The CARES Act enacted into law on March 27, 2020 contains provisions which enables employers with fewer than 500 employees (per location) to apply for SBA backed loans with the intention that the loan proceeds would be used for employer “payroll costs”, rent/mortgage interest, and utilities. These Paycheck Protection Program (PPP) loans can be partially to completely “forgiven” and turned into non-taxable “grants” IF the employer spends at least 75% of the SBA loan proceeds on “payroll costs” (defined below), with the remainder spent on rent/mortgage interest and utilities during the 8 week “forgiveness period” which begins on the day in which the employer receives any portion of the PPP loan proceeds.
The emphasis on PPP loans has turned from “how do we apply and get the loan”, for many employers, to “how do we optimize the forgiveness portion” of the PPP loan during the 8 week “forgiveness period”. FOR THOSE EMPLOYERS WHO ARE APPLYING FOR ROUND 2 OF THE PPP LOANS, EXPECTED TO START THIS WEEK, PLEASE READ ACCUPAY’S PREVIOUS PAYDAY EMAILS ABOUT PPP LOANS AND INFORMATION NEEDED BY SBA LENDERS TO PROCESS YOUR REQUESTS. This PayDay will discuss the “forgiveness details” of the PPP loans, along with how to account for and document your costs to your SBA lender during the 8 week “forgiveness period.”
THE FORGIVENESS PERIOD
Treasury has advised that the 8 week “forgiveness period” starts with the day you receive the PPP loan proceeds in your bank account and ends 8 weeks later. A good starting point for planning for the disbursement of costs eligible for forgiveness is to identify the exact 8 week “forgiveness period”—-starts with day you get the PPP proceeds and ends exactly 8 weeks later. Once you have identified the exact 8 week post loan time frame, you can then start a spreadsheet or other accounting procedures to “track” costs eligible for forgiveness and “adjust/tweak” as needed to actively monitor the progress of your eligible costs during the 8 week time frame. It is very important that you “fit” eligible costs into the 8 week period as best you can, in order to optimize forgiveness of the PPP loan proceeds.
START WITH A PROJECTION OF ELIGIBLE NON-PAYROLL COSTS
Since “payroll costs” are the most complex concept as to potentially forgivable costs during the 8 week “forgiveness period”, we suggest that you make a list of non-payroll eligible costs and project how much they are/when they are due, during the 8 week forgiveness period. These eligible non-payroll costs are:
- Rent—-Clearly this includes rent on your business office/facilities/real estate—–it is unclear whether rent on personal property (say equipment or vehicles) is also included—-Treasury needs to:
- clarify what costs are included in “rent”—-I have seen it suggested that “capital leases” are not considered “rent”—-at this time, I would not count on rental costs beyond rental of real estate (with the lease agreement being in place as of February 15, 2020.)
- Mortgage interest—-If the employer has a mortgage on their buildings/real estate, interest paid during the 8 week forgiveness period is eligible for forgiveness. Treasury needs to clarify whether other business interest is included in this definition.
- Utilities-The CARES Act and interpretations indicate that electricity, water, gas, phones, internet services and “transportion” are examples of included utility costs. We presume that cell phones also be included as a utility, as well as scavenger services. Transportation is totally unclear—is it “fuel” for trucks/vehicles, mileage reimbursements to employees, or ???—-Treasury needs to define what a “utility” is, in particular what they mean by “transportation” as a utility.
Project what you will spend for 8 weeks of the above costs, and make sure you start accounting for them from day 1 of loan proceeds and 8 weeks thereafter. This will give you a pretty good idea of your non-payroll eligible costs to pay for the 8 week period—–make sure you actually pay those costs during the 8 week “forgiveness period.”
As a “general rule” and subject to further clarification, costs for rent, interest and utilities above 25% of the PPP loan proceeds will not be forgiven, since Treasury has stipulated that at least 75% of the PPP proceeds must be spent on “payroll costs” to optimize forgiveness.
PPP LOAN PROCEEDS LESS ELIGIBLE COSTS
For optimum forgiveness of the SBA loan debt, an employer should spend a minimum of 75% on “payroll costs” during the 8 week “forgiveness period.” For starters, it is important that you actually run payrolls/fund them for at least 8 weeks during the 8 week period following the day you receive your SBA loan. Review your scheduled paydates and make sure you process and pay for at least 8 weeks of payroll during the 8 week “forgiveness period” which you have identified as described above. This may include running a partial, extra, etc payroll during the 8 week period—-If you only pay for 6 weeks of payroll with 2 more weeks right after the end of the 8 week period of time, that is poor planning—-Treasury has not defined whether is it 8 weeks of payroll “paid” or “incurred” based on pay periods. To be safe, “pay” at least 8 weeks worth during the 8 week “forgiveness period.”
