May 11, 2020

GBQ’s COVID-19 response team provides answers to questions submitted during the webinar COVID-19: SBA PPP Loans – Forgiveness Updates, Myths and Additional Scrutiny presented on May 6, 2020.

1099

1. We are an employer, but have one 1099 contractor so I was wondering if we could use that cost as part of our payroll? Can we use the cost of a 1099 contractor as payroll?

    • No. The idea is that 1099 contractors can apply for their own PPP loan.

 

75/25 Rule

2.  Can you please re-state the formula for computing the percentage of payroll?

    • Payroll Spent / 75% * 25% = Allowable amount of non-payroll expenditures for debt forgiveness purposes

 

Cash vs. Accrual

3.  What is the current thinking on the key date for when payroll costs are counted as part of the 8-week forgiveness period:
a.  The pay period end date (so when hours are worked)?
b.  The date the payroll company pulls funds out of a client’s bank account?
c.  The date employees are paid (typically the day after).

    • Updated 5/19/2020 – Payroll cost will be based on when paid or incurred per the Debt Forgiveness Application. From the application – “Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred, but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period), are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).”

 

Documentation

4.  Has there been any guidance as to the types of reports that will need to be submitted for a loan forgiveness audit?

    • There has not been any guidance issued. It’s likely the type of analysis and documentation will vary by company but could include:
      • Projections of various scenarios of what business will be for the next several months, demonstrating that without the PPP loan funds the company would have needed to lay off employees or be unable to pay certain expenses.
      • Projections that demonstrate, even if employees were not laid off, that without the PPP loan funds, the company would have had to borrow against a line of credit, dip into reserves that may be needed in the upcoming months or tap into other resources that are necessary to support the ongoing operations of the business over the longer term.
      • Evidence of uncertainty regarding operations and cash flows, such as accounts receivable collection issues that could affect cash flow.
      • Correspondence from clients, customers, and vendors about changes in projects, payment cycles or access to supplies, etc.
      • Evidence of the difficulty in hiring workers resulting in increased labor costs including retention or signing bonuses and shift premiums to attract workers from unemployment back to work.
      • Updated 5/18/2020 – Page ten of the application lists, in detail, the documents required to be submitted to the lender and those that should be kept in the company’s files. Click here for the application.

 

FAQ # 31

5.  Regarding 5/14 safe harbor, why not just keep the loan? If at the end of six months (when more time and info prevails) if your business ends up not being harmed, why not just pay the loan back and be safe?

    • The FAQ 31 and 37 indicate that if you believe you cannot certify, in good faith, that due to economic uncertainty the loan was necessary to support operations, then you should return it by May 14th. We do not know what the potential liability or penalties could be for not returning the money by May 14th. Each company will need to assess that risk individually.
    • Updated 5/19/2020 – Further, FAQ 46 has further refined this answer to indicate that companies under $2 million (in aggregate loans applying the affiliation rules) will be deemed to have certified in good need. See here, page 16, FAQ 46 for more detail.

 

FTEE

6.  For question 40, if we are able to reduce our headcount if an employee refuses an offer to return, how do we treat that person in a calculation in the ACA’s FTEE definition? For example, if they were a full-time employee it’s simple, but if they were a 15-hour per week employee, do we just remove a half employee from our “before” count?

    • Updated 5/19/2020 – The Debt Forgiveness Application indicated that the FTEE will be based on 40 hours. It also provided an alternative calculation as described below:
      • For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the borrower.

7.  For the FTEE count, is that based on pay dates since the view is payroll cost cash basis?

    • Updated 5/18/2020 – The FTEs are to be counted based on a weekly average and should be calculated either according to the original 8-week period or Alternative Payroll Period (see described above).

8.  Can an employee on maternity leave be counted in FTEE calculation?

    • Updated 5/18/2020 – The Debt Forgiveness Application does indicate an exception for any employees for which the “Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period, which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours.” It does seem like maternity leave may apply to this exemption.

9.  For the forgiveness FTEE baseline and calculation, do you have to include temporary workers in FTEE or is it just full-time employees?

    • If the temporary workers are on your payroll and will get a W-2 from your company, then they are included in your FTEE baseline calculation. If they are employed through a temporary agency, then it does not appear that those would count as your employees. There is guidance regarding PEOs, but no guidance related to temporary employees.

