Self-Employed Individuals and Small Businesses, Paycheck Protection Program and Loan Forgiveness
If you’re self-employed or have a small business with just a few employees, applying for the Payroll Protection Program (PPP) can bring up a lot of questions.
We’ll help you make sense of how the program applies to you as a self-employed individual or as a business your size, and will cover:
- What the Payroll Protection Program covers and how to apply
- Amount you could expect to receive based on employee count and payroll
- Loan forgiveness requirements
- Ways to ensure you’re tracking the spending associated with PPP loans
Below is a transcript of the webinar.
Amanda: And today we have Henry Rinder, who's going to be the moderator for today's webinar. Henry is a licensed certified public accountant in New Jersey and New York with more than 30 years of public accounting experience.
We also have Dan Kruesi, who's a licensed certified public accountant as well and he's been practicing public accounting for over 20 years. He advises high net worth individuals, partnerships, S corporations and handles estate planning. We also have Tom Cole. Tom is a licensed certified public accountant in Florida, New Jersey and he has more than 35 years of public accounting experience. And with that I will pass things along to Henry to get things started.
Henry Rinder:
Thank you. Thank you very much Amanda. We're going to just cut to the chase this morning, or this afternoon, rather. And because these are the important topics and surely we don't have a lot of time in 30 minutes to cover something this complex. So the agenda today is really to address the framework of Payroll Protection Program, what it covers and how to apply for the forgiveness grant. Also, we can address what to expect in terms of your employee count and payroll, how those calculations are made and what are the actual application for loan forgiveness requirements. What is it that you would need to submit and who do you submit it to? And frankly, I hope that we're going to have time to address also suggested ways to ensure you are tracking the spending properly. So this way when it comes to the grant, you have the appropriate justifiable documents to back up your request for the forgiveness. I will turn over, as we go through the first slide out, I'll turn the mic over to Tom. Amanda, next slide please.
Tom Cole: Thank you, Henry. Just a quick overview of the program. It was a lifeline thrown by the federal government in order to cover payroll and other costs for eight weeks during the COVID period. If you haven't done your application yet, you probably should get on that very quickly because money is going fast. The application is made with your bank or and the other local bank that will take the application but we typically suggest to go to your current bank. It can be applied for through a Schedule C, a partnership, or corporation or a nonprofit entity. The calculations for that loan amount are basically your payroll costs. Your payroll costs divided by 12, times two and a half, which gives you a magic number of your loan amount. Excuse me.
Let's see, when you get that loan you have to be very careful about how you spend it. It is really payroll driven, so they really want you to cover payroll, 75% of payroll. I think Dan's going to get into some of those numbers, and you can also spend it on some other items, rent and utilities and some mortgage payments or loan payments. And Dan will get into the forgivable portion of it. What else do I need to [inaudible 00:04:24] Your payroll costs are typically your gross payroll, your fringe benefits, your retirement benefits. And that's about it to make that multiplication in that application.
Henry Rinder: Thank you, Tom. And as we move to the loan forgiveness, which is an important aspect of it, obviously as our clients are eligible for the loans, they can borrow the money and borrow the money not only from sources like a bank, but you mentioned that if the bank is not taking application to consider other sources. For example, there's internet lenders right now who are permitted to also grant these loans, including Kabbage and PayPal and Intuit. So we recommend clients to make sure that they file applications, even if there's a question about forgiveness and the forgiveness that provides the tax fee grant is something that Dan Kruesi. will address now. Dan?
Dan Kruesi: Yeah, the next slide. Okay, so the loans, again, this is the part that I think everybody's interested in. The loan itself is a great loan. It's 1%, over two years and you get to defer it for six months before you have to make a payment. So if it ever happened that you didn't get your loan forgiven, which was basically a grant, it's still a good program. But when you think about the words, it's Paycheck Protection Program. So there's a concentration on payroll. So if you want to have this forgiven, there is a eight week covered period that you're going to have to do testing on and you're going to have to keep records on what kind of expenses did you incur during this eight weeks period? So the eight week period starts with the bank first distributes the funds. So the day the bank distributes the funds is the day that this eight week period would start.
And this eight week period, you're going to have to measure what your payroll costs are, what your interest expenses were, what your rent expenses were and what your utilities were over the eight week period. Now 75% of the payroll, has to be 75% of your expenses in that eight weeks period that you're using this loan on has to be for payroll. The other 25% can be spent on other costs such as interest or rent or utilities. There is, so now we're into that. So your main expenses now are your payroll costs, your mortgage interest, your rent, and your utilities. 75% has to be for payroll costs and the other 25% could be used for mortgage, interest, rent and utilities during that eight week covered period. Okay, we can go to the next slide.
