The following is a text version of the recorded webinar presented by Windes on September 1, 2020.
Please contact Windes for more information or questions regarding your particular situation at
844.4WINDES (844.494.6337) or via email at email@example.com.
Thank you all very much for joining us. I am looking forward to sharing with you some information we have related to the paycheck protection program and loan forgiveness, with a little bit of a nonprofit slant. We will talk about accounting options as it relates to fiscal year-ends that are going to be in the middle of the PPP process, the receipt of the loan, the use of funds, and ultimately, forgiveness.
Many of you in this meeting have a June 30 fiscal year-end. There are some options to consider, which we are going to present. Thanks very much for being here today. My name is Michael Barloewen, and I am an audit partner here with Windes.
Looking at the attendee list, I have had the privilege of working with so many of you and appreciate you joining us. I head up the firm’s nonprofit group and am also the chairman of the Audit & Assurance department. It is my privilege to host today’s presentation. I am going to present an overview about our firm and then I will hand it over to my very capable colleagues Bella Wang and Kelly Buck to present the meat of this material. You should be on mute, but I hope you will make use of the chat function and/or Q&A to submit questions, which we will answer throughout this presentation and at the end, as well.
Learn more about Windes
Our nonprofit group performs audits for over 120 organizations. We are very diverse in the subsections of the nonprofit sector that we serve. We do a great deal of work for all types of nonprofit organizations, such as social service organizations, arts and culture charities, museums, and all types of foundations. We also service many environmental organizations, disaster relief, universities, and private schools. You name it, we have experience in it, which helps us with the work that we do for all of our nonprofit clientele.
All of our people on the audit side are yellow book trained. We do
OMB uniform guidance audits for about 20 of our clients every year. We do a lot of internal training and think of ourselves as one of the best nonprofit firms in Southern California.
I like to point out that we are proud of our tax expertise, as well. I think it is beneficial to our clients that we have people that you work with who are audit and assurance experts like myself, on the audit side, but at the same time, the firm has a real tax expertise, as well. We have a partner and multiple managers and senior accountants that are experts in the nonprofit 990, and they really help our clients put their best foot forward when it comes to the 990, which is, of course, public information for most charities.
Our nonprofit group meets regularly and writes a quarterly newsletter,
The Nonprofit Advisor, that many of you receive. We have organized lunch and learns in recent years that many of you have enjoyed and appreciate. We take a holistic view of our relationship with our nonprofit clientele, always looking for opportunities to educate and take care of what is coming ahead. Our lunch and learns have been an opportunity to present on upcoming accounting standards or tax developments that affect the 990. We look for opportunities to share our knowledge, to help you run your businesses, or service your nonprofits as best as you possibly can. Obviously, this year we did not have as much in the lunch and learn category because we have been dealing with COVID, but we really appreciate your attendance today on this webinar and we look forward to doing more things like this in the future.
In addition, we have services around
Paycheck Protection Program forgiveness. Obviously, for our audit and attest clients, we want to make sure that if you would like us to help you in this regard, that we don’t cross any independence lines. We just want to make you aware that this is an option for you to consider and feel free to reach out to us if you think that we might be able to help you with PPP loan forgiveness process.
With that being said, I am going to hand this over to my colleague, Bella Wang who is going to start us off. As I said, any questions, feel free to reach out to us throughout the presentation. Thank you very much.
Bella Wang, Director, Tax & Accounting Services:
Good morning everyone. Thank you, Mike. Here is today’s agenda. We are going to go over the qualified costs that can be forgiven with a PPP loan, the two requirements you need to do in order to avoid any reduction in your forgiveness, as well as the forgiveness application process, including documentation requirements.
Kelly Buck is going to go over the financial accounting perspective. She will also cover what happens if your loan is not 100% forgiven – the loan repayment schedule, the payroll tax deposit deferral, and the proposed
What are considered “qualified costs?” Many of you probably know that PPP Flexibility Act was passed on June 5, 2020. If you received your PPP loan before June 5, you have the option to use either eight weeks or 24 weeks as your covered period or the forgiveness period. If you received your PPP loan after June 5, then you must use 24 weeks for your forgiveness period, but the forgiveness period will end on December 31, 2020. So for example, if you received your PPP loan on August 1, you do not get the full 24 weeks. Your covered period will end on December 31 of this year.
The application to apply for a PPP loan closed on August 8. If you did apply for the PPP loan, you missed the opportunity to apply and must wait until Congress passes a second loan program. What can be included in the forgiveness? Payroll costs may be included. Payroll costs include salaries, tips, and severance pay or payment for a separation that you pay to an employee. You can then add the health care benefit and retirement plan benefit on top of salary costs.
The healthcare benefit is the group health coverage for your employee. The retirement plan benefit is the contribution you make to your employee’s plan, in addition to the state and local taxes you pay on the employee’s wages, such as the California Employee Training Tax and unemployment insurance. Please keep in mind that federal taxes like Social Security tax and Medicare tax do not qualify for forgiveness. Only the state and local payroll taxes qualify.
