Just final night time, the SBA gave new weekend plans to these of us who advise debtors and banks on the right way to plan for and perceive the PPP mortgage forgiveness guidelines and course of.
The new Interim Final Rules encompass 26 pages that construct upon what we discovered from the Loan Forgiveness Application and Instructions, which cleared up a number of objects, and resulted in a number of questions, and now some have been answered. A second set of Interim Final Rules, additionally launched on May 22nd and consisting of 19 pages, present steering with respect to the SBA mortgage assessment course of in addition to borrower and lender obligations related therewith.
The Application and Instructions are mentioned typically in my internet publish of May 16th, and in nice element in Toni Nitti’s internet publish of May 16, 2020.
I want to thank Brandon Ketron, CPA, JD, LLM for serving to me to know these new pronouncements. Brandon and I are teaming up tomorrow with CPA Kevin Cameron to debate these new guidelines in a free 30 minute webinar at 11 a.m. EDT. Please be at liberty to electronic mail me at firstname.lastname@example.org and put “webinar” within the RE/SUBJECT line, and we’ll ship you an invitation to view this reside or to view a replay.
Taking the 26 pages of double-spaced regulatory language that was issued final night time web page by web page, and together with issues we already knew or thought we knew, I famous the next:
1. Time is of the Essence. The Interim Final Rules point out that the primary PPP loans had been disbursed after April threerd, so many debtors are already of their sixth week of spending to facilitate forgiveness, and definitely in want of this steering, which presumably could be relied upon by debtors and lenders to find out forgiveness quantities for Loan Forgiveness Applications which can be filed earlier than the principles change once more!
2. Better Defined Terms. The Interim Final Rules reiterate that debtors might be eligible for forgiveness in an quantity equal to “the following costs incurred and payments made during the covered period.” These “costs and payments” embody (1) Payroll Costs, (2) curiosity on mortgage obligations, (three) lease, and (four) utilities.
Payroll Costs embody “salary, wages, commissions, or similar compensation, cash tips or the equivalent (based on employer records of past tips, or, in the absence of such records, a reasonable, good-faith employee estimate of such tips), payment for vacation, parental, family, medical, or sick leave, allowances for separation or dismissal, payments for group health care coverage, including insurance premiums, and retirement, as well as payment of state and local taxes assessed on compensation of employees.”
The above language is immediately offered in Footnote 2 of web page 6, and appears to inform us the next:
(i) Tips About Tips. Employers who’ve workers that obtain suggestions can have the mortgage forgiven for suggestions offered through the “covered period,” although these come from clients, and never the employer, so the extra the higher.
The employer ought to hold information of suggestions, or if there aren’t any such information, can use “a reasonable, good-faith, employee estimate of such tips.”
The language signifies that that is for money suggestions or the equal.
We usually are not positive what “the equivalent” means. Maybe reward playing cards and different objects of worth given to workers will qualify.
(ii) Always Read the Footnotes. The similar Footnote refers to “employee benefits consisting of . . . retirement,” with no definition given to what retirement means. We know that this consists of tax certified 401ok, pension, and profit-sharing plans, however it’s not clear whether or not it might embody the contribution of inventory to an worker inventory possession plan, or a non-tax certified retirement plan, reminiscent of a “top hat plan” for extremely compensated workers, or a “rabbi trust,” the place cash is put aside contractually and in a separate fund, however not thought of to be tax-deductible by the employer or included in earnings by the worker.
three. Planning for Interest, Rent and Utilities. Besides the above dialogue of “payroll costs,” the Interim Final Rules assessment and provides some new specificity and readability to the opposite three classes of funds which can be countable to find out the entire quantity forgiven, being curiosity, lease and utilities.
The Interim Final Rules affirm that the borrower can cut back what’s owed again on the mortgage by the quantity of any “Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal).”
The above language is in keeping with the Loan Forgiveness Application Instructions, which point out that curiosity on indebtedness secured by “personal property” (objects that aren’t actual property) could be forgiven on debt that “was incurred” earlier than February 15, 2020.
Presumably, which means that the debt needed to be in place earlier than February 15, 2020, however not essentially that the debt needed to be secured by a mortgage or safety curiosity in the true or private property, and there doesn’t look like any prohibition in opposition to rising the rate of interest payable on debt that existed earlier than February 15, 2020 to a good market worth rate of interest when associated events are concerned.