So the concentration of the loan forgiveness in that eight week period that starts when the bank first distributes the funds to you, you start counting then. The main component is payroll costs. Payroll costs, and there was a lot of confusion on this when the law first came out. Payroll costs are salary, wages and tips up to a hundred thousand dollars for any employee. And you can also on top of the hundred thousand dollars, you can also include into that other covered benefits such as pension expenses or medical expenses or state and local expenses you might have like un-insurance premiums for these people.
Now, it's only going to be eight weeks of coverage. So basically if someone made a hundred thousand dollars, you'd take the hundred thousand dollars divided by 52 weeks, multiply it by eight weeks, and so the maximum amount that any individual would have would be $15,385 per person. That would be the max. And if you have an employee you could take there, let's say fringe benefits on top, their retirement, their medical expenses, self-employed people, they can also qualify. There is a couple of different rules that are quite tricky and that we should have Tom go over in a little detail just explaining difference between the different entities.
Tom Cole: Okay, yes. Your corporations are going to just take the payroll costs right out of your tax return, limited by a hundred thousand dollars. The self-employed individual has a strange setup, especially for Schedule C where they're only going to look at your payroll costs plus the net compensation to the self-employed individual. So the maximum you can get is that 8/52's of net profits, which is limited to $15,385. Now, if I was just a sole proprietor with no payroll and I did the math on that on my 2019 Schedule C, that math have comes out from my loan being $20,833 so my maximum forgiveness will be $15,385. So you would be left with a loan of roughly $6,000 which is not a bad thing. So you're forgiven basically on the money you're taking home, but you're going to have a loan for any other use.
Partnerships you have to go to, individual partners can not file for this loan, the partnership would file. And you're going to look to their self employment income on the Schedule K1 you're going to have to present a partnership tax return for that and you reduce it by section 179 and you do the payroll costs if you have employees as well.
Henry Rinder: So as we move to the next slide then can you address what payroll costs do not include?
Dan Kruesi: Okay, so there was confusion about this also when the law first came out. You cannot include in payroll costs, federal employment taxes such as FICA or FUTA, so you cannot have the federal unemployment cost, you cannot have... The social security portion is paid by the employer or the employee and you cannot have the Medicare portion as well. If you also have people where there is qualified sick leave wages or qualified family leave wages, that also was covered in the CARE act and there's a payroll tax credit that came along with that, you can not include those payroll costs in the forgiveness calculation.
This was also something that also there was confusion about, you cannot include independent contracts into your payroll costs. And the reason for that, which Tom had just briefly spoken about, is that self-employed people or people that receive a 1099 miscellaneous who are independent contractors, they can go and apply for this program themselves. So if you would've counted independent contractors, there would be a double counting of that person.
Dan Kruesi: Okay, so non-payroll costs, 75% of the payroll has to, if you want to have it forgiven, has to go payroll. You can use the other 25% for non-payroll costs. Well what are they? It would be interest payments, rent payments and utility payments. Now these expense has had to have been incurred before February 15, 2020. So for example, you cannot go and open up a loan right now and try to have your interest payments or start some sort of a rent agreement that happens after February 15th and have those expenses count. They had to have existed before February 15th.
If you have interest payments, interest payments, the actual word that's used is covered mortgage obligation, but it's on real and personal property, which means that it's more than just a mortgage on real estate. If there is other interests such as interest on perhaps a piece of equipment that's in the company that could also be used. And then there's the rent payments and the utility payments, that covers your electricity, your gas, your water, your transportation, your telephone and your internet access. So you can see that that 25% should be pretty easy for most businesses to cover in using those three different types of expenses.
Henry Rinder: And then just to clarify. Interest payments, when we talk about these mortgage obligations, we're basically talking about mortgage obligations on real estate stated and secure loans on personal property. I mean that's, our interpretation-
Dan Kruesi: Correct.
Henry Rinder: ... of the statute, isn't that correct?
Dan Kruesi: So personal property, is not and that's a tax definition, which in layman's terms is equipment.
Henry Rinder: Next slide please. And Dan, this is really where it gets complicated so we need you to explain how loan forgiveness is actually adjusted by these different criteria. Can you explain it for us?
Dan Kruesi: Okay. So once you get through and you calculate in that eight week period for forgiveness and you count up your payroll and you count up your other non-payroll expenses, you're still not done yet. There is a two prong tests that you're going to have to get through in order to get everything that you wanted to be forgiven in this grant. You're going to have to go through a head count reduction test and you're going to have to go through a salary reduction test. The head count reduction test, that is a proportionate test. And the salary reduction test is a dollar for dollar reduction test and so let me try to explain it a little bit quickly.
