizing that 24-week covered period, employees can get up to 46,154. Owner employees have another limitation that they have to pass here. And you’ll see that on the slide. Just to touch on it, owner employees are only owners that own 5% or more. So if you are a 2% owner in an S corporation or a partnership, these rules do not apply to you. You fall back into those employee rules.

So if you are an owner employee, on an eight-week period, you’re going to be limited to 15,385. And then on a 24-week period, what is the big change is that you’re actually limited to only 20,833 in compensation or two and a half months of your 2019 compensation. And that number can be a little different depending on what type of tax entity you are. If you’re an S corporation to a partnership, those numbers vary slightly, depending on what items you can include, even with the C corp as well. But it’s key to look at that 2019 number, because if you weren’t over 100,000, you will not be able to get 20,833 in forgiveness for that owner employee on the backend.

And then lastly, items that can reduce your forgiveness is going to be the salary and wage reduction and the FTE reduction. So for the salary and wage reduction, you’re comparing your 2020-21 compensation to the covered period. If you reduced the compensation for the individuals by 25% or more, you’re going to have a reduction that is dollar for dollar on your payroll costs. So if you had someone that was making $10, we’ll go to $20 an hour for each purpose here, and then you reduce their wages to $14 an hour, well, now you have an extra dollar per hour that was an excess of your 25% limit. So there are potential safe harbors that you can use if you did do that. Maybe you reduce them upfront, but now you have restored their compensation to an equivalent level over the covered period, and that’s allowed. Employees that are exempt from this requirement are those that made more than 100,000 in 2019. And also, owner employees are exempt. Those individuals, they were allowed to cut in excess and not affect their forgiveness calculations.

Lastly, you have the FTEs. This reduces all expensive, I’m sorry, expenses. And that’s where this one really becomes a heavy hitter. So when you work through your form, you accumulate all your expenses. You take your reduction for any salary and wage reductions that you might’ve incurred. And then they apply this ratio based on your FTEs to all your expenses. So it can have a greater effect if you did this and then reduce your FTEs. And while we’ve touched on previously, there are many exceptions and ways to mitigate a reduction in FTEs. One of them being that we saw a lot of people who may be reluctant to return back to work due to health risk or other items. So if you, as a business, offered reemployment to your employees and they turned it down, that is an exception that is not included in your reductions. Also, if you had someone voluntarily reduce their hours or retired due to all of this, non-affected in your FTE calculation.

And then due to one of those situations, if you had an inability to hire similarly qualified employees to replace them and you weren’t able to find that similar quality, that also would be an exception and not a reduction in your FTE. And when we talk about the documentation earlier, well, we’ll kind of mention a couple of things that go along with that to help support those, but you also have your safe harbors in play too. So if you restore your employees by December 31st, that would help eliminate your FTE reduction, but that means you also have to wait to apply for forgiveness after the end of the year, which Dan will touch on some of the issues that we have regarding the application forgiveness there. But there’s those key components that are really going to be heavily involved when calculating your forgiveness, depending upon which form you use. Obviously, if you use the S and the EZ, it is a little bit easier for you and maybe not so calculation as intensive, but with the 3508, it could get pretty heavy. So now, Amanda, if you can go on to the next side, please?

Now, we’ll talk about the documentation now. First and foremost, it’s going to be payroll records. As we discussed, it has to be 60% of your forgiveness. And so it’s going to make up a huge component. And as you’ve been working through these applications, we found some significant variances between different payroll companies, but by far, the most noted item is this payroll companies don’t know who the owner employees are. So when they’re doing these calculations for the businesses, they’re not properly limiting the cash compensation that is allowed. And I’ve seen some companies are better than others that do more of the calculations to help the process, but other companies give you all your payroll numbers for those periods and you really have to work through them to get the right information here for your cash compensation, your FTEs, and the salary wage forgiveness. And on addition to your payroll records, you’re going to also want 941s and your state unemployment returns as well for payroll.

Additionally, with non-payroll costs, if you’re utilizing rent expense as a non-payroll costs, you need to have your lease. That lease needs to be in effect as of predating February 15, 2020. If you had a lease renewal between in your covered period at the beginning of the covered period and the end of your covered period, I would have both leases there so that you can show them that this lease was in effect pre-COVID and we just had to renew it at a regular schedule time. Any financing arrangement that you have for the interest, you’ll want to have those as well. For your insurance expenses and utilities, things like that, you’re going to want to have a copy of the invoice, and a copy of an invoice substantiating that this service or an insurance in effect as of February 15th. This is a key date for those non-payroll costs. And then also canceled checks showing that you paid these bills. If you do payroll on your own, then you’re probably going to need a little bit more backup as well. Canceled checks for your payroll and the pay stubs might help move things along.