In addition, if there was an settlement to increase debt that was made on or earlier than February 15, 2020, and the mortgage was made or elevated after that date however earlier than the start of the eight week interval, then it might appear that the precise quantity of curiosity incurred through the eight week interval ought to depend in the direction of what’s forgiven.
Borrowers ought to train warning in amending associated social gathering debt or lease agreements, because the SBA may disagree with this place. This is also used as a sword by the SBA in opposition to the borrower within the occasion of an audit as a result of if the borrower may afford to pay a associated social gathering larger curiosity or larger lease, then there could also be a query as as to if the mortgage was actually mandatory within the first place.
four. Timing is Everything. Page 13 of the brand new Interim Final Rules tells us that advance funds of curiosity usually are not eligible for mortgage forgiveness as a result of the CARES Act’s language particularly excludes “prepayments” of curiosity owed on indebtedness.
On the opposite hand, curiosity that has accrued earlier than the start of the eight week interval and paid through the eight week interval would appear to be lined based mostly upon the language of web page 12 of the brand new Interim Final Rules, which reads as follows:
A nonpayroll price is eligible for forgiveness if it was:
(i) Paid through the lined interval; or
(ii) Incurred through the lined interval and paid on or earlier than the following common billing date, even when the billing date is after the lined interval.
It would subsequently seem that curiosity that’s accrued and owed as of the day earlier than the start of the 56 day interval that follows receipt of the primary mortgage proceeds could be paid through the eight weeks to qualify for mortgage forgiveness.
Further, curiosity accrued through the eight weeks might be included within the forgiveness quantity, so long as it’s “paid on or before the next regular billing date” which follows the eight week interval.
The guidelines typically present that lease is handled the identical approach, and could be based mostly upon the rental of actual property or non-real property belongings “under a Lease Agreement in force before February 15, 2020.”
It doesn’t seem that the property needed to be in place or truly being leased as of February 15, 2020, so long as there was “a Lease Agreement in force” earlier than that date that offered that the lease association would happen. For instance, a “to be” lessor and a associated social gathering might have agreed beneath a binding written or oral settlement that an asset could be made accessible and offered to a lessee by a lessor.
There can also be no obvious prohibition in opposition to rising the lease being paid to truthful market worth. Many associated social gathering leases are at beneath truthful market worth with a purpose to keep away from state gross sales or use taxes that may in any other case apply. The Interim Final Rules don’t seem to forestall amending leases to offer for truthful market worth rental from the efficient date of the modification ahead. Fortunately, for lease there isn’t any “prepayment” exclusion beneath the language of the CARES Act, so tenants can have better forgiveness if they will defer paying lease till the start of the eight week interval in order that they will have forgiveness on the lease “paid during the covered period” and in addition the lease incurred through the eight week lined interval “and paid on or before the next regular billing date, even if the billing date is after the covered period.”
Again, any lease that’s deferred from earlier than the start of the eight week interval have to be paid through the eight week interval with a purpose to be credited.
5. The Utility of Utility Payments. The similar rationale applies for “business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.”
This clause tells us that “utilities” means an expense “for the distribution of electrical energy, gasoline, water, transportation, phone, or web entry”, regardless of the heck that’s.
Certainly, these phrases embody cellular phone service and enterprise prices of “internet access,” however not prices paid to 3rd events for providers offered on the web, reminiscent of Netflix, even when used within the enterprise, Cloud providers and different computer-based or third social gathering offered bills which can be incurred “on the internet”.
Like lease, utility prices which can be incurred earlier than the eight week interval could be paid through the eight week interval with a purpose to be included within the forgiveness quantity.
6. Enough Already About the 75% Rule. The Interim Final Rules point out that the entire prices for curiosity, lease and utility funds “cannot exceed 25% of the loan forgiveness amount.” This is one other approach of claiming that 75% of the entire forgiveness needs to be based mostly upon bills paid for payroll, together with medical health insurance and retirement contributions. If a borrower has $25,000 of curiosity, lease and utility bills and $70,000 of payroll bills, then solely $23,333 of the curiosity, lease and utility bills might be forgiven, as a result of $23,333 is 25% of $70,000. We can now ensure that the 75% of payroll requirement doesn’t imply that there isn’t any forgiveness if payroll prices are lower than 75% of the entire mortgage quantity.