10.  Does an S-Corp owner who is paid a W-2 wage count as an FTEE?

    • We believe the owner would be included in the FTEE count.

 

FTEE / 25% Reduction

11.  For the 13-week vs. 8-week PPP period, is the weekly average to be used? The comparison between Q1 and the 8-week period is problematic.

    • The language in the CARES Act says the average compensation, and thus we believe that it would be an average over that whole time period.
    • Updated 5/18/2020 – The Debt Forgiveness Application does the comparison by converting salary employees to an annual figure and hourly employees it compares the average hourly rates during the time period.

 

Health Insurance

12.  Does payroll include healthcare, dental, and vision?

    • Yes, we believe all the insurance costs are included in payroll.

13.  Do health reimbursements under an HRA plan qualify as medical costs along with health insurance premiums? Is the cost of dental included as well?

    • We believe that health reimbursements under an HRA plan would qualify if they were incurred and paid during the 8-week period, which would include dental as well.

14.  If health insurance premiums are included in the compensation part of PPP forgiveness, does that still need to adhere to the $100,000 annualized income, or can this be in addition to the max income?

    • Updated 5/18/2020 – Health insurance payments are in addition to the $100,000 annualized income limit. The $100,000 only applies to cash compensation.

15.  Does “payroll” include other compensation such as health insurance?

    • Updated 5/18/2020 – Yes, health insurance is in addition to cash compensation.

 

ESOP Interest

16.  Does ESOP loan interest qualify as a valid non-payroll PPP expense?

    • Only interest on mortgage (mortgages entered into prior to 2/15/2020) qualifies as a valid expense for forgiveness. However, interest on other loans (entered into prior to 2/15/2020) is an allowable use; it will just not qualify for forgiveness.

 

LLC

17.  For clarification purposes, when you are using the term “partner” does that include LLCs being taxed as a partnership?

    • Yes, it would include LLCs being taxed as a partnership.

 

Main Street Lending Program

18.  On the Main Street loan size, “including undrawn committed debt”, does that mean you must subtract the debt from the 4x or 6x EBITDA?

    • Under the current terms of the loan facilities, the maximum loan amount is the lesser of a set amount (either $25MM or $200MM depending on the facility of the loan) or an amount that, when added to existing and undrawn debt, does not exceed 4 or 6x EBITDA. So yes, essentially you would subtract your existing debt from 4x or 6x EBITDA to calculate this threshold.

19.  Can the Main Street program proceeds be used for capital expenditures or software development that would have been suspended due to COVID-19?

    • Under the current guidance, the loan proceeds can be used for any business-related purpose, such as capital expenditures or software development. The borrower will need to make certifications that they will refrain from using the loan proceeds to repay other loan balances or other debt (except for mandatory principal payments).

20.  With the Main Street Program, are you eligible for the loan if your 2019 EBITDA is at a loss?

    • We need more guidance in this area. It is important to keep in mind that the Main Street Lending Program is intended for businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under the current terms of the loan facilities, the maximum loan amount is the lesser of a set amount (either $25MM or $200MM depending on the facility of the loan) or an amount that, when added to existing and undrawn debt, does not exceed 4x or 6x EBITDA. If EBITDA is negative, this then seems to suggest that your maximum loan amount would be negative also and you would not be eligible.

 

Miscellaneous

21.  We have the PPP loan proceeds in a separate bank account. Do we have to spend on payroll, rent, and utilities directly out of this account or can we reimburse our main operating checking account for these items? Both accounts are in the name of the company that took the PPP loan.

    • You can reimburse your main operating checking account for those items. The important part will be tracking the eligible expenses so you can substantiate the business purpose of the expenses.

 

Other Interest

22.  Forgiveness for interest on floorplan debt, as it pertains to the auto dealership industry.

    • Only interest on mortgages (specifically on mortgages entered into prior to 2/15/2020) qualifies as a valid expense for forgiveness. However, interest on other loans (entered into prior to 2/15/2020) is an allowable use; it will just not qualify for forgiveness.

 

Payroll

23.  If our loan was funded end of April and we still aren’t allowed to open, can we give bonuses to employees to use the money for payroll?

