CARES Act: PPP Forgiveness and Business Tax Update

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The information contained herein is general in nature and based on authorities that are subject to change. Insero & Co. CPAs, LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained by others as a result of reliance upon such information. Insero & Co. CPAs, LLP assumes no obligation to inform the reader of any changes in laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their advisors concerning the application of laws to their particular situation.

Presented By

Timothy McLaughlin

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Steven Mills

AgendaPPP Loan ForgivenessBusiness Tax Update

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PPP Loan Forgiveness7

Paycheck Protection Program (PPP)General Information

Created under the CARES Act (3/27/2020)Borrowings based on 2.5 months of payroll costsGoal: keep employees on payroll, cover some overheadMust use funds by 6/30/2020Forgiveness provision (8 weeks)Must spend 75% on payroll costs

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PPP Recent Updates

Loan Forgiveness Application released on May 15, 2020

SBA May 15, 2020 Press Release: • “SBA will also soon issue regulations and guidance to further assist borrowers as they

complete their applications, and to provide lenders with guidance on their responsibilities.”

Updates to Eligibility Certifications and SBA FAQ

Treasury to Audit loans >$2,000,000

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PPP Recent UpdatesLoan Forgiveness Application

SBA Form 3508Application, Instructions, WorksheetsProvides additional guidance on:• Eligible costs• Time periods• Cash vs accrual method of determining eligible expenses• FTE and wage reduction rules• Documentation requirements

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PPP Use of Loan ProceedsPayroll costsInterestRentUtilities

All the above have specific definitions.

Must be used by 6/30/2020.

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PPP Forgiveness AmountsAllowable Payroll Costs

Salary, wages, commissions, or similar compensationVacation, parental, family, medical, or sick leaveEmployer contributions for employee health insuranceEmployer contributions to retirement plansState unemployment insurance$100,000 limit on annual payroll; $15,385 in the 8-week period

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PPP Forgiveness AmountsAllowable Non-Payroll Costs

Covered Mortgage Obligations• Interest on business mortgage obligations on real OR personal propertyCovered Rent Obligations• Rent or lease payments pursuant to lease agreements for real OR personal

propertyCovered Utility Payments• Payments for electricity, gas, water, transportation, telephone or internet access

Key Date: February 15, 2020

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PPP Forgiveness Provisions8-Week Covered Period

Forgiveness provision:

Applies to the use of loan proceeds for allowed expenses during the8-week covered period starting from the date of the disbursement of loan proceeds.

The expenses in the 8-week covered period are the “Expected Forgiveness Amount.”

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PPP Forgiveness ProvisionsAlternative Payroll Covered Period

For Payroll Costs only the SBA will allow borrowers to select an alternative 8-week period –

The period begins on the first day of the first pay period following receipt of loan proceeds.

For example – loan proceeds received Monday 4/20/20; the 1st day of the next pay period is Sunday 4/26/20; the borrower can start the 8-week payroll period on Sunday 4/26/20 and end on Saturday 6/20/20.

To use this alternative you must be on a weekly or bi-weekly payroll schedule (not monthly or twice/month)

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PPP Forgiveness ProvisionsTiming of payments – Accrual or Cash Basis??

Payroll costs are eligible for forgiveness if they are paid or incurredduring the 8-week covered period.• Payroll costs are considered paid on the date paychecks are delivered or direct

deposits made.• Payroll costs are considered incurred on the day that the employee’s pay is

earned.• Payroll costs incurred but not paid during the last pay period of the covered

period are eligible for forgiveness if paid on or before the next regular payroll date.

• Expect further clarifications.

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PPP Forgiveness ProvisionsTiming of payments – Accrual or Cash Basis??

Non-Payroll costs must be paid during the 8-week covered period OR incurred during the 8-week covered period and paid before the next regular billing date, even if the billing date is after the 8-week covered period.

Count non-payroll costs that were both paid and incurred only once.

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PPP Forgiveness Provisions

Forgiveness Amount = “Expected Forgiveness Amount” x FTE Ratio

• Expected Forgiveness Amount = $ spent in the 8-week period on eligible payroll and non-payroll costs,

• FTE Ratio = Employment Test

FTE = Full Time Equivalent

NOTE: Forgiveness amount can also be reduced if you decreased employee pay rates.

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PPP Forgiveness ProvisionsHow to calculate FTEs?

FTEs are calculated based on 40 hours per week.Hours worked divided by 40 rounded to the nearest tenth.The maximum FTE for an employee cannot exceed 1.0This calculation will need to be done weekly for:• The 8-week covered forgiveness period• The Reference Period of 2/15/19 – 6/30/19 OR 1/1/20 – 2/29/20Simplified FTE Method – assign 1.0 FTE for any employee that works 40 hours or more and .5 FTE for any employee that works <40 hours in a week.