The wages must be incurred or paid during the covered period. For example, you received your PPP loan on April 1, and you have a payroll schedule that is on a monthly basis. Your payroll from March 16 to March 31 was paid on April 2, the day after you received your PPP loan. Since it was paid during your covered period, you can include that payroll in the forgiveness calculations, even though the wages were incurred before your covered period started. In addition, for your payroll – your wages, your healthcare benefit, and retirement plan benefit – you can use the alternative payroll covered period, which I will go over in a little bit.
Looking at the example, the PPP loan was received before June 5, and the decision was made to use eight weeks as your covered period. The eight-week covered period started on April 22. That is the day the PPP loan was funded. Therefore, your covered period is from April 22 until June 16. If you have a weekly payroll, you will use your regular covered period so that your payroll can be included in the forgiveness calculation, which should be started on April 13, because that payroll period was paid during your covered period. It was paid on April 24, which is the day after you received your PPP loan. Since your covered period is eight weeks, the payroll you can include in the forgiveness calculation starts on April 13 until June 14. If you have a biweekly payroll period, then you can choose to use the alternative payroll covered period.
If you choose to use alternative payroll covered period, then the first payroll period that you can include in your forgiveness calculation will be April 27, which is the first payroll period starting after your funding. I know this is a little confusing, but you can see that if you choose to use the alternative payroll covered period, then you will start with the one that I highlighted in yellow (on the presentation slides).
If your payroll period is semi-monthly, then you start with every 16th. Therefore, in this example, the payroll amount that can be included in the forgiveness will start on April 16, because that was paid on April 30, which is after you received your PPP loan. Keep in mind that if your payroll period is not weekly or biweekly, and can be lined up with the covered period, then you can have a partial pay period included in your forgiveness calculation.
In this example, your covered period is until June 16, and the June 16 to June 30 was paid on June 30, so for that last payroll period, you can include one day of the payroll in your forgiveness calculation. For example, if in that last payroll period, from June 16 to June 30, you paid $30,000 in payroll, you can then include one day of that $30,000 in your forgiveness calculation. Keep in mind that this is the same rule as when you applied for the PPP loan, that for employees’ salaries, you have to cap at $100,000 on an annualized basis.
Therefore, for the eight-weeks, if you decide to use eight-weeks as your covered period, that limit is $15,385 per person, per employee. If you decide to use 24-weeks, then the limit is $46,154 per employee. This is only on the salary, so you can take the limit. Therefore, if you have 24-weeks, then you take $46,154, plus the healthcare benefit and the retirement plan benefit that you pay for that particular employee.
According to the
additional guidance from the SBA, for the health care benefit and a contribution to the retirement plan, you cannot include the employee contribution. If you deduct from the healthcare benefit from your employee’s paycheck, you cannot include the employee’s own contribution in the forgiveness calculation. In addition, you cannot prepay your healthcare benefit and a contribution to a retirement plan. Therefore, for your health care benefit and the retirement plan benefit, you have to pro-rate it for only the covered period, which is the amount attributable to the covered period.
If you had a retirement plan contribution of $100,000 for the entire year, then you have to take that whole year contribution, divide it by 52 weeks, times eight, or times 24 weeks for your forgiveness calculation.
Again, what are qualified costs? The wages, healthcare benefit, retirement plan contribution, rent, mortgage interest, and utilities are all qualified costs.
All of the qualified costs you paid or incurred during the covered period can be forgiven. If you have a utility that was incurred during the covered period, but it was paid on, or before, the next regular billing cycle, then that can be included in the forgiveness calculation. For example, ABC Company received a PPP loan with the forgiveness period from April 15 to June 9. It has a utility bill of $100 for the period from June 1 to June 30, and is due on July 10. Given that utility bill is paid after your covered period, you can still include a portion of the utility bill in the forgiveness calculation because a portion of that utility bill was incurred during your covered period.
For your rent and mortgage interest: The rent and the lease agreement must be in place before February 15, of this year (2020). You can renew the lease during the covered period, as long as the lease agreement was in place before February 15, 2020, the rent you pay for that lease agreement can be included in the forgiveness.
For the interest: The interest must be secured by a real property or personal property. If you pay interest on the line of credit, that does not qualify for forgiveness. If you pay interest on the equipment loan or on a property, a real property, then that can be qualified for forgiveness. Again, the loan must be in place before or on February 15, 2020.
Additional guidance from SBA last week indicated that if you sub lease a portion of your space to someone else, a tenant, then any amount of the rent you pay attributable to the sublease is not eligible for forgiveness. For the example, you pay monthly rent of $10,000 to your landlord, but you sublease 25%, so you receive $2,500 from your subtenant. For your forgiveness calculation, you can only include $7,500 in the calculation.
For your utilities, you must have the service in place as of February 15 of this year (2020). Any utility that was placed in service after at date does not qualify for forgiveness. What type of utilities can be included in the forgiveness? Your electricity, gas, water, telephone, including cell phone, and internet access. Any IT consulting charges cannot be included, only the internet assets for your Wi-Fi and the transportation.