    • Bonuses are included in the definition of payroll. We do think that having a business justification and documenting that reasoning for the bonuses (i.e. retaining employees while awaiting opening) is a best practice.

24.  Can an LLC that has been taxed as an S-Corp claim owner distribution (up to $100k per owner) as forgivable payroll? We’re neither a sole proprietorship nor partnership.

    • We do not believe S-Corp distributions can be included in the payroll calculation.

25.  Can we use temporary staffing costs in personnel costs?

    • If the temporary workers are on your payroll and will get a W-2 from your company, then they are included in your payroll costs. If they are employed through a temporary agency, then it does not appear that those would count as your payroll. There is guidance regarding PEOs, but no guidance related to temporary employees.

26.  BWC Ohio annual premium is due. Does this count as a payroll expense? Do worker’s compensation payments qualify as a state tax on compensation?

    • Updated 5/19/2020 – At this time, based on our interpretation, we believe Ohio BWC premiums can be included in the payroll calculation. Unfortunately, the issuance of the Debt Forgiveness Application on 5/15/2020 did not provide any additional clarity on this item.

27.   We are an S-Corp with seven shareholders and two are active in the business with W-2 salary. If we distribute income to all the shareholders (including non-payroll owners) in the 8-week period, does all distribution count as payroll for the forgiveness?

    • We do not believe S-Corp distributions can be included in the payroll calculation. The wages paid to the two shareholders active in the business on a W-2 are eligible as payroll for the forgiveness, but the distributions they receive would not be.

28.   Can vacation be counted in PPP?

    • Yes, payroll expense is based on an employee’s gross pay, which includes vacation pay.

 

Rent

29.  Lease on equipment?

    • Updated 5/18/2020 – The Debt Forgiveness Application does specify that rent is rent or lease expenses on personal or real property so long as the lease was in place prior to 2/15/2020.

30.  If we, as a tenant, are required to pay insurance and property taxes as part of our lease or rent costs (therefore we have a triple-net lease), can we include those costs for forgiveness?

    • The CARES Act and guidance does not list property taxes and insurance when it describes rent. It says rent for leases in place prior to February 15, 2020.

 

Retirement

31.   Does payroll tax, retirement match count toward the 75%?

    • Retirement is considered a payroll cost. Employer FICA and FUTA are not includable as a payroll cost. The employer portion of State Unemployment is considered a payroll cost.

32.  I need to make a contribution to my Profit Sharing Plan, which is a discretionary plan. Can I use my PPP money for this, and will this count towards forgiveness? Does this also adhere to the $100,000 annualized limit? I have a discretionary Profit Sharing Plan and have to make a contribution for 2019. This amount has already been determined. If I use PPP money for the payment, can I use this amount as part of the compensation package over and above the $100,000 annualized limit, and will it be ok towards the 75% minimum compensation for forgiveness?

    • Updated 5/18/2020 – Contributions to retirement are considered in the definition of payroll, which goes to the 75% portion. We are awaiting guidance as to what portion can be included, i.e. 8/52nds, 100% of 2019 contribution due in 2020, etc… Unfortunately, the Debt Forgiveness Application issued 5/15/2020 states that retirement is what is “paid” during the 8 weeks and does not indicate a limitation of 8/52nds but we would not be surprised if that is further clarified. The $100,000 pro-rata limit is for salary/wages only and does not include benefits.

 

Self-Employed

33.   The amount self-employed can pay themselves is eight weeks out of 52. That is less than 2.5 (10 weeks) taken for PPP. Does that mean only two months are forgivable?

    • Updated 5/18/2020 – That is how we currently interpret it. The other .5 is intended for rent, utilities, and mortgage interest. Compensation cannot exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385.

34.  Will a PPP loan to a self-employed 1099 be forgiven when calculated from net income line 31 from the schedule C profit and loss form?

    • The loan received by a self-employed person is eligible for forgiveness. An article regarding this matter can be found here.

35.  For 1099 payments to contractors, does the PPP contemplate reimbursing companies that pay them until they get their money?

    • The PPP loan did not allow companies to include independent contractors in the loan calculation. As a result, independent contractors are not included in the forgiveness calculation either.

36.  If you work out of your home, full monthly utility bills can be deducted back to what date? We prorate utilities for deduction, but can you include the whole AEP bill?