7. The Further Reduction Tests. The whole quantities that may in any other case be forgiven for the above payroll prices and prices for lease, curiosity and utilities might be additional diminished if there are reductions within the variety of workers thought of to be employed through the eight week interval, and by sure reductions of compensation as to a number of explicit workers, as described beneath.
eight. The Timing of Payroll. The Interim Final Rules go into vital element with respect to the timing of payroll prices, and the way the brand new Alternative Payroll Covered Period that was launched within the Loan Forgiveness Application and Instructions will work. These new guidelines enable debtors to make use of their regular payroll interval of 1 week or two weeks, as defined within the following instance:
Example: A borrower has a bi-weekly payroll schedule (each different week). The borrower’s eight-week lined interval begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that begins within the lined interval is June 7. The borrower might elect another payroll lined interval for payroll price functions that begins on June 7 and ends 55 days later (for a complete of 56 days) on August 1. Payroll prices paid throughout this various payroll lined interval are eligible for forgiveness. In addition, payroll prices incurred throughout this various payroll lined interval are eligible for forgiveness so long as they’re paid on or earlier than the primary common payroll date occurring after August 1. Payroll prices that had been each paid and incurred through the lined interval (or various payroll lined interval) might solely be counted as soon as.
As the results of this, debtors electing the Alternative Payroll Covered Period won’t have forgiveness for payroll prices which can be incurred between the day after receiving the PPP mortgage and the day that the following payroll interval begins. It could also be attainable to delay paying workers, in order that the quantities which can be paid through the 56-day Alternative Payroll Covered Period will embody quantities due for days labored earlier than that interval begins, and to even have forgiveness on quantities paid throughout and after the relevant 56 days for providers rendered throughout Alternative Payroll Covered Period.
9. Bonuses and Hazard Pay. The Interim Final Rules additionally make it clear that compensation paid to a furloughed worker, and in addition bonuses and “hazard pay” might be included as authentic payroll prices, besides to the extent that such quantities would push an worker’s whole compensation above $15,385 ($100,000 instances eight/52nds) through the measurement interval.
10. New Harm Imposed Upon Employed Corporate Shareholders. The Interim Final Rules add a brand new and shocking limitation for compensation paid to “owner employees and self-employed individuals.” The Rules state that compensation paid to homeowners can’t exceed the lesser of (1) 15,385, or (2) eight/52nds of their 2019 compensation. The Rules level out that this limitation applies to all companies, so shareholders of S-Corporations or C-Corporations that paid low compensation quantities in 2019 might have restricted forgiveness because of this. This can even severely punish new companies the place homeowners might not have taken a full 12 months of compensation or had restricted earnings in 2019. Hopefully, future steering will make clear that companies that weren’t in operation for all of 2019 will be capable to use some various calculation to use this limitation.
11. Some Relief for General Partners. While General Partners in a partnership are typically restricted to the lesser of (1) $15,385 of forgiveness for compensation paid to them by the partnership, or (2) eight/52ds of their 2019 “net earnings from self-employment” (restricted to $100,000 as prorated for the eight week interval), their internet earnings from self-employment won’t be diminished by Section 179 expense deductions, un-reimbursed partnership bills, or depletion from oil and gasoline properties, multiplied by 92.35%.
Therefore, companions that had low taxable earnings because of a big Section 179 deduction or depletion deduction, earnings won’t be unfairly penalized because of this. Many readers of the Interim Final Rules will marvel the place the 92.35% comes from. This share is from Form 1040 Schedule SE, which assesses Self-Employment Taxes on partnership earnings. Self-employment earnings is diminished to 92.35% of internet partnership earnings or internet Schedule C earnings to take into consideration the “employer’s” share of payroll taxes (7.65% consisting of 6.2% social safety and 1.45% Medicare). By multiplying partnership earnings by this share, payroll prices for associate’s self-employment earnings extra intently resembles gross wages obtained by workers, which aren’t elevated by the employer’s share of payroll taxes.