There is a bit of confusion about what kind of transportation can be included in the forgiveness calculation. According to the additional guidance from the SBA, it is specifically the transportation utility fee assessed by the state and local government. Therefore, if you have a big truck, you use some fuel, paid the gas for the vehicle – that does not qualify. Again, the utility must be placed in service on February 15, 2020. If you have a utility that was due in February, but you paid it late, sometime in April, so it is a past due, but you paid it during your cover period, then you can include that in your forgiveness calculation.
A change due to the Flexibility Act: Before the Flexibility Act on June 5, you had to spend 75% of your PPP loan on payroll costs, which is the salary, healthcare, and retirement plan benefit. Because of the Flexibility Act, you now only need to spend 60% of your PPP loan on payroll costs.
Bella, one of our attendees has a question related to payroll costs. If an organization has both a biweekly and a monthly payroll period, which they have set-up for different types of employees or different divisions, are there any special considerations as it relates to what you went over with payroll?
Yes. Definitely, you should do a calculation because you have an option whether to use the regular covered period or the alternate payroll covered period. We have a few clients that have this kind of situation. They have a monthly payroll and a biweekly payroll. Therefore, it will make a difference if your payroll, your qualified costs, are very close to your loan amount. If you want to maximize your forgiveness, you will need to do the calculation. If you go with the regular covered period, then for the monthly or semimonthly payroll, you will have to do the proration, you have to do the partial payroll calculation, and you will also have to do the same calculation with your weekly or biweekly payroll.
This is something that we can definitely help the client to determine which way is better for their situation. Whether they should do a regular covered period or an alternative payroll covered period, which is a little more complicated, so definitely reach out to u
Now I am going to go over the potential reduction of your forgiveness. There is a requirement, that in addition to spending at least 60% of your loan amount on qualified payroll costs, you also need to make sure that you do not have a reduction in your full-time employee head count, and you do not reduce your employee salary level by more than 25%. The second requirement only applies to employees whose annualized salary is $100,000 or less.
We are now going to talk about the reduction of head count in the number of full-time employees. You can use either your average number of full-time employees, per month, during the period from February 15, 2019 to June 30, 2019, or you can compare your average number of full-time employees during the coverage period, to the average, during the period from January 1, 2020 to February 29, 2020.
Whether you want to use last year’s number or this year’s number, it is up to you. You can see which number is lower. You have the option. If the average number of full-time employees, per month, during the covered period is the number that you want to use, you need to make sure that you meet the target.
Who is considered as a full-time employee? The employee must work 40 hours or more a week to be considered as a full time-employee.
If you have employee who works less than 40 hours per week, you have to do a percentage calculation. Say you have an employee who works only 30 hours per week. You will take 30 hours, divided it by 40 hours, then that person is considered 0.75. If you have an employee working 20 hours, then they will be considered 0.5. If you have many employees, this becomes a lot of work. You can use the simplified method. For any employee who works less than 40 hours per week, you would just use 0.5 for each employee in the simplified method.
If you have a lot of employees whose work-hours vary between 20 hours to 40 hours, some work 30 hours, others 25 hours, and some 35 hours a week, then it is better to use the percentage calculation to the nearest 10th of average for the period. If you use the simplified method, 0.5 per person, then you can have a number less than the target.
There is a safe harbor. If you do have a reduction in your full-time employee head count, there are a couple safe harbors that you can apply for that will not reduce your forgiveness.
First, if the employee voluntarily resigns, they terminate the employment voluntarily, or they were laid off for costs, those situations would not be considered a reduction in head count. Let’s say that you do have a reduction in head count. The second safe harbor allows you to rehire the employee before December 31, 2020, and there will be no reduction in forgiveness.
Many borrowers and clients ask: Should I wait to submit my forgiveness application until the end of the year? If you have a reduction in your full-time employee head count, and you think you will rehire those employees before end of the year, then it is probably better to wait so that you do not have a reduction in head count. In addition, towards end of the year, if you have availability or capability to hire those people back, then you will meet the safe harbor. It is important to determine if you will have a reduction in head count, which can affect your forgiveness.
The other safe harbor allows you to rehire the people who left, but what if you have a hard time hiring the same qualified employee? If you have an employee who has left, whom you then try to rehire, but the employee refuses to come back, that scenario also meets the safe harbor.
The other safe harbor is…say you are in the restaurant business and you cannot return to the same level of business activity because of government regulations, CDC requirements, then that also meets the safe harbor and will not be considered a reduction in your full-time employee head count.
We talked about trying to rehire your employee and if the employee refuse to come back, then that is not considered a reduction in your head count; however, there is a requirement you must do. You must inform the California Employment Insurance office within 30 days after you receive your employee rejection of your offer to rehire. You must have written documentation to prove that you offered the employee to come back and he/she rejected your offer.
The second requirement is that you cannot reduce your employee salary level by more than 25%. Again, this only applies to the employee who makes $100,000, or less, on an annualized basis. For a salaried employee, you have to compare the salary you paid to your employee who makes $100,000, or less, during the covered period, to their salary level in the first quarter of this year, on January 1 to March 31, 2020. For an hourly employee, you need to make sure that the hourly rate is not reduced by more than 25%. If you are paying this person $20 per hour, you need to make sure that during the covered period, you pay him/her at least $15 per hour.
