This informative webinar discusses the additional guidance issued by the Small Business Administration (SBA) on August 11, 2020, for loan forgiveness under the Paycheck Protection Program and reiterates the changes to the program based on the Flexibility Act. It also covers the forgiveness application and the documentation required for the forgiveness.
The following is a text version of the recorded webinar presented by Windes on September 17, 2020.
Host & Moderator
Guy Nicio, CPA, MST is a Partner and Chairman of the firm’s Tax department. He has more than 20 years of public accounting experience and focuses on tax planning, compliance, and consulting with start-up to middle-market businesses and their owners.
Presenters
Bella Wang, CPA, MST is a Tax Director and has more than 20 years of experience in public accounting and specializes in tax planning, consulting, and compliance.
Kelly Buck, CPA, MAcct is a Senior Manager in the firm’s Audit & Assurance Services Department. Her expertise includes audit, accounting, and consulting for nonprofit organizations and employee benefit plans.
DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.
Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at solutions@windes.com.
Guy Nicio, Partner – Chairman, Tax:
Hello and welcome. Thank you for being with us this morning. You will hear two great presenters who are very technically educated and informed on this topic. At the end of this webinar, you will have more knowledge about the PPP Loan Forgiveness process. Windes can help you, if that is something that you would like, as well. Today is September 17, 2020. My name is Guy Nicio and I am the chairman of our tax practice here at Windes.
I am going to be joined today by two of my colleagues, Bella Wang, who is a director in our tax practice and Kelly Buck, who is a senior manager in our audit practice. I will start by telling you about the three of us, and then I will tell you a little more about Windes as a firm. I started my career in public accounting at Windes and I have been with the firm for 22 years. I split my time between client accounting services and tax advice planning and compliance. Currently, I oversee the tax practice, as well as the client accounting services group that operates within the tax practice.
Bella Wang is a tax director who has been with the firm since 2000 and has over 20 years of experience. She is one of our technical resources within the firm who has strong experience in all areas of taxation, including international tax. She is the leading expert, internally, on our paycheck protection program and continues to be a resource to all of our clients, as well as our internal staff here at Windes. Kelly Buck is a senior manager on the audit side. She joined the firm in 2015 and her practice focuses include audit, accounting, and consulting for privately held businesses, nonprofit organizations, and employee benefit plan audits.
What we are going to talking about today is the Paycheck Protection Program (PPP). I think most of you already know the fundamentals about the program, and likely already have received a Paycheck Protection loan that since now, you have not had to worry about the calculations for.
Bella Wang will discuss the tax side of this topic. She has definitely spent a lot of time in this space and knows it very well. It can be very complicated and everyone’s situation is different, so we find that there continues to be questions for each unique situation that our clients have, or that taxpayers have, based on their unique and particular set of facts and circumstances.
Bella’s going to do her best, along with Kelly Buck, to provide guidance on both the tax side and the financial statement side, so that you should be able to handle things yourself, internally, for the calculations of the loan and for the proper recording of transactions for bookkeeping purposes. If you find yourself, at the end of this or at any point in time, needing help from experts, please do not hesitate to contact us. Windes has a team of experts that provides a service to support you, as needed, in your paycheck protection program loan forgiveness calculations, documentation packages, etc. We have a couple of different options. With our VIP service, we do it all. Then we have another option, which is customizable to your specific needs. You can do most of the work yourself. We provide the guidance and direction, answer questions, and we will review your calculations. If anyone is interested at any point in time, subsequent to this webinar, in talking to us about our services, we would be happy to do so.
Now onto the fun, technical stuff. I will turn it over to Bella to take over.
Bella Wang, Tax Director:
Thank you, Guy. Good morning. Thank you for joining today’s webinar. I hope you all had a very nice breakfast and a cup of coffee. There is a lot of information to cover. We will go over questions at the end of the presentation. First, I am going to talk about what is a qualified cost for loan forgiveness. Then, I will discuss the requirements you need to do to avoid any reduction in your loan forgiveness, the forgiveness process, the application, and what kind of documentation is required for the forgiveness application. Kelly will discuss the accounting and financial statement perspective. I will follow-up with loan repayment, in case your loan is not 100% forgiven. Finally, we will cover the payroll tax deposit deferral.