Making the above cost projections will provide you with an estimate of “payroll costs” you may choose to use as your “target” to pay during the 8 week forgiveness period.
SPECIAL NOTE—-We hope that Treasury adjusts the “forgiveness period” such that it does not require that restaurants, healthcare provides, local gyms, etc spend money to hire/rehire employees with nothing to do since the small business or non-profit is still not open when the 8 week period starts. This problem should be “top of mind” to Treasury since it has been well publicized—perhaps the 8 week period for “shut-down businesses” does not start until they can reopen, or the 8 week period turns into a 12 week period for certain types of industries——BUT that is pure speculation on my part, and at this point the law is that the 8 week period for “counting costs” for forgiveness starts the day you receive the loan.
WHAT IS INCLUDED IN PAYROLL COSTS?
Payroll costs eligible for forgiveness at the end of the 8 week post loan period are exactly the same costs which were used to calculate your PPP loan amount. They are:
- Gross compensation paid to employees, before any deductions—–include reported tips in grosscompensation and we believe a pastor’s housing allowance as well (not yet clear). This amount is the total amount you pay to your employees BEFORE any deductions for insurance, retirement plans, garnishments, taxes, etc—-this is your “starting point”!—HOWEVER, you must “cap” gross compensation to any employee who earns over $100K per year to exactly $100K—and the “cap” must be ratable for the 8 week period. $100K divided by 52 weeks equals $1,923 per week, $3,846 per biweekly pay and $15, 385 for total compensation for an 8 week period—-An employer can not “count” over $15, 385 per employee as “payroll costs” for forgiveness during the 8 week forgiveness period. If you pay any bonuses during the 8 week period, a portion of the bonuses may not qualify for forgiveness due to the $100K per employee cap.
- Employer share of medical benefits/group insurance—-Employers can “count” their share (not employee shares/deductions) of group insurance, HSA matches, dental, vision, etc benefits as “payroll costs” during the 8 week period. This includes 100% of those benefits for employees who earn beyond $100K and are “capped”—Benefits for those employees can be counted (NOTE—-If you are a S corporation, the medical insurance paid or reimbursed for 2% or greater “shareholder-employees” (owners of S corps on the payroll) should be included in “gross compensation” wages, not as fringe benefits. Make sure the S corporation employer actually pays those premiums, including reimbursement, during the 8 week forgiveness period.
- Employer share of retirement plans—-Payroll costs include the employer share of retirement plan funding of 401k, 403b, 457 and Simple IRA plans. Do not count the employee shares “elective deferrals” as part of your “payroll costs”. For employers who fund retirement plan costs annually and often after year-end calculations by TPA’s, we suggest that you talk with your plan administrator about actually funding 8 weeks worth of employer retirement funding during the 8 week forgiveness period. We have spoken with TPA’s who are aware of this.
State and local taxes assessed on employee compensation—-we do not believe this refers to the employer’s payment of state/local employee withholdings, since those are already included as gross wages/compensation. Treasury has not clarified the definition of this category of payroll costs but we believe it is state unemployment taxes plus any other employer-paid taxes/assessments which exist in some local jurisdictions.
KEEP TRACK OF YOUR ACCUMULATING PAYROLL COSTS AND COMPARE IT TO YOUR PPP SPENDING GOALS ON YOUR SPREADSHEET!
OPTIMIZING PAYROLL COSTS WHICH ARE FORGIVEN AND TURNED INTO A NON-TAXABLE GRANT
Once you have totaled your “payroll costs” paid/incurred during the 8 week period following your SBA loan deposit, the portion of your payroll costs which will not be forgiven is based on 2 types of “reductions” to forgivable payroll costs”, which are as follows:
Your FTE’s (full-time equivalents”) employed during the 8 week period as a ratio of FTE’s during one of the following 2 timeframes (you select the lowest FTE timeframe)—-February 15-June 30, 2019 OR Jan 1-February 29, 2020—–Calculate your “lowest” FTE timeframe from these 2 options—–EXAMPLE—-An employer has 40 FTE’s during the 8 week “forgiveness period” and had 45 FTE’s during the period Feb 15-June 30, 2019 and 35 FTE’s Jan 1-Feb 29, 2020—–Total payroll costs during the 8 week period is $200,000. If the employer chooses the 2019 FTE period of 45 FTE’s, then 40/45 X $200,000 of payroll costs would NOT be forgiven, or $17,778 not forgiven.
By choosing the lower FTE period of 35 employees in Jan-Feb of 2020, 40/35 X $200,000 of payroll costs means all the payroll costs of $200,000 will be forgiven. So the number of your FTE’s during the 8 week forgiveness period will be very important in determining what percentage of your payroll costs spent during the 8 week period will not need to be repaid on the SBA loan. This will be a “challenge” for businesses not open when they receive the SBA loan proceeds since rehiring/hiring employees when your business is shut down does not make a lot of sense.