12. Self-Employed Individuals Still Out of Luck. The Interim Final Rules emphasize that there isn’t any forgiveness offered for retirement or medical health insurance contributions made for self-employed people (impartial contractors or sole proprietors) or General Partners, utilizing the reasoning that “such expenses are paid out of their net self-employment income.” Net self-employment earnings is decided after discount for contributions made in the direction of worker retirement and medical health insurance bills on the Form Schedule C and Form 1065, and such filers usually are not allowed to take deductions for contributions to their very own retirement plan or well being bills, which is seemingly the reasoning that the SBA is following for not permitting self-employed people or companions in a partnership to take medical health insurance and retirement plan prices under consideration.
13. What If You Tried to Bring Them Back, Jack? The query as as to if an worker who was laid off could be thought of to have been introduced again for functions of the discount to indebtedness that incurs when there’s a discount within the variety of workers has been clarified and made extra liberal by the next language:
Specifically, in calculating the mortgage forgiveness quantity, a borrower might exclude any discount in full-time equal worker headcount that’s attributable to a person worker if:
(i) the borrower made a great religion, written provide to rehire such worker (or, if relevant, restore the diminished hours of such worker) through the lined interval or the choice payroll lined interval;
(ii) the provide was for a similar wage or wages and similar variety of hours as earned by such worker within the final pay interval previous to the separation or discount in hours;
(iii) the provide was rejected by such worker;
(iv) the borrower has maintained information documenting the provide and its rejection; and
(v) the borrower knowledgeable the relevant state unemployment insurance coverage workplace of such worker’s rejected provide of reemployment inside 30 days of the worker’s rejection of the provide.
A Footnote  on web page 14 signifies that additional steering on how debtors will report rejected rehire presents to state unemployment insurance coverage workplaces might be offered on the SBA’s web site, and the brand new Rules have added that employers might be required to “nark” on workers who don’t come again to work and could also be receiving the $600 every week federal unemployment compensation as a part of the appliance course of.
14. Headcount Reduction Relief. At web page 22 of the Interim Final Rules, an worker who’s “fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction” won’t be counted as now not being within the enterprise for the “fewer employees” discount take a look at.
The Rules additionally add that “borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests.” Many debtors had been questioning if they might be penalized for a headcount discount in conditions the place workers have died or are incapacitated because of the virus or different circumstances. Do they must make a suggestion to rehire such worker and doc that it can’t be accepted with a dying certificates? It could also be attainable that the above emphasised language can be utilized to indicate that the discount because of dying was not because of an employer motion and that no discount in mortgage forgiveness ought to happen.
15. Full-Time, Part-Time, All Around the Town. The Interim Final Rules additionally outline “full-time equivalent employee” to imply an worker who works 40 hours or extra, on common, every week. Hours in extra of 40 are disregarded for functions of figuring out whether or not there was a discount within the variety of workers.
The Interim Final Rules give extra steering on the election that debtors could make to contemplate all part-time workers to be working precisely 20 hours every week for calculation functions.
The Interim Final Rules additionally affirm that workers who had been employed in 2020 might be included within the discount calculation . . . 25% take a look at.
16. Reducing Hours vs. Reducing Rate of Pay. The Interim Final Rules additionally affirm discount in compensation that’s attributable to a discount within the variety of worker’s hours won’t be counted as a discount in compensation for the 75% or extra take a look at in order that debtors won’t be double penalized for each a headcount and wage discount.
In different phrases, if an worker making $10 an hour and dealing 40 hours every week would usually subsequently earn $400 every week, and this worker is diminished to 20 hours every week, the truth that she is going to solely make $200 every week doesn’t trigger this to be thought of a greater than a 25% discount in her compensation.
This would work the identical approach if she was diminished from $10 an hour and 40 hours every week to $7.50 an hour and 20 hours every week, as a result of it might nonetheless not be a “more than 25% reduction in pay,” as relative to hours labored. The borrower would nonetheless have a discount in mortgage forgiveness as a result of the worker headcount could be diminished by a minimum of zero.5, though this discount may very well be compensated for by hiring one other part-time worker.
This applies however whether or not there’s an general discount in worker hours that causes a discount in forgiveness because of this thereof.
The guidelines don’t handle whether or not an owner-employee or associate in a partnership is taken into account within the headcount calculations.