If you have a certain headcount of employees, let's say your company only has two employees and after the eight week period, you only have one employee, so you had a 50% reduction and headcount. If you did that, your loan forgiveness amount would be cut in half because you did not keep the same amount of head count of people that you had. There is a somewhat complicated terminology used which is a full time equivalent person. And so somebody that is a part time person, you might have two part-time people might equal one full-time equivalent person. That headcount, if you want to get 100% percent forgiveness, needs to be the same. If you drop the head count, then there is a proportionate calculation that will reduce your forgiveness.
After you get done with that, you then go to the second test, which is the salary reduction. You are not allowed to reduce any person's salary by more than 25%. If you do reduce the person's salary by more than 25%, whatever dollar amount that is that falls below the 25% for each person or each salaried person that you have, you have to then reduce after the head count reduction test is done, you then reduce that dollar-for-dollar for the amount of salary for any person that's over 25%. Now, there are certain calculations that are going to be tough with this, for example, you might not have the same employees working for you that when you started before the covered period test began. So the question is, if I hire a new employee, am I still good with this? Do I still meet the head count reduction test? Do I still meet the salary reduction test and we believe the answer to that is yes, but it's on a case-by-case basis.
Henry Rinder: So it's surely, this test, the two criteria test, shows and demonstrates how the whole program is designed to maintain the labor force at the same level with some possible salary reductions to sort of help a loan during the COVID-19 crisis. But needless to this is complex and it was a good explanation. Can you then go to the next slide and address what is the process of applying for the forgiveness?
Dan Kruesi: Okay, so even though this plan is done through the federal government and the Small Business Administration, the loan process when you go to apply for the loan is done through a bank. The same forgiveness process is also done through the same bank or banker that you actually started this program with and who gave you the loan.
So what you need to do is after that eight week period is over with, you need to then apply with your lender who is your banker for this forgiveness piece. And you're going to have to supply documentation verifying with support what the full time employees are from the start to the finish to basically satisfy the headcount reduction test. You're also going to have to provide them with documentation showing the pay rates during that covered period.
When it comes to your other non-payroll expenses such as mortgage obligations or utilities or rent, you're going to actually have to show documentation showing those payments actually did occur and the lenders are required by the law to give you an answer with your loan forgiveness within 60 days of receipt of the application.
Henry Rinder: So maybe Tom, if you could address this question, if you were Schedule C and your forgiveness amount is based on what you made in 2019, what do you think would be a documentary support that you would need to submit to a lender to demonstrate your qualification for the forgiveness if you're a schedule C?
Tom Cole: Well, if you're a Schedule C, Henry, with no employees, you're actually just showing them the same Schedule C from 2019 that you provided for your application. So they're not looking to see if you took the money home. They're just saying we'll forgive you for that. They're protecting the self-employed individual's payroll check. If you have payroll involved there, you'll have the same situation if you have employees under your Schedule C, you'll have the same situation as Dan described, but you will have to get the same payroll information and whatnot for that forgiveness portion.
Henry Rinder: Amanda, if we can go to the final slide, we're going to open to questions. And frankly, I'm going to tee off with pretty complex question that we have seen surfacing in previous webinars and that is we have the EIDL loans and we have the PPP loans. We also have the payroll tax deferment and we have a payroll tax credit. And the question that often comes is, how do these programs overlap? There's an up to $10,000 out grant in the EIDL loans, the Economic Injury Disaster loans. And there's also a payroll tax credit that's was already enacted as well into law as a way to help with the cashflow in the deferment. So Tom, perhaps you can tee off and see how you can explain this overlap?
Tom Cole: It's talk about retention credit real quickly. I mean that's 50% of your $10,000 per employee wages that you could take as a tax credit directly on your 941, your employment tax form. The problem with the retention credit is there's some hurdles. You have to look back one year and see if you had a decline in [inaudible 00:21:49] of 50% or more to a similar quarter to the prior year. So you have to start to really show that you're in real trouble in order to accomplish that credit. Now, as far as getting the credit for, "I'll bring in all my family in to work." It doesn't work for family members of the owner. So, they are specifically disallowed from that credit.
Now currently there's also a deferral of the 6.2% employer's side of FICA. That deferral can be used as we're going right now, so everybody should really be deferring the employer portion of their FICA. And that goes up to the point of forgiveness. So we have that, that's a live deferral right now that you should be taking.
The EIDL loan:
Yeah, the $10,000 if you were lucky enough to receive that grant, is a forgivable, sorry, tax break but forgivable $10,000. Not everybody has gotten that $10,000. But if you've got forgiveness from that EIDL front end loan, you have to reduce your forgiveness on the PPP loan.
Henry Rinder: So it reduces it dollar for dollar. If you got it on the EIDL, it reduces whatever the amount that would be forgiven under the PPP loan. Nonetheless-
Tom Cole: That's correct.
Henry Rinder: the loan under the EIDL, you can also get the loan under the PPP. And those do not sort of prohibit people from applying for one or the other. Isn't that correct? You can do both?