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PPP Forgiveness ProvisionsFTE Ratio

FTEs “8-week period”DIVIDED BY

FTEs in 2019 or 2020

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2019: Average FTEs 2/15/19 – 6/30/19

or

2020: Average FTEs 1/1/2020 – 2/29/2020

PPP Forgiveness ProvisionsOther FTE Issues

If my FTEs were reduced due to a lay off or furlough can I cure that?

Yes – the FTE Reduction Safe Harbor allows a borrower to avoid reduction in forgiveness caused by reduction in FTEs if:

• The borrower reduced its FTEs between 2/15/20 and 4/26/20 AND

• The borrower restores its FTEs by 6/30/20 to the FTEs during the pay period that covers 2/15/20.

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PPP Forgiveness ProvisionsOther FTE Issues

FTE reductions during the covered period are added back if an employee:• Was fired for cause,• Voluntarily resigned or• Voluntarily requested and received a reduction of their hours

If a borrower made a good-faith, written offer to rehire an employee during the covered period which was rejected by the employee an FTE add back is allowed

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PPP Forgiveness ProvisionsForgiveness Example• Loan amount - $500,000• Amount spent during 8-week period - $400,000 (75% must be on payroll)

• Average FTEs 8-week period - 85• Average FTEs 2019 - 100

Forgiveness Ratio = 85 ÷ 100 = 85%

Forgiveness Amount = $400,000 spent x 85% = $340,000

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PPP Forgiveness ProvisionsSummary of Key Points

Must spend at least 75% of loan proceeds on payroll costs

Forgiveness amount is reduced by• Reduction in FTEs• Reduction in employee pay rates• Any EIDL Grants received

Additional guidance is expected

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PPP Loan ForgivenessForms

SBA Form 3508 Loan Forgiveness Application• PPP Loan Forgiveness Calculation Form• PPP Schedule A• PPP Schedule A Worksheet (Supports Schedule A)• PPP Borrower Demographic Information Form (Optional)

Lenders may use an electronic application form

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PPP Documentation

The new guidance provides a detailed list of documentation required to be provide to apply for loan forgiveness

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PPP Forgiveness Provisions Documentation – SEE PAGE 10 of Application

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Payroll support – 3rd party payroll reports, federal payroll tax forms, state wage and unemployment filings.

Cancelled checks or account statements documenting contributions to employee health and retirement plans.

Interest – lender amortization schedules, receipts, cancelled checks, account statements for February 2020 and the covered period.

PPP Forgiveness Provisions Documentation (continued)

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Rent – lease agreements, receipts or cancelled checks, lessor account statements for February 2020 and the covered period.

Utilities – invoices, receipts, cancelled checks, account statements for February 2020 and the covered period.

FTE calculation documentation

PPP LoansWhat happens to loan balance not forgiven?

Balance is a 2-year term loan with monthly payments

Interest at 1%

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PPP Certification IssueOriginal Certification at Application

Borrower was required to certify in good faith that:

“current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

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PPP Certification IssueSBA/Treasury Additional Guidance

After media reports of several large well-known entities receiving PPPLoans, the SBA/Treasury started issuing additional guidance on theoriginal Certification of Eligibility.

FAQ #31 (4/23/20)FAQ #37 (4/28/20)FAQ #39 (4/29/20)FAQ #43 (5/05/20)FAQ #46 (5/13/20)FAQ #47 (5/13/20)

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PPP Certification IssueSBA/Treasury Additional Guidance

FAQ #31 Issued 4/23/2020 - Borrowers must also consider:

Their economic need at the time of applicationCurrent business activityAbility to access other sources of liquidity sufficient to support their ongoing operations that is not significantly detrimental to the business

SBA allowed borrowers to return PPP Loans by May 18th to avoid penalties.

FAQ #31 originally targeted businesses owned by “large companies with adequate sources of liquidity” and public companies “with substantial market value and access to capital markets”

BUT…..

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PPP Certification IssueSBA/Treasury Additional GuidanceFAQ #37 Issued 4/28/2020

Stated that these standards were also applicable to private companies “with adequate sources of liquidity.”

And…..

FAQ #39 Issued 4/29/2020

Stated that all PPP loans >$2,000,000 will be reviewed by the SBA to “ensure PPP loans are limited to eligible borrowers in need.”

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PPP Certification IssueSBA/Treasury Additional Guidance

The additional requirements imposed on borrowers caused a tremendous amount of uncertainty for privately held businesses and nonprofits.

What do these rules mean?How can you change the rules after the fact?What will the SBA Audits consist of?Should I return the money?