Many people ask: The pay rate is the same, but for those hourly employees, before they worked 40 hours, now they only work 30 hours a week. Will that be considered a reduction in the salary level?
The answer is no. As long as you pay, the hourly rate is the same. This will not be considered a salary reduction, but keep in mind that before, the employee was considered a full-time employee and counted as 1.0. However, now, if this employee only works 30 hours per week, then that employee is only counted as 0.75. In this case, even though there is no salary reduction, you will have a reduction in the full-time employee head count.
In the summary, for your forgiveness calculation, you calculate the total qualified costs you paid, or incurred, during the covered period. That is the total amount that can be potentially forgiven. If you have a reduction in your salary level, you take the total qualified cost, minus your reduction in the salary level, and you should get the reduced forgiveness amount. If you further had a reduction in your full-time employee head count, then you have to take that number, times the percentage of the reduction in your full-time employee head count, to get the forgiveness amount. If you have both a reduction in the salary level and the reduction in the head count, that can hurt you. Once you figure out the forgiveness amount, you should talk to us to find out if we can maximize your forgiveness.
If you have spent all of your PPP loan funds and you have no reduction in the salary level, and/or no reduction in the head count, or even if you have a reduction in head count, you can apply for the safe harbor. Now you are ready to submit your application.
I am now going to talk about the loan forgiveness process. There are two application forms and you can use either one of them: Form 3805 is the regular form, Form 3805EZ is the easy form. I will go over who can use the EZ Form next, but whether you use either Form 3805, the regular form, or the EZ Form, you will submit the Form to your lender. The lender has 60 days to review the application with all the supporting documentation you submitted. If everything looks fine, the lender will submit it to the SBA. The SBA has 90 days to tell the lender whether, or not, they agree. If the SBA agrees, then your loan will be forgiven.
Many borrowers also receive an EIDL grant. If your PPP loan was $100,000 and you also received an EIDL grant of $10,000, in advance, when you sign the PPP long agreement, that $10,000 EIDL advance has already been rolled up into your PPP loan. So technically, you only have $90,000 of PPP loan and $10,000 of EIDL. Therefore, on your loan agreement, you will show that your PPP loan is $90,000 and only $90,000 will be forgiven.
Many people ask: Do I have to pay back the $10,000 EIDL grant? The answer is no, because the EIDL advance is a grant. It is money that has been given to you. Form 3805EZ is called the EZ Form because it is very short, only three pages. Who can use the EZ Form? If you are a self-employed individual and you have no employees, you can use the EZ Form. If you do have an employee, but you have no reduction in the employee salary level, and no reduction in the full-time employee head count, then you also qualify for the EZ Form.
In the second situation, in which you do have employee, but you have no reduction in the salary or the full-time employee head count, you can use the EZ Form. Keep in mind when you use EZ Form, you still need to provide the supporting documentation to the lender because the lender will have to verify that you qualify for the EZ Form. There are no calculations on the EZ Form. It is a lot more straightforward, and I think people are estimating it will probably only take you about 20 minutes to fill out.
The third situation is that you have employees and you did not reduce anyone’s salary level during the coverage period, but you do have a reduction in the full-time employee head count. You can apply for the safe harbor for the reduction, and if your reduction was due to a CDC regulation and you cannot go back to the normal business activity level that you had before, then in this situation, you would qualify to use the EZ Form.
These slides show what the Forms look like. First, you have to put down your organization information. Is all very basic information. You can see that you have to provide the loan number. If you also received an EIDL grant, then you have to provide the amount and the EIDL application number. You can also see that you have to indicate what payroll schedule you are using, weekly, biweekly, semimonthly, or monthly, and if you are using the regular covered period or the alternative payroll covered period.
I am going to quickly show you the
EZ Form. You can find this form online, or you can get it from your lender. You have to certify that you meet the requirement to use the EZ Form. You have to sign it and make sure that everything you provided on the form is correct.
Now we are looking at
Form 3805. This is the regular forgiveness application. You can see the top section is the same as the EZ Form, but on the regular Form, you will need to provide information regarding how you calculated your forgiveness amount. You must certify that the information submitted is true and correct and then you have to sign it.
Here is the fun part. Here is the PPP the application’s Schedule A, where you have to calculate your head count, the average number of full-time employees you have. You also have to calculate your salary level in order to meet the requirement so that you have no reduction in your forgiveness. I am not going to spend a lot of time going over every single line. If you need help doing this calculation, we are more than happy to help you with it. We can prepare the calculation, or you can do the calculation, we can review it.
Here is the timeline, again, just a summary. If your loan was funded on April 1, you have either 8 weeks or 24 weeks. Again, keep in mind if you receive your PPP loan after June 5, then you must use 24 weeks as your covered period. If your 24 weeks is not finished yet, you are still within those 24 weeks, but you already spent all your money – you received a $2 million loan and it is all spent – you can submit your application now, or you can wait until the end of your covered period, or wait until December 31. If you decide to submit your application early, during your 24 week covered period and you end up having a reduction in the head count, or a reduction salary level, you may have an issue. However, if you are pretty certain that those reductions will apply to you, then yes, you can submit your application early to your lender.