And then as we talked about the FTEs, the documentation starts to get a little bit heavier there. You’re going to want to show payroll records for the covered period that show how many hours are worked, or if these individuals were salary or hourly. Then we need to go get payroll records for your measurement periods. There’s two that you get to choose from, one being January 1st, 2020 to February 29th, 2020, and then the other is February 15th, 2019 to June 30th, 2019. Between these two measurement periods, you, as a borrower, are able to choose whichever one works best for you. So make sure if the first one you tried doesn’t give you full forgiveness or the necessary outcome you’re looking for, make sure you try the second one too, because it might be better depending on your business.

Some other items that you’re going to want to put together, but you may not have to submit with your lender is support that shows which employees were making over 100,000 and under 100,000 in 2019, or at an annualized rate of 100,000. So it could be W2s. It could be some pay stubs, things like that from 2019. You’re going to want to retain those salary and wage reduction calculations. And then if you are utilizing any of the FTE exceptions, you’re going to want to make sure that you document those by having written evidence, whether it’s emails, text messages. I know some people may be hard to get ahold of. If you’re going to utilize any of the government exceptions, so you’re going to want to go get either your state and local ordinances and executive orders that restricted your business from operations. Things like that are going to go a long way to help support that.

And then, also, any safe harbor support. So if you are restoring wages or restoring FTEs, you’re going to want to have evidence of that that shows where you were at the time of your covered period, and now you’ve restored it. So the documentation can get pretty lengthy. When you think about putting together your package, it’s kind of, you want to make it easy for the bank. So they’re going to be getting a lot of these applications here soon, and we know that they have 30 days to give you a response, I’m sorry, 60 days to give you a response. And then the SBA also has 90 days to look at that as well. So the more upfront work you do to make it easier for the banks, the easier it’ll be for you to get forgiveness and to put this behind you.

Henry Rinder: Thank you, Nick. Now, we’re going to move into a couple of areas that have been touchy because they create wrinkles in this whole process. And Dan, I know you’ve been looking at a couple of those areas, especially the taxation piece, but also what happens if you have a change of ownership during this period. So Dan, the mic is yours.

Dan Kruesi: All right. Great. So as you all know, we have a changing political landscape in the United States, where Joe Biden is most likely our next president and the Senate is in a flux right now, 50 to 48 Republican. Georgia is having a recount, which is supposed to be done by November 20th. And we’ll find out whether Purdue received 50% or not. If he does not receive 50%, there’s two centers in Georgia going to have a special runoff election, which will be decided on January 3rd. So most likely, we will not know who controls the Senate until year ends. And so that kind of puts us into a tax planning flops. And you might not think that or you might say, “Hey, I’m not really that concerned about a change of ownership.” I’m going to give you some guidance on that. This is actually coming up a lot because it’s a common belief amongst tax practitioners that the tax rates are going to go up next year in 2021, not just at the individual level, but also at the corporate level, and most importantly, at the capital gain level.

So the question is, what is a change of ownership? A change of ownership is a 20% change that involves either a transfer or a sale of common stock, a partnership interest, a sold per partnership interest, or more than 50% transfer sale of assets of the business. What is a transfer? And this is something that I don’t think a lot of people have really paid attention to on this. A transfer is also a gift. So it’s not just the sale of your interest in your business. It’s not just the potential of the sale of your assets, but it’s also a gift that would occur more than 20% in your business that could actually trigger this. And what gets triggered is that you cannot make these transfers until the SBA gives you their approval.

Now, if you have basically a sale of your business interests, you’re just going to either sell the stock or you’re going to sell your partnership interest and it’s between 20 and 50%, all you have to do is you have to go to your lender, who is your bank. You have to put in writing that you plan on making this transfer and you have to give them a copy of the proposed agreement. If you do that, you will not need SBA approval. However, if you have a transfer that involves more than 50% of the assets or 50% of your stock or your business interest, then you must get approval from the SBA to actually have your sale. And as you know, this whole process is really getting dragged on what? From eight weeks to 24 weeks. You have 10 months to actually submit your application. The bank then has two months to come back and give you a decision. So this whole process is around a year and a half.