What are the qualified costs that can be forgiven? First, you must understand the forgiveness, or covered, period. If you received your PPP loan before June 5, then you have two options. You can use either eight weeks or 24 weeks for your forgiveness period or covered period. If you receive your PPP loan after June 5, then you must use 24 weeks. You do not have the option to use the eight-week period.
The last day to apply for a PPP loan was August 8, 2020. If you received your PPP loan on August 1, the end of your 24-week period is going to be past December 31; however, your covered period will end on December 31, since the covered period cannot be past December 31, 2020. Qualified costs include payroll costs, such as salaries, cash tips, a payment for leave, and any allowances for separation on dismissal.
Keep in mind that if there was a payment for family leave and/or sick leave, and you used the payroll tax credit for those payments under the Family First Coronavirus Response Act, then you have already used the benefit of claiming the payroll tax credit on the payment for the leave and cannot include those payments in the forgiveness calculation. The qualified payroll costs also include the payment you made for the employee’s healthcare coverage, retirement plan contribution, and the state and local payroll taxes on the payroll. For California, there will also be the employee training tax and unemployment insurance. Therefore, all the wages and the qualified payroll costs you paid or incurred during the covered period is allowable for forgiveness.
For payroll costs, you can choose the regular covered period or the alternative payroll covered period. Here is an example if you received your PPP loan before June 5 and you choose to use eight weeks as your covered period. In this example, your eight-week covered period started on April 22, which is the day you received your funds. The eight-week covered period would end on June 16. If you used the regular covered period, then what payroll can be included in your forgiveness calculation? The payroll period that started on April 13 can be used because that payroll period was paid on April 24, which is after the starting day, or the first day of your cover period. Therefore, even though that payroll, payroll for the period from April 13 to April 19, was incurred before the loan was funded, you can still include that payroll in your forgiveness calculation because it was paid or incurred during the covered period.
If you decide to use the alternative payroll covered period, then you will include the payroll period that started on April 27. For instance, if you have a weekly or biweekly payroll, it is probably more beneficial to use the alternative payroll covered period because you can line up your alternate payroll covered period with your covered period. Therefore, if you have the option to decide and you elect to use the alternative payroll covered period, then your first payroll that will be included in the forgiveness calculation will be the ones highlighted in yellow in the example or started on April 27.
You will need to run the numbers because if your payroll is different for every pay period, you will have to run a calculation to see which way is more beneficial.
In addition to having a weekly or biweekly payroll, say you also have a semi-monthly payroll. In this same example, the eight-week covered period starts on April 22 to June 16. For your payroll from April 16 to April 30, which was paid on April 30, can be included in the forgiveness calculation. The last payroll from June 16 to June 30, which was not paid on June 30, but was the first payment date after end of your covered period, can be included in the forgiveness calculation; however, you need to do a proration. Therefore, for that last payroll period from June 16 to June 30, you can only include the payroll for that one day, for June 16, in the forgiveness calculation. There is a lot of confusion and many questions about which payroll to include in the forgiveness calculation. So again, feel free to reach out to us if you want some clarification or want us to walk through in your specific situation to figure out the best way to maximize your forgiveness.
The payroll costs that you can include in the forgiveness calculation are very similar to the rule that you used when you applied for the loan. For all your employees, the compensation is limited at a hundred thousand on an annualized basis. If you take a hundred thousand divided by 52 weeks, times eight weeks, you get $15,385. That is the maximum amount you can include for each employee if you choose to use the eight-week forgiveness period. If you decide to use 24-week forgiveness period, then the maximum amount of salary you can include in the forgiveness calculation will be $46,154, and that is salary only. You can add your healthcare benefit, retirement plan contribution, and state and local payroll taxes on top of that with a $15,385 or $46,154 limit.
August 24, the additional guidance issued by the SBA, clarified that an owner-employee only includes an individual who own 5% or more in the company. Therefore, if you have any employee who owns 5% or more in the company, then the wage limit is different. For those 5% or more owner-employees, if you choose the eight-week covered period, the limit is eight-weeks out of 52 weeks of their 2019 compensation or capped at $15,385. If you choose the 24-week covered period, the limit is the lesser of 2.5 months of 2019 salary or $20,833 maximum. However, if you have an S corporation and the shareholder did not take out any salary in 2019, that could be a problem because the 2019 compensation will be zero, and basically you get zero amount can be included in the forgiveness calculation.