The benefit of submitting your application for forgiveness early is, and I think is Kelly going to go over this next, you will have that loan as a payable on the books. If you have the loan forgiven early, then you can take that off your balance sheet as a liability.
Keep in mind your lender has 60 days to review your application. After your lender approves it, they have to forward the entire package to the SBA. The SBA has 90 days to tell your lender whether they approve it, or not. If they approve it, then the SBA will remit the funds back to your lender. Your lender will let you know that your loan is being forgiven and you will not have to pay anything back to your lender.
If you do have to pay back a portion of your loan, you have either two or five years to pay it back. Keep in mind that the interest will start accruing on the day you received the loan, which is the loan funding date, or the origination date. The date you received the loan will determine your repayment schedule. If you received your loan before June 5, then you have two years payback the loan, unless you negotiate.
You can negotiate with your lender to change the term from two-years to five-years. You do not have to pay back the entire amount until the maturity date of the loan. If you received your PP loan after June 5, then you have five years to repay the loan.
I want to thank you all for the questions that are coming in. I think we will wait until the end of the presentation and address them at that time. We will make the slides available to the attendee list after this presentation.
As far as the forgiveness process with different lenders, I think each lender is going to have their own process for getting comfortable with the information they are going to send to the SBA. I know a couple of different lenders that have engaged different public accounting firms of different sizes to do procedures around each organization or each application for forgiveness.
One of my clients recently received a letter from their lender, and from the CPA firm that the lender had employed, saying that they concurred with their application for forgiveness. Now, and Kelly will talk about this, but that would not be enough for your auditing firm to determine if that is actionable for proof of forgiveness. It ultimately has to come from the lender themselves, but that is a process they are going to have to get comfortable with – what they are going to send to the SBA to ultimately get the verdict on the actual forgiveness. I just thought I would share that.
Thank you. Now, we are going to go over the documentation requirements. What kind of documentation you are required to submit to your lender with the application? First is your payroll records since most of your loan money will be spent on salaries. The lender will definitely want to see your payroll record, which would include your Form 941, your state payroll tax return, if you do a direct withdraw, your bank statements to show the money being wired out to, or directly deposited to your employees’ bank accounts. If you write your employees a check, then the lender will want to see a copy of the canceled check.
You will need to provide the number of full-time employees. This is usually on your payroll tax filing, Form 941, or the state payroll tax return. For your non-payroll costs, such as your mortgage interest, the lender will want to see a copy of the amortization schedule and payments, such as a cancelled check or bank statement, to show the direct transfer or wire.
For rent, again, you will want to provide a copy of a cancelled check or other proof of payment. They also will want to see the lease agreement to make sure the lease was in place before February 15, 2020. For your utilities, they will want to see a copy of the invoice from the utility company and the proof of the payment.
Again, you must submit all of the documentation requested by your lender with your application. As you can see on the application, you have to certify that all documentation submitted is true and correct and all the money was used to cover qualified costs.
Keep that in mind that you will want to be prepared for an audit, especially if your loan amount is more than $2 million. We were told that it is highly likely that an audit of your documentation will be performed if your loan amount is more than $2 million. However, even if it is less than $2 million, you should still keep all your documentation for at least six years, in case they want to come back and review it. Now I am going to turn it over to Kelly.
Kelly Buck, Senior Manager, Audit & Assurance Services:
Thanks, Bella. Today I am going to talk a little bit about the financial accounting side of things, from the auditor’s side. I want to mention a few things that you should keep in mind, to help you as you are tracking this in the GL. Setting-up external accounts would be helpful, setting-up an account for where the bank funds are going, setting-up internal accounts to track the loan funds, the loan liability, and then down the road, the other income where the gain is going to be recognized for the portion of the loan that gets forgiven.
It is also important to make sure you are tracking each transaction, because as Bella mentioned, you want to be able to easily have access to the records that coordinate with the loan forgiveness. So having it easily accessible, so that you can run reports is definitely something we recommend. In terms of the financial accounting perspective, there was a technical Q&A that came out almost two months ago. It basically had two scenarios, which is mostly the guidance that we have had so far from the SBA.
The first scenario of how you would recognize the loan forgiveness would be the debt model. I want to bring this up because as a lot of you are June 30 year-ends and something that is going to come up is: How are you going to recognize the loans at June 30, when you may have received the funds in April and May, and have spent some of the money on employees, maybe not all, or maybe half? So, what are your options at June 30?
There are two models, the first is the debt model. The debt model is probably the easiest to understand. Basically the loan is going to stay a loan until there is the official forgiveness by the SBA, which is the tail end of this whole process. Listening to what Bella said, that could be five months down the road after you submit the application, assuming that they take the full 60-days and then the full 90-days thereafter. So, that’s definitely a long time down the road.
In this model, you will recognize the cash that comes in. You will recognize the cash is a loan liability, and you will keep it as a loan liability through June 30. Here is an example, the financial statement on the right shows that there is going to be a mismatch between the expenses, when the expenses are incurred, and when the gain on the funds is going to be recognized. I want to bring that up as one of the drawbacks…
This is an example where most of the expenses occurred in fiscal year 2020, but the forgiveness is recognized in 2021 when the lender acknowledges that forgiveness.