If you were thinking, “Oh, I’m just going to go and sell my business right now because I got this good deal. And you know what, I want to get capital gain rates at either 20 or 23%, 23.8%, instead of paying something that might be around 37%, the capital gains,” you might not be able to pull that off because you’re going to need SBA approval if you have more than 50%. When you go to the SBA to try to get approval, they are going to first off ask for a whole bunch of things in writing, basically saying that you are still at risk. If the loan isn’t paid off, you’re still responsible for anything that would happen that you wrote down in that application. And they will also ask for additional risk mitigation measures.

And it can take the SBA for when they receive all the information that they’re required from you two months to make a decision, which most likely would push you into 2021, which might… A lot of times when you delay deals, and then we’ve seen this many times, with things come up like this, a lot of times the deal falls apart. If you have more than 50% sale of assets, the SBA is also going to ask that the new buyer assume all your PPP loan liabilities for that loan. So, that would be another thing where the deal might not go through. If you do not want the SBA to look at your loan process here to see whether they will okay the change of ownership, there is a way around that and the way around that is not that great. You have to fill out the application. You don’t need approval for the application, but you do have to fill it out.

And then along with it, you have to set up an escrow with your lender or your bank that you took out the loan, and you have to set up an interest bearing escrow account that is equal to the outstanding balance of the loan. So whatever you borrowed on the PPP loan, you’re going to have to set up an escrow if you don’t want to get the SBA involved to actually do this deal. So you could see that this is something that you might have. A lot of people are actually being involved in this now that you might not have been aware of. And if it’s something that comes up, where you have this, it’s actually is somewhat complex, I would probably recommend that you reach out to us and we could help you along with the process. All right, let’s go to the next slide.

Okay. Taxation of the PPP loan. All right. One of the big selling points of this loan when it first came out was, “Hey, you know what, this isn’t really a loan. In a way, it’s a grant. It’s going to get forgiven or a large part of it will get forgiven. And unlike cancellation of debt income that exists with other times when you have a loan and it’s together, it will not be taxable.” So in the CARES Act, section 1106(i), it specifically says in there that loan forgiveness under a PPP loan is excluded from gross income. So that’s great. That’s a great benefit. You get this grant. You get to help out your employees. You pay the payroll and it’s not taxable.

Well, the IRS came along and they came out with a notice 2020-32 that denies the tax deduction for any of the business expenses that was funded by a forgiven PPP loan. So now, the IRS kind of pulls the rug out from it being non taxable and backdoor makes this into a taxable event. There are a lot of very smart tax people who believe that the IRS has taken an incorrect position on this. Senator Grassley and Rubio, they have also come out and said, “That was never our intent.” But you still have to be aware that the IRS is saying, “As far as we’re concerned, you’re not going to get any of the expenses as a deduction.” There is a Senate Bill 3612 that is sitting right there in the Senate. They have not voted on this yet. We don’t know what’s going to happen because the Senate is in a flops. We don’t know what happens next year, if they would actually, they say, “No, this was not our intent right now. It seems like the IRS is in control.” And so, it brings up the question of timing.

You’re going to have to have these expenses disallowed. Should they be disallowed in 2020 or should they be disallowed in 2021? What if your application is forgiven in 2021? Would that make sense that that’s the time that these expenses should not be deductible? Should it be when you actually paid the expenses, which would be in 2020, or should it be when you actually filled out your application? If you think about it from a tax planning standpoint, for most people, there are definitely exceptions. If I had time, I’ll give you a whole bunch of exceptions why 2021 would be better. 2020 would be the most conservative and probably tax-wise with rates going up would make the most sense for this to be a taxable 2020 event.

There are some situations too where you wouldn’t want it to be 2020, you have increased income if maybe you have an NOL. In the C corporation, you could carry them back with an amended return and get a refund at higher rates around 34% instead of 21%. But this is something that is going to affect everybody that’s got this PPP loan. Hopefully, there’ll be a court case against the IRS that may overturn this, but we’re not going to know that until next year. If something happened with the Senate, we’re most likely not going to know until next year. So this is something that you have to be conscious for because your estimated payments could be affected by this. And your payment that you’re going to basically make either in March or in April is going to be affected by this. All right. Do we have any more questions? So if you have any questions, now is probably a good time.

Henry Rinder: Amanda?

Amanda: Yeah. We got a few questions in. So one of the questions, and I thought it’s come up a couple of times is for the full-time employee rule, what happens if you had a few part-time people and now, let’s say you’ve had six part-time people and now you’ve let people come and some people go, and now you consolidate it into, let’s say three full-time people, does that still cover the equivalent for that? Or what does that look like?