Hats off to Kevin Cameron, CPA for developing with a spreadsheet calculator that has enabled us to run eventualities to see how the mortgage numbers actually work, and to help debtors in figuring out what the relative prices and advantages are of bringing staff on or increasing in any other case relevant work hours, and adjusting compensation, with due regard to what extent loans might be forgiven or repaid. A PDF of Kevin’s spreadsheet, which is offered for buy in Excel from Leimberg Information Services could be obtained by emailing me and placing “Send Spreadsheet” within the Subject/RE line. The AICPA has a free spreadsheet accessible on their web site that’s considerably tougher to make use of, and Bob Keebler has a less complicated one as properly.
It helps to have the spreadsheet in hand when reviewing the beneath to know the way every little thing matches collectively.
17. The Banker’s Dozen (of Headaches). The second set of Interim Final Rules issued Friday night time, which is cleverly referred to as SBA-2020-0033 outlines the “Loan Forgiveness Process” on web page 7, and supply borrower should full and submit the Loan Forgiveness Application (SBA Form 3508 or Lender Equivalent) to the lender servicing the mortgage.
The lender has 60 days after receipt of the entire Application to assessment the Application and supporting documentation and “issue a decision to SBA” as to how a lot is to be forgiven, at which period it’s going to additionally request fee from the SBA of such forgiven quantities.
The SBA is to then remit the relevant quantity to the lender, plus any curiosity accrued thereon, not later than 90 days after the lender has issued its resolution.
The SBA will deduct as much as $10,000 of EIDL advance quantities which have been given to the borrower from the quantity remitted to the lender.
18. Ineligible Borrowers Cause Bankers to Lose Their 5% Loan Fees. If the SBA determines that the borrower was not eligible to obtain a PPP mortgage based mostly upon relevant guidelines, then the mortgage won’t be eligible for any forgiveness by any means, and the lender might be chargeable for notifying the borrower.
Any steadiness due on a PPP mortgage have to be repaid by the borrower on or earlier than the 2 12 months anniversary of when the mortgage was made.
If the borrower has made funds on the mortgage earlier than they’re due, then the lender should remit the quantity that the borrower paid to the borrower, plus accrued curiosity if the quantity that the SBA pays to the lender exceeds the remaining principal steadiness of the word.
19. SBA Review. The Interim Final Rule signifies that the SBA might assessment any PPP mortgage, and whether or not a borrower calculated the mortgage quantity appropriately and used mortgage proceeds for allowable makes use of in making its dedication as to how a lot of the mortgage is to be forgiven, however the SBA shouldn’t be required to do that and should depend upon the borrower and the lender to do that.
20. 6-Year Record Retention. Borrowers should retain the PPP documentation of their information for a minimum of six years after the date that the mortgage is forgiven or repaid in full. If the SBA determines borrower was not eligible for a mortgage, then not one of the mortgage could be thought of as having been forgiven.
21. Banker Requirements. Lenders are required to do the next:
(i) Confirm receipt of borrower’s certifications contained within the Loan Forgiveness Application Form.
(ii) Confirm receipt of the documentation that have to be submitted to confirm payroll and nonpayroll prices.
(iii) Confirm that the borrower’s calculations on the Application are correct.
(iv) Confirm that the 75% of payroll take a look at is being complied with.
The lender shouldn’t be required to independently confirm the borrower’s reported data, if the borrower attests to the truth that it has offered the suitable documentation supporting its request.
Lenders must give again their mortgage processing charges inside one 12 months after a mortgage was disbursed, if the SBA determines that the borrower was not eligible to obtain the mortgage, however whether or not this was the fault of the financial institution or not.
Nevertheless, the SBA will nonetheless assure the mortgage, if the lender has complied with its obligations, so the lender’s threat is proscribed to the lack of its price and attainable causes of motion by debtors in opposition to lenders who might allegedly give incorrect recommendation on the method.
We could be positive there might be additional modifications and clarifications by FAQ’s and laws as time marches on, however we look like properly previous the 50-yard line in understanding what is required and required to adjust to this program, and what planning and actions can happen to assist guarantee that the meant impact of this program could be effectuated, a minimum of to some extent, for all debtors.
In the meantime, please be very sort to CPA’s, who’ve each tax submitting and now PPP mortgage deadlines to take care of as finest they will.