Thank you, Mike. As Mike mentioned, you are going to be recognizing the expenses as normal. Therefore, as your payroll expenses are being incurred, you are going to continue to do debit cash or debit the expense and credit cash, as you are paying out employees. There is going to be no journal entry on the loan liability side after the initial recognition of the loan.
Until you get that official forgiveness at the end of the period, at the end of the whole process. At that point, you will recognize a gain. Therefore, you will debit the loan liability and credit the gain for the amount that is forgiven. Hopefully, the amount forgiven is all of it, but if there is any remaining amount, you would keep that as a loan and then recognize the payment over the future term.
The other model is the conditional grant model, and this is akin to many federal grants or many state/county grants that you may receive as a nonprofit organization and you are going to recognize the gain as the expenses are incurred. This is similar to the reimbursement-type model, which you should be familiar with. As the expenses are incurred, you will reduce the liability for the loan and recognize the gain at the same time.
So in essence, you are going to have the expenses from the payroll and then you will have the forgiveness of the loan. So looking at the chart, you would have the gain and the expenses in the same period. There would be no net effect to the financials, which sounds great, and looks like it would be the better option, but it does require management in order to estimate what amount, at June 30, is going to be forgiven at the end of the period, since you do not know what amount that is going to be.
You will have to put together an estimate and calculate the expenses that are going to qualify for forgiveness. On the auditor side, we would have to feel comfortable with the amount that you are estimating for forgiveness. There are some drawbacks. You are going to have to do a bit more work at the June 30 period, but in terms of financial presentation, you may be able to show something that is more realistic regarding how you are going to use the funds.
Just to add in, obviously, we are well underway with our June 30 fiscal year-ends, and it is busy season for our nonprofit clients. We have had conversations with our clients, and with our audit committees of our clients, very regularly and have gone over these two options. It has been interesting to me to see that there is no clear consensus about which option is best. Sometimes when there are options, there is a clear winner but I have had maybe 50/50 clients that are going to follow one model versus the other.
What we tell our clients is that they should consider what the pros and cons are of the two different approaches: What will the readers of your financial statements benefit most from, as far as presentation? What would benefit your organization the most, as far as what you put out there to the public? In either case, any activity will be disclosed – that you participated in the program, how much money you received, and if there has been forgiveness or not.
So either way, consider what your financial statements will look like from a visual standpoint. Would it be better to have this extra boost next year because this year it turned out that things are working out, or do you want to show the matching so that it looks like more like a normal year? These are things that should be considered internally. The only other thing I would say about this model is that like everything else that has happened with this program, we are learning as we go, which is why there have been so many FAQs. So much information is still coming out about the forgiveness process, so it is possible that we do not fully understand exactly how it will be played out. Therefore, if you do recognize that forgiveness, and it just turns out that the SBA takes a harder line than anybody expected, you might end up in a situation where you have recognized a gain that needs to be reversed in the next period.
We do not expect that, and think the flexibility act is a very clear indication that they are making changes so that everyone receives full forgiveness as possible, but we will not know until we have gone through the entire process.
Just some last thoughts that I wanted to mention: some of the questions that came in beforehand asked about the best method of using the funds. We want to make sure that you are careful not to double dip. That means that you are not using the same payroll costs for one of your other federal grants, or one of your other grants, that requires the kind of the reimbursement method you are also using to qualify for PPP loan forgiveness.
There is definitely going to be some organizations that have to look at what is the best way to use these funds, as well as other grant funds. For one of my clients, their other grantors, the non-PPP loan funders, were encouraging them to use up all the grant funds before the year-end. However, in order to do that, they would then not have enough costs to meet the forgiveness model for their PPP loan. They ended up not doing the PPP loan program. Therefore, it is something to keep in mind that you have to make sure you are covering all the bases and have that bigger picture in mind when you start to look at the forgiveness aspect of it. I will now hand it back to Bella.
Thank you, Kelly.
There has been some discussion from an income tax standpoint: The forgiveness is not taxable, but all the expenses paid with the PPP loan are not deductible. From the state side, California, and there is still a debate on whether the IRS/federal government is going to allow a deduction on the expenses paid with the PPP loan. We still do not know. We have some for-profit clients, or even if you are a nonprofit and you are doing a 990-T, and you have to file the extension, you may still have questions about whether you can deduct expenses that were paid from the PPP loan. If you have the loan sitting as a liability on the balance sheet and you still have those qualified costs recorded as expenses, and you decide that the expenses are not deductible, you may have to pay tax on the expenses that were not deductible for tax purposes. This is something you want watch out for, as we still do not know the answer.
You may want to be conservative, maybe just add back those expenses for tax purposes, for now. California already said that even if the federal government decides to let businesses deduct those expenses, California would not allow those expenses to be deducted. For the repayment, if 100% of your loan cannot be forgiven, you have either two years or five years to pay back the loan. If you received your loan after June 5, 2020, then you have five years to repay the loan. If you received the loan before June 5, 2020, you have two years, unless you negotiate with your lender.