    • We believe utilities can be included similarly to how they would be used for the home office deduction. Therefore, you would prorate accordingly.

37.  Schedule C, no payroll, used 2.5 average monthly SE income. If an individual can only use 8/52 then he/she automatically has excess funds that cannot be used, and therefore a loan? Doesn’t seem right?

    • The other portion of the loan (.5 factor) can be used for expenses such as rent, utilities, and mortgage interest. At the end of the 8-week period, if there are loan proceeds remaining, the funds can be paid back with no prepayment penalty.

 

Timing

38.  We pay bi-weekly, and because of the loan timing, we have three pays in May. We have one EE, which bumps against the $100k limit. With three pays, will we lose out on two weeks of forgiveness? Also, are the calculations $8,333 per month, or is it based on one week?  Can the payroll date be changed?

    • Updated 5/19/2020 – Payroll cost will be based on when paid or incurred per the Debt Forgiveness Application. From the application – “Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).”
    • Employee compensation is limited to $15,384 ($100,000/52 * eight weeks) during that eight-week period. Unless that employee is an owner, then it is limited to the lesser of 2019 compensation or $100,000 on a pro-rata basis.

39.  Can you clarify what you mean by an interim payroll? Is this suggesting paying off cycle?  My company is on a twice-monthly payroll cycle, which would result in us having only three paydays in an eight-week period on a cash basis. How can/should we adjust payroll timing to maximize forgiveness?

    • Updated 5/19/2020 – An interim payroll would no longer be necessary given the guidance in the Debt Forgiveness Application. The application allows for any payroll at the end of the eight-week period that is incurred (i.e. the employee worked), but not paid to be counted so long as the employee is paid during the normal course of the next payroll.

40.  When is the date the company starts counting for PPP? What determines the eight-week period start date? Is it the date on the loan closing documents, the date the first funding is received, or another date?

    • Updated 5/19/2020 – The days the funds hit the bank account or as described above, for payroll, there is an option for an Alternative Payroll Period.

41.  We received our loan the same day we made payroll, how do we handle this?

    • Updated 5/19/2020 – Payroll cost will be based on when paid or incurred per the Debt Forgiveness Application. From the application – “Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

42.  What would you suggest if we aren’t able to open until the end of May and we received funding of our PPP on April 23?

    • There are many considerations as to what to do in this situation. Our SBA team wrote an article regarding creating a strategy and different considerations which can be found here.

 

Use of Funds

43.  What happens if we inadvertently spend loan funds on ineligible items? Example: pay a previous debt.

    • We are still waiting on the final ruling; however, we believe that a portion will not be forgiven and you may have to pay back that portion or turn it into a loan (two years at 1% interest).

44.  Referencing the PPP loan, if you are unable to spend the loan amount within the eight-week period on the forgivable requirements, does the remaining fund amount convert to an interest-earning loan?

    • You have an option to return it or you can continue to use it. Then it will be a loan with 1% interest and a two-year period.

45.  If we were to use the whole funding to handle payables, payroll, etc., beyond the “eligible” period (i.e. 2019 bills), we would pay in two years at 1%? So it’s a cheap operations loan?

    • While debated amongst the professionals, there is some belief that the proceeds can be used for any SBA 7(a) purpose. In that instance, the funds would not be eligible for forgiveness (assuming they were not payroll, rent, mortgage interest or utilities during the eight-week period), but would be a loan subject to the terms of the loan documents.

 

Utilities

46.  For contractors, are utility expenses for job sites considered in the 25% calculation or just home office expenses?

    • Utility payments include electricity, gas, water, transportation, telephone, and internet related to business and would be considered an eligible expense for debt forgiveness.

47.  Is gasoline, diesel and hydraulic fluid for a trucking company considered utilities to calculate for forgiveness?

    • The guidance lists “transportation” as a utility expense, however, this expense category is not very well defined.  At this time, we believe this was meant to include expenses such as fuel for trucking companies.

48.  Is fuel considered a utility, provided for a specific industry such as transportation, agriculture, etc.?

    • The guidance lists “transportation” as a utility expense, however, this expense category is not very well defined.  At this time, we believe this was meant to include expenses such as fuel for trucking companies.

 

 

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