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PPP Certification IssueSBA/Treasury Additional GuidanceFAQ # 46 Issued 5/13/2020 – Provides a Safe Harbor

Loans < $2 million will be deemed to have made the required certification concerning the necessity of the loan in good faith.

The SBA “determined that this safe harbor is appropriate becauseborrowers with loans below this threshold are generally less likely to havehad access to adequate sources of liquidity in the current economicenvironment than borrowers that obtained larger loans.”

Borrowers with loans > $2 million must comply with the additional guidance to obtain forgiveness. These loans are also subject to SBA/Treasury review.

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Questions?

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Business Tax Update37

Topics for TodayIntroductionSelected tax aspects of PPP loansQualified Improvement Property (QIP)Loss carrybacksInterest expense deduction changesPayroll Tax opportunitiesState tax considerations

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IntroductionWe must remember what this Act was all about-cash into the hands of individuals and businesses as quickly as possible. Nothing to do with tax policy, everything to do with immediate cash.

Thus, loss and deduction limits relaxed for current and prior years, allowing access to prior amounts of tax paid in addition to less current tax to pay; along with relaxed and extended due dates for filing and payments.

Fast & Furious-IRS pronouncements and FAQs weekly, if not daily. Timing issues and due dates for filing for relief are critical. Many unknowns remain.

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Selected Tax Aspects of PPP LoansAct Section 1106(i) - “For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from income.”Internal Revenue Code of 1986 Section 265 (paraphrased for clarity) - “…No deduction shall be allowed for any expense otherwise allowable as a deduction which is allocable to income wholly exempt from tax…”What exactly does this mean?

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Selected Aspects…IRS Notice 2020-32 (paraphrased) – no deduction is allowed for an otherwise allowable expense if the payment of that expense results in forgiveness of a covered PPP loan.

Uh-oh.

Congressional response – Oops, we didn’t really mean that. We meant for the forgiveness to be nontaxable and the expenses to remain deductible.

Legislative fix in the works? Senate Bill S. 3612 introduced last week.

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PPP ContinuedWhat about Schedule C filers?• Forgiveness of owner compensation is a math function (8/52) of 2019 Schedule

C taxable income (as limited by the $100,000/year requirement).• SBA current guidance says that the Schedule C that was provided at the time of

the loan application must be used to determine the amount of net profit allocated for the 8-week forgiveness period. • Interesting. What about retroactive tax planning (bonus depreciation or Section

179)?• 75% rule still applies to Schedule Cs, keeping in mind the owner compensation

limit.

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PPP Loan Taxation ExampleAssumptions:PPP loan of $100,000PPP loan forgiveness of $80,000Net 2020 income from operations (not considering loan forgiveness) - $0What is 2020 taxable income?

Answer:2020 taxable income will be $80,000. Why?

Be ready for this!

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Qualified Improvement Property (QIP)

BackgroundCARES ACT changes• 39-year life -> 15-year life

• Thus eligible for 100% bonus deduction now

Amended tax return versus change in accounting method2018 and possibly 2019Revenue procedures 2020-23 and 2020-25

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Business Interest Limitations Relaxed

Background50% limitation versus 30% limitation for years beginning in 2019 and 2020• Partnerships only 2020, special rule for 2019Real estate trades/businesses may want to revisit prior electionsRevenue Procedure 2020-22

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vs.

Loss CarrybacksBackground5-year carrybacks now allowed for losses incurred in years beginning in 2018, 2019, and 2020Rate arbitrageIn conjunction with prior two slides, this is a VERY powerful toolCareful of timing and filing requirementsNotice 2020-26 and Revenue Procedure 2020-24

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Payroll Tax ChangesRetention CreditDeferral of Employer FICA after 3/27/20 (if not paid already)• ½ due 12/31/21• Remainder due 12/31/22• Big time deferral possibility• How computed for SE individuals and partners? Not sure yet. • Deductible for cash basis entities?

• Probably not, but statutory language is interesting. PPP loan (Retention credit) /forgiveness (Deferral) are disqualifying events for these creditsTalk with your payroll company right away if you think you qualifyFamilies First Act credits also available

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State ImplicationsNYS Budget ActPersonal Income Tax-NYS has changed to fixed date conformity as of March 1, 2020 (i.e. before the CARES Act).

Business Taxes-NYS has “decoupled” from federal changes with respect to the 30%/50% business interest limitations. Was already decoupled with respect to NOL’s and bonus depreciation.

Consider the implications of this.

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Questions?

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Thank YouThank you for your attendance at today’s program.

For more information regarding the topics discussed today, please feel free to contact us at:

Loan.Assistance@inserocpa.com(800) 232-9547

Insero & Co. CPAs, LLPwww.inserocpa.com

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