The repayment will not start until the SBA remits the forgiveness amount to your bank, the lender. You will have to wait – look at the timeline. After you submit the application, you can have 60-days plus, and 90-days until you start making the repayment. Because of the Flexibility Act, you can now defer your payroll tax deposit. Before the Flexibility Act, if you received a PPP loan, you could not defer your payroll tax deposit, but now you can. You can defer your share, the employee share of the Social Security tax and Medicare tax, 50% until the end of 2021, and the remaining 50% until the end of 2022.
A quick update on the HEALS Act: This is a proposal and is not final yet, but there is a discussion on the possibility of a second draw PPP loan. This was released by the Senate in response to the House Democrat’s
HEROES Act. Under the HEALS act, $190 billion will be provided for the second draw. Who can qualify for the second PPP loan?
First, you have to meet the applicable SBA revenue size standard. We do not know what that standard is yet, but you will need to be either the same, your gross revenue, or your gross profits, must be $10 million, or $50 million, or less. Whatever the standard is, you must meet the revenue size standard.
You must have 300 or fewer employees and you have experienced at least 50% reduction in your gross revenue in the first or second quarter of this year, compared to last year.
The maximum loan size in the proposal is 2.5 times your monthly payroll costs, up to $2 million – similar to the rule we had on the PPP loan. If you already received the first PPP loan, the aggregate amount for your first and the second loan cannot exceed $10 million. Therefore, if you received $9 million for your first PPP loan, then you can only get $1 million for the second PPP loan.
There will be a wider range of the expenses that can be forgiven, including expenses you pay to provide the PPP to your employees. The second loan will automatically forgiven if it is under $150,000. For loans between $150,000 and $2 million, you are not required to submit any documentation to the lender, but you will still need to complete the certification and keep your records for at least three years. Again, this is just the proposal. If you are on our distribution list for our Tax Alerts, Audit & Assurance News alerts, or our Nonprofit Advisor, we will keep you updated on any new developments.
I think we should pause and acknowledge that that was probably more likely to happen a month ago. There was some negotiation between the House, which passed this, and the Senate to some degree, and the negotiators for the President, but that has completely broken down. As far as I can tell, and as we get closer to the election, it seems less likely that this will happen anytime soon. It was nice to see what they were thinking, as far as the next branch or tranche for this kind of relief funding.
Thank you Bella and Kelly. We have some questions that have come in and I am going to throw them out there for either of you to answer, if you like. They run the gambit of what we have been talking about, but one of the questions is about the subject of qualifying costs and rental expenses. If an annual lease is in place as of February 15, and ends on June 30, but is renewed to begin again on July 1, is that deemed to be in place throughout the processes?
That is good to know. Therefore, it is not a new lease if you are doing an extension.
I would like to add to that. In addition, regarding your mortgage, if you have a loan and it is refinanced, that also qualifies. As long as the original loan was in place before February 15.
Good. For the PPP application, does it matter what period you use to determine your full-time employee (FTE) head count?
Well, it matters. For your FTE, you have to calculate your FTE, your average monthly head count, the number of FTE during the covered period. Then, you compare that to either from February 15 to June 30 of last year or from this year, January 1 to February 29, 2020. For the base period, you have the option to choose the 2019 number or the 2020 number, but for your covered period, you have to use the average monthly number of full-time employees during your covered period.
Another qualifying expense question: If common area maintenance (CAM) charges are required per the lease, are these qualified costs? Does it matter if the CAM is for prior years and paid in the 24-week period?
If it is part of the lease, it really depends on the lease agreement or when you make the payment. Is it all included in your lease or is it a separate charge? If it is a separate charge, I do not believe that it is considered rent, but if it is all lumped into your lease, or your rent payment, then it can be included. If it is part of the lease payment, then even is for the prior year, but it is paid during the covered period, then you can still include it in the forgiveness.
What about copying machine leases? Like capital leases, perhaps, are those included?
If it is an operating lease, yes.
If it is operating lease.
Yes. If it is a capital use, it is probably sitting as asset on your balance sheet.
So it would be excluded. Can we pay a contractor with PPP loans?
No. The contractor will not count. It has to be your employee, has to be reported on the W2. So when you look at the payroll costs, the wages are pretty much everything you include in the employee W2. So, if you paying somebody for the P99, as an independent contractor, that will not count for the forgiveness.
What if your normal work hours are 37.5 hours a week? Does that mean I am penalized for all employees? Is there a distinction if you have a 40-hour workweek versus a 37.5-hour workweek? If so, what is the impact?
That is a very good question. I think in your number of employees head count, the FTE calculation, unfortunately, since its 37.5-hours per week, you will have to do the percentage calculation. You will take 37.5 divided by 40 to calculate, so that not all of your employees will count as 1.0.
If you use either the 2020 or 2019 as your base period, and if your work hours are the same, 37.5 hours a week, then there is no difference because how you calculate the FTE during the covered period and how you calculate the FTE during your base period, the number is the same. You are using the same number, 37.5 hours per week.
