PPP Loan Forgiveness PPP Loans $513 billion approved loans - - PowerPoint PPT Presentation

PPP Loan Forgiveness

CAPATA PRESENTS

CAPATA CPA | 2020

PPP Loans

$513 billion approved loans $118,000 national average loan amount 4.4 million approved loans

Loan Forgiveness

HOW DOES IT WORK?

Loan received is equal to 2.5 times average monthly payroll Spend Period At least 75% of funds used must be attributable to “Payroll Cost”

CAPATA CPA | 2020

Supporting documentation submitted to the lender to apply for loan forgiveness Up To 25% attributed to Rent, Utilities, and Mortgage interest

Agenda

BORROWER CERTIFICATION PAYROLL COST DEFINING ELIGIBLE EXPENSES & QUALIFICATION CALCULATING LOAN FORGIVENESS CAPATA CPA | 2020 STEP-BY-STEP CASE STUDY IRS UPDATE APPLYING FOR LOAN FORGIVENESS & DOCUMENTATION Q&A

Borrower Certifications

CAPATA CPA | 2020

April 26th – SBA released guidance regarding borrowers who applied before April 26th and repay 100% of the loan prior to May 18th will be deemed to have acted in good faith What Does This Mean? – Documentation is KEY from applying to receive the money to applying for forgiveness

Good-faith Certification

CAPATA CPA | 2020

Any borrower, with its affiliates, who received PPP loans less than $2 million will be deemed to have made the required good-faith certification. This safe harbor will promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.

Payroll Costs During 8- week Covered Period

CAPATA CPA | 2020

Covered Period - Alternative Covered Period

Cash compensation Non-cash compensation Owner compensation

Eligible Expenses: Payroll Cost

CAPATA CPA | 2020

Wages paid which are subject to Social Security and reported on a W2 (IRC 415) Sick leave pay for which a credit is allowed under Families First Coronavirus Response Act is not eligible Portion of group health benefits paid by the employer Profit Sharing or 410(k) match prorated for the 8-week period Max wage per employee over 8-week period is $15,384 Employer Share of Social Security and Medicare ARE NOT ELIGIBLE EXPENSES State or Local taxes assessed – State Unemployment Tax $100,000 x 8/52

Eligible Expenses: Interest, Rent & Utilities

Mortgage Interest is eligible, but specifically:

Mortgage is a liability of the PPP loan recipient Mortgage in place before February 15th No prepayment of interest Interest only, no principal

Rent is eligible but must be “obligated under a leasing agreement in force before February 15, 2020”

Specifically “Rent obligated” (Does not allow prepayments) Copy of mortgage or lease may be necessary

Eligible Utilities specified, but only if service began before February 15, 2020

Electricity, gas, water, transportation, telephone and internet

Non-payroll forgiveness limited to 25%

Eligible Expenses: Qualification

Payroll/bills PAID with PPP funds for periods before the Covered Period do not qualify

CAPATA CPA | 2020

Nonpayroll costs that are eligible for forgiveness must be incurred during the Covered Period and paid by the next regular billing date, even if that date is after the Covered Period NO Prepayments Segregation of Funds is PREFERRED but NOT REQUIRED

THE 3 OBSTACLES TO LOAN FORGIVENESS

Any amount not used will not be forgiven by any means–the money must be spent to be forgiven Number of Full-Time Equivalent (FTE) employees has the most significant impact on forgiveness

• f spent money

Reducing pay for any employee by more than 25% reduces forgiveness CAPATA CPA | 2020

Breaking Down this Calculation

Step 1: Determine the eligible cost

Eligible cost: payroll cost, payments of rent or mortgage interest, covered utility payments

Calculate average number of FTE’s during covered period Calculate average number of FTE’s during base line period Divide covered period by baseline period Step 2b: Step 2a: Determine salary/wage reduction in excess of 25% per FTE between covered period from base line period for FTE position

CAPATA CPA | 2020

STEP 1 EXAMPLE: AN ISSUE FOR EVERYONE

Step 2a: Reduction Related to Salary & Wages (this is for employee A)

CAPATA CPA | 2020

Step 2a Example: Salary/Wage Reduction Greater Than 25% Per Employee

CAPATA CPA | 2020

Step 2b: Reduction in FTE Employees

Compare average number of FTEs per month during the covered period to either:

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But how are average number of FTEs per month calculated?

February 15, 2019 – June 30, 2019 January 1, 2020 – February 29, 2020 Tip: Go with the smaller number

Average Full-Time Equivalency Reductions

Employer’s forgiveness reduces when there is a reduction to the average full-time equivalent (FTE) employees within the Covered Period

• pposed to a past reference period, unless the new FTE Reduction Safe

Harbor applies to the employer.

CAPATA CPA | 2020

Note: The calculation is capped at 1.0 per week. Employees who work 40 hours or more a week, automatically receive 1.0 weekly, and employees who work less than 40 hours a week receive 0.5 weekly.

To calculate the FTE:

Enter the number of hours paid each week per employee throughout the Covered Period or APCP Divide this amount by 40 Round to the nearest tenth

Exceptions to FTE Reductions

An employer is not penalized for FTE reductions due to:

CAPATA CPA | 2020 Reductions during the Covered Period of APCP related to an employee who was fired with cause, voluntarily resigned, or voluntarily requested a reduction of hours Reductions to any position when the employer has made good-faith, written offers of rehire that were rejected by the employee(s) during the Covered Period or APCP

FTE Reduction Safe Harbor

The PPP safe harbor exempts employers from losing forgiveness based

• n reduced FTE employee levels. The safe harbor applies when both
• f these conditions are met:

CAPATA CPA | 2020 The employer reduced FTE employee levels within the period beginning

• n February 15, 2020 and ending on April 26, 2020

The employer restores FTE employee levels that existed in the pay period including February 15, 2020 no later than June 30, 2020

Step 2b: Calculating Avg. #

• f FTEs Per Month

CAPATA CPA | 2020

Step 2b Example: Reduction in FTEs

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Step 3:

Borrower must apply for forgiveness (See SBA Application) Forgiveness without documentation is Prohibited Documentation verifying the number of FTE employees on payroll and pay rates for the covered period and base line period

Payroll tax filings reported to the Internal Revenue Service and State (FORM 941, DE 9 / DE 9C) CAPATA CPA | 2020 Minimal impact due to cancelled checks, payment receipts, bills, payroll registers, etc., delay PPP loan proceeds being disbursed

IRS NOTICE 2020-32

On April 30, 2020, the IRS' stated their position on the PPP loan forgiveness. Income from forgiveness of PPP loans is to be excluded from gross and taxable income. IRC Sec 162 provides for a deduction for “ordinary & necessary” business expenses paid with forgiven funds is not tax deduction. Covered rent, utility, interest, and payroll costs are all considered ordinary and necessary under IRC Sec. 162. The IRS is only taking this position for the amounts forgiven, and not amount of unforgiven PPP loan proceeds. Expenses paid with unforgiven PPP loans are deductible.

This presentation is intended for educational purposes only and do not replace independent professional judgment. Statements of facts and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of CAPATA, its cosponsors, or its committees. CAPATA does not endorse or approve, and assumes no responsibility for the content, accuracy or completeness of the information presented. Attendees should note that sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.

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Q&A

SAL KUREH

Partner

LEO ZHANG

Staff Accountant

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