Tom Cole: Yes, you can do both. And you can also choose to refinance your EDIL loan within your PPP loan. But the $10,000 is not a double dip anywhere. You can't get the $10,000 and the full PPP forgiveness.
Henry Rinder: Thank you, Tom. I'm all done. Let's open the floor and see what kind of questions we get from the audience.
Amanda: Yeah. So there are actually a lot of questions around this one and one that actually came up a number of times, it's kind of a combination. People are asking if cell phones and cars and car is in terms of, is it a lease, is it car repair, is it gas? Do those count as part of the PPP loan? And does that extend to their employees? So, not just themselves but also the employees.
Tom Cole: I could take that Henry, if you want.
Henry Rinder: Please. The gas, you'll see transportation under utilities and I've seen it referenced in some of the guidance, but that's really going to be your gasoline for your vehicles, for your business vehicles. Auto leases I think are under the equipment [inaudible 00:24:43] pole. Was there something else in there ma'am, that was asked?
Amanda: Repairs and then the cell phones.
Tom Cole: Cell phone, yes as long as you had your cell phone service prior to February 15th. I would be very cautious about car repairs. I don't think that's one of them.
Henry Rinder: So, Tom or Dan, are you saying that the car rentals, meaning leases on let's say corporate automobiles, would fall under what you would consider rent and therefore be a part of the forgiveness amount? Is that what I'm hearing?
Tom Cole: Yes. On the 25% portion.
Dan Kruesi: You also have to realize Henry that we're still waiting for regulations on the forgiveness. We're still dealing with the statutory forgiveness provisions. The SBA and the U.S. Treasury have not come out with regulations. So if we give you an answer and say yes for something like that which might appear to be gray, there's no guarantee that in the regulations they might not come out and specifically address like that.
Tom Cole: Yeah, that's right Dan.
Henry Rinder: Excellent point.
Tom Cole: Those should be out any day now, yeah.
Henry Rinder: So Amanda, next question.
Amanda: Sure. So one of the questions that was asked was for self-employed individuals is health insurance a payroll cost or non-payroll cost?
Tom Cole: Health insurance for your employees as a payroll cost. Health insurance for the self-employed individual is not.
Dan Kruesi: Yeah, so what's interesting about that is if you read the regulations that came out for self-employed people, they're not allowed to include were extra fringe benefits. Whereas somebody that would receive a W2 but still be a shareholder in a C corp or an S corp would be allowed to include those extra costs. Self-employed individual will not be allowed to.
Henry Rinder: Good point. Dan and Tom. Amanda, next question.
Amanda: Yeah. So someone asked, is there a maximum on 401k contributions. For example, if the maximum contribution is $26,000, do you have to divide that amount by 52 and multiply by a certain number to determine the amount to be paid out similar to wages?
Henry Rinder: So, let me just clarify this for the panel. I think the suggestion is that somehow the contribution amount itself, not the corporate match, but the contribution itself becomes a qualified cost. Is that correct, Tom?
Tom Cole: That's a deferral of payroll but it's part costs. So it's part of your gross pay. Any deferral, the 25-26,000. You agree, Dan, on that?
Dan Kruesi: Yes, I agree.
Henry Rinder: Sorry, but we talking about just increasing the payroll up to a 100k pro rata anyway, so you cannot go over that number, correct? I mean you have the top number. So this can only help people that are making less than a 100K, perhaps.
Tom Cole: Yeah. And one of the questions I've been hearing, Henry, is, "If I could use a defined benefit plan and take all the money and load up on my defined benefit plan?" I just caution anybody that's trying to take advantage of this system at all to be very careful because they're going to come looking and the intent is payroll.
Henry Rinder: And we already had some indications that both SBA and Treasury not looking kindly at abuse in this area, correct? Can you talk to that point for a few seconds?
Dan Kruesi: And I know that Schumer who actually was part of one of the people that actually crafted this wants an investigation on some of the abuses that might've occurred in this. I don't think that's going to be geared towards smaller real small businesses, but there are some businesses that are on the gray whether they really have 500 employees or less than 500 employees. I think that is going to be the area where they're going to be scrutinizing. You're starting to see a lot of negative coverage happening for some companies already they've already given back their loan money.
Henry Rinder: Yeah, I've seen the commentaries kind of pointing to public companies that have taken advantage of it. And on both sides, those arguments, whether they were eligible or not and even if they were eligible, whether it was appropriate for them to take the money. But truly to your point, that seems to be who they targeting in terms of concern, in terms of abuse of this program.
It is now 12:30 and this webinar is going to come to a conclusion momentarily. I just wanted to close with a comment that to the extent we have not answered your questions, we're going to consider your questions and we got to reply to you directly. And I wanted to thank Amanda for hosting it for us and Tom and Dan for doing a terrific job. Thank you very much. And this will conclude our webinar.