On Schedule A, when it asks for average FTE, is that a percentage or average FTE dollars?
It is average FTE, the number that we just talked about. If you have an employee who works 40-hours a week, he/she is considered 1.0. So it is not based on how much you pay them, it is based on the hours they work. So, it is really hours. The calculation is based on hours worked.
Do payroll costs include the payroll service fee?
No, it does not. The payroll costs only include salaries, the healthcare benefit, retirement plan benefit, and the state and local payroll taxes. It does not include payroll service fees.
Does our organization need to pay the accrued interest after six months of receiving the loan, even though we have submitted the loan forgiveness application and we are waiting on approval? So, in the meantime, do they have to pay their interest payment?
No, they do not. The first payment will start after the SBA remits the funds back to the lender. If you only have 90% of your loan forgiven, the other 10% will have to be paid back. The repayment will start after the SBA makes that determination and the lender lets you know when you have to start your first repayment. Even if the SBA disapproves your forgiveness application, you still have the opportunity to appeal it.
Just to confirm, the FTE calculation date is the date of submission of the forgiveness loan, correct? Not a set period?
The FTE calculation is the calculation for the entire covered period. If you use either the eight-week or the 24-week period, it starts on the date when the PPP loan was funded. The FTE calculation is for the entire covered period, and you compare to the base period. However, if you have a reduction in your FTE, you have until the end of the year to restore it back. Therefore, you will have to look at the number of the headcount on December 31 this year (2020), if you think you will meet that safe harbor.
This is an interesting question: What happens if the original representations included false information assertions? Can they still file for forgiveness or would this require them to just pay the funds back?
If false information was provided, you will be required to pay the funds back immediately, and there could be fines, or civil and criminal charges. One of the questions on the application is regarding the good faith certification. If you received your PPP loan and later discovered that you provided false information, then you have to pay back the loan immediately.
I think we are all waiting to see how that unfolds. Obviously, when organizations applied for the loans in March or April, it was hard to predict the future and things looked very, very bleak. Perhaps they received the loans, and hindsight being 2020, it was not as bleak as it seemed. Does that mean that their initial representations were invalid? It is a debatable point. I think reasonable people will come to reasonably different conclusions there, and we are all anxious to see how this unfolds with the forgiveness process. Correct me if I am wrong Bella, but I think it was indicated that any PPP loans over, was it $2 million or $3 million…
…$2 million and under…
…would have an automatic audit from the government. So that might be the mechanism where they will look at that and consider those good faith representations, or not. There was that brief safe harbor period where you could give the funds back in May, I think it was. We just do not know exactly how this program is going to unfold in the end, as far as these very reasonable gray areas.
So this question about us. Is Windes able to apply for loan forgiveness on behalf of the nonprofit, or review the loan forgiveness application and supporting documents, and review journal entries?
I will let you speak to that Bella, but I will say that we are capable under the
AICPA independence rules, depending on what our relationship is with you, whether you are an attest client or an audit client, there are different levels of support we can provide during this process. Now, if you are an audit client, we would be able to enter into an arrangement with you where we would provide consultation, review your calculations, and do some work around that, but our arrangement letter in that such scenario is very clear that we are not making any decisions, and that you are submitting the application. We are trying to keep that line clear. I think if we do not have that relationship with you already, there is more than we can do. Do you have more to add to that, Bella?
I think you covered everything.
You can get a sense for what a public accounting firm could do for you if you Google
AICPA, PPP loan, agreed upon procedures matrix, or something like that. It is an authoritative source that ascertains what the existing relationship is and the amount of support we can provide without crossing independence lines, which we cannot do.
Mike, should we discuss some of the questions that were sent in prior to the webinar?
Sure. If you would like to answer a few of those.
All right. An interesting question was, if the IRS says that expenses paid with the SBA PPP loan funds are not deductible, how will nonprofit organizations handle it on the 990s?
Well, I think the expectation, unless there’s a 990-T involved, because the 990 is an informational return, that there will not be any difference in the accounting for these expenses related to the forgiveness. Therefore, your payroll and other costs will still appear in your statement of activities, your financial statements, in your 990, and the various Schedules, in the same way that they currently do.
I think we already covered the rest of the questions, but if not, please definitely chime in.
I want to say thank you to you all for your attendance. Thanks to Kelly and Bella for putting this together and presenting it. You have Bella’s and Kelly’s contact information (last page of the presentation slides) and you can always reach out to me as well:
If there is anything more we can do for you, feel free to reach out to any of us at any time. We love working with our nonprofit community. It is something that we are very, very passionate about. We love sharing our knowledge so that access to this information is as seamless and as smooth as possible, on your end, as well.
It is a straightforward program, but there are many nuances and it helps to have some information to refer to, and of course reach out to us if we can help. With that being said, I want to thank you all and hope you all have a wonderful rest of your day. I hope you all stay safe out there and healthy, and enjoy the long weekend coming up. With that, I will say goodbye. Thank you.
Please contact Windes for more information or questions regarding your particular situation at
844.4WINDES (844.494.6337) or via email at firstname.lastname@example.org.