IMPORTANT PROVISION IN CARES ACT—–An employer who rehires employees who were terminated during the period Feb 15-April 26, 2020, with such hiring/rehiring occurring by the end of the 8 week period can “replace” or treat those employees as included in the employer’s FTE count for all payroll periods during their 8 week forgiveness period. With this provision, it would seem to enable an employer to increase the percentage of payroll cost forgiveness if they rehire/hire employees back by the end of the 8 week period, instead of immediately hiring employees when the business is closed. Even though hiring towards the end of the 8 week forgiveness period will increase the forgiveness percentage, it will still not increase the payroll costs actually spent during the 8 week period, which are eligible for forgiveness.
The amount of your payroll costs which are forgiven at the conclusion of 8 weeks will be reduced by the amount of any employee’s salary or wages (pay rates) which are decreased by greater than 25% from their previous salary/payrates paid during the 4th quarter of 2019 (just the excess over the 25% reduction, not the amount actually paid). An important provision in the CARES Act indicates that IF those employee salaries/wages are restored to their previous pay levels by the conclusion of the 8 week period, then forgiveness will not be reduced since pay levels have been restored to their previous levels
FOOD FOR THOUGHT (and perhaps Treasury clarification!) AS TO PAYROLL COST FORGIVENESS STRATEGIES
- If you are a business owner or spouse who has not been “on the payroll”, consider putting yourself on the payroll during this 8 week period of time at a “reasonable” amount based on the value of your services.
- If you generally compensate the owners’ spouses/kids for actual work performed, but typically do it at year-end (such as for 401k funding), you likely wish to pay your spouse/kids for 8 weeks worth of payroll costs at similar rates to 2019 levels—-get those typical year-end payroll costs ratably into the 8 week period.
- S corporation shareholder-employees who have medical insurance paid by a S corporation and reported at year-end on their W-2, should pay 8 weeks worth of insurance premiums during the 8 week period to make sure those costs are included (do NOT withhold Fica/Medicare taxes as a general rule).
- If the employer funds retirement plans annually, perhaps with calculations “accrued” and paid after year-end, talk with your plan TPA about funding 8 weeks worth of costs during the 8 week period.
- Make sure you understand that a bonus paid during the 8 week period may be “capped” as to forgiveness if the employee’s annual compensation with the bonus, based on the 8 weeks of total compensation, exceeds $15,385 in total for the 8 week period of time (which is equivalent to $100K for 8 weeks).
- As to trying to increase your FTE counts during the 8 week forgiveness period, remember that 2 30 hour per week employees are 2 FTE’s as compared to an employee working 60 hours per week, who is 1 FTE—-At this time, the law seems to follow ACA law’s definition of a FTE, which is based on a 30 hour average workweek.
- As you hire new employees who qualify for the work opportunity tax credit (employees who are veterans, on food stamps, public assistance), consider screening new hires for the WOTC federal tax credit. This does not apply to “rehires” of former employees.
ACCOUNTING AND RECORDKEEPING DURING THE 8 WEEK PERIOD OF TIME FOR FORGIVENESS
Some employers are setting up brand new bank accounts in which they are depositing the PPP loan proceeds, and from which they are paying for all payroll costs and other eligible costs (rent, utilities, etc), and as such their bank balance will continually report the amount of remaining/unspent SBA loan proceeds. This may be a useful “visual” for some employers to manage expenses and track the usage of their PPP loan proceeds.
Many others we have spoken with are putting all “eligible costs” on a spreadsheet, showing the original amount of the PPP loan proceeds and then entering the costs of payroll and other eligible expenses on the spreadsheet. Whichever method, or any other method which tracks the usage of the PPP loan proceeds (could be a yellow legal pad of paper if you wish to be “old school”) you use, be prepared at the end of the 8 week period to provide supporting documents to your SBA lender to show costs which qualify for forgiveness.
Make it easy for the banker to review your calculations and supporting documents for the loan forgiveness calculation at the end of 8 weeks (sort of like preparing for an audit—lay it out in an orderly fashion for inspection!!). Stay up on future clarification from the Treasury/IRS as to examples of “forgivable costs”, since some of the items are simply not clear. We also suggest that you ask your CPA or business consultant for ideas on tracking PPP costs and helping you monitor and optimize the amount of forgiveness on your SBA loan.
If you have questions or ideas on any aspect of “forgiveness”, please email firstname.lastname@example.org. This PayDay is based on our understanding of the forgiveness provisions of the PPP loans, much of which has not been clarified. We will continue following developments in this area as FAQ’s and Treasury interpretations are released.