Henry Rinder: So we had a little bit of static on that question, but I think Nick can still address the substance of it. Nick?

Nick Gutzmer: Yeah. Thanks, Henry. So for part-time employees, when you start evaluating FTEs regarding part-time, it takes all your part-time employees. We add up all their hours that they’ve worked and you divide them by 40. So you take all the part-time people and put them in to make them one number, so that you add them to your other full-time employees and then that becomes your full-time equivalent at that point. And then if I miss something, Amanda, just let me know. Like Henry said, we got a little bit of static.

Henry Rinder: Amanda, any more questions-

Amanda: Yes, there are quite a few actually in here. One of the other questions was, and again, we saw this a couple of times, that if your payroll alone covers the cost of your loan, do you still need to include things, like the utilities? And another person had asked, what if our non-payroll and payroll expenses exceed the cost of the loan?

Henry Rinder: Terrific. That sounds like another question for Nick.

Nick Gutzmer: And as we touched on earlier, if you can submit with just payroll, we’ve found that that’s going to be probably the cleanest and easiest way to go about it. So there’s no need to include those other items because now you start giving the bank more information than they need. Maybe there’s issues with some of the other support you provide that hangs them up as far as getting back to you. So if you can do it with payroll alone, go for it and keep things simple. And then I’m sorry, Amanda, what was the second part of that question?

Amanda: That was basically the same question. So, yep, you answered both people’s questions.

Henry Rinder: Terrific. Amanda, we have still a minute or so. So, let’s take on a couple more questions.

Amanda: Yeah, sure. So a question as far as the timing of the application, is there any benefit to applying for forgiveness now, or should they just continue to wait? Like you guys said, there’s a lot of changes happening.

Henry Rinder: That question seems very fitting for Dan. So Dan Kruesi, would you please answer it?

Dan Kruesi: Well, this goes back to my time at the taxability of it. If you are going to basically make an argument to the IRS that these expenses should be non-deductible in 2020, when most likely rates will be lower than 2021, I would highly recommend that you file your application in 2020 so that there can’t be any argument that no, you actually filed your application in 2021. You will forgive it in 2021. That’s when those expenses should have been non-deductible. It’s a gray area, but not to take a chance and to push it off doesn’t seem to make much sense. It would be that under most situations for most people, it would be better for you to file in 2020 than 2021.

Henry Rinder: And needless to say, to add to your answer, Dan, this particular question is getting a lot of traction among our clients and among other professionals. So I think if people are considering the timing of recognition or nonrecognition of these deductions, they should talk to somebody at Smolin and seek advice. Amanda, we’ll take one more question before we wrap it up.

Amanda: Yeah. Sure. Someone had a question about what happens if they don’t need that full-time equivalent? So let’s say they had their funds. And then by week 11, they spend almost all of them, but one employee went out on unemployment, let’s say in week eight, are they going to deduct for that, or what would that look like if they haven’t met that full amount?

Henry Rinder: Terrific. I’m sure that Nick can address that question and give an answer to it.

Nick Gutzmer: Thanks, Henry. So from a pure, easy to use example here, let’s say you spent 100,000 over your covered period payroll, non-payroll expenses and you went from 10 employees before this whole PPP thing started to nine now, you’re going to reduce your spend of 100,000 by 10%. Now, if you’ve got a loan for only 75,000, you’re okay. You have 90,000 worth of qualified expenses and only a $75,000 loan. So you are a little bit safe there. And it doesn’t matter how much you spend. You’re only going to get forgiven for what you borrowed.

Now, to touch on that situation, it sounds like if you offered your employee employment and they chose to stay on on employment, that won’t actually be a negative effect on your FTE calculation, because that’s one of the exceptions. You just want to make sure that you properly documented your offer of employment, whether that’s in a letter or an email. Verbal becomes tough because you have no proof, but if you may have taken a note of the call and things like that, whether the date and time, that can help. You might just have a little bit more leeway or live work to do there for that one. But offering employment and it being turned down is an exception to the FTE reduction, so you might be okay. You can reach out to us and we can touch on that example in a little bit more detail if there’s still some questions.

Henry Rinder: So as we wrapping up today’s webinar, we are still open to questions. And if you email them to us, if you post them, we will respond to you directly. One of our team members will reply to you. And I just wanted to thank Amanda for hosting today’s webinar. I wanted to thank Dan and Nick for providing great content to us. And I wanted to thank you all for attending. Have a great day.