There is also a different rule for general partners in a partnership. For LLCs, general partnerships, or limited partnerships, if you have a general partner, the general partner’s compensation that can be included in the forgiveness calculation is 2.5 months of the general partner’s 2019 self-employment earning that’s reported on the partners 2019 schedule K1, Box 14a. You also need to reduce that number by any Section 179 deduction that was reported on the K1, minus any unreimbursed partnership expenses, then times 0.9235. Basically, for the general partner, this calculation is similar to how the self-employment tax was calculated on the general partner’s individual return.
Again, this rule can be a little confusing, so feel free to contact us if you want to go over the rule after the webinar. Here is an example. Becky is a sole proprietor. She filed a Schedule C with her 2019 return and she reported $100,000 on the Schedule C net income. She has no employee. When she applied for the PPP loan, she qualified for $20,833, which is her Schedule C income capped at a 100,000 divided by 12 months, times 2.5 months. If she decided to use eight-weeks as her forgiveness period and she pays $2,000 rent during that eight weeks, the maximum amount that can be forgiven will be $15,385 just on the compensation portion, plus $2,000 of rent, resulting in only $17,385 that can be forgiven. However, if she decided to use 24 weeks as her to forgiveness period, then the entire loan amount, $20,883, can be forgiven.
We discussed that qualified payroll costs include salary, compensation, plus healthcare benefits, retirement plan contributions, and state and local payroll taxes. For the owner-employee, you cannot include their health insurance premium that was paid by the company. For S corporation shareholders, there is exception. Therefore, for an S corporation shareholder, if the medical insurance premium paid by the S corporation is included in the shareholder employee’s W2, then you can include that in the calculation. However, the whole amount, the wages, plus the medical insurance premium paid by the S corporation are subject to that $15,385 limit for eight weeks or $20,833 for 24 weeks. That is the special rule for S corporation.
For C corporations, if you have a C corporation shareholder-employee, the wages, just the salary, is limited to $15,385 for eight weeks or $20833 for 24 weeks. Then you may add the medical insurance premium paid for by the C corporation shareholder-employee on top of that wage limit. Therefore, it could be more advantageous for the C corporation shareholder-employee because you get to add the additional medical insurance premium paid on top of the wage limit.
For S corporations, you cannot do that because the medical insurance premium is included in the wage limit. Moreover, for the S corporation, you have to apply the family attribution rule. If you have a 2% S corporation shareholder, the dad, another 2% S corporation shareholder, the son, and then the wife also own 2%, under the family attribution rule, they all own more than 5%. Their wages and medical insurance premiums paid by the S corporation will be limited in the forgiveness calculation. For the owner-employee for S corporations and C corporations, you can include the retirement plan contribution that the company made for them in the calculation. However, you will be capped at 2.5 months, divided 12 months, of the 2019 retirement plan contribution.
If the 2019 retirement plan contribution made for the C corporation and S corporation shareholder is $100,000, then you take 100,000, divided by 12, times 2.5, and that will be your limit. Retirement plan contributions are NOT allowed for the self-employee, individual, or general partner in your partnership.
Again, since there is a different rule for the owner-employee of different types of business entities, I think this slide will be helpful. At the end of the webinar, we will provide a copy of the presentation slides. You can use it as reference to see what can be included, and what cannot be included, in the forgiveness calculation for those owner-employees.
Payroll costs include salary, plus health care benefits, and retirement plan contributions. You cannot include the employee contribution for healthcare benefits in the calculation. Therefore, if you have a cafeteria plan and a certain amount of the medical insurance premiums are deducted from the employee’s paycheck that is the employee’s own contribution. You cannot include it in the forgiveness calculation. In addition, any prepaid healthcare benefits and the retirement plan contributions are not allowed. You are only allowed to include the healthcare benefit and the retirement plan contributions attributable to the covered period in the forgiveness calculation.
Therefore, you cannot prepay your healthcare benefits and contributions in the calculation, even they were paid during the covered period.
Qualified costs. We just went over the payroll costs. So again, payroll costs include your salary, plus healthcare benefits, plus retirement plan contributions, plus state and local payroll taxes. Those are the payroll costs.
In addition to the payroll costs, you can also include other non-payroll costs, such as rent, interest, and utility bills. Non-payroll costs have the same rule; they must be paid or incurred during the covered period.
Here is the example. ABC Company received a PPP loan on April 15. The covered period is from April 15 to June 9. The company has to pay a $100 utility bill, which was due on July 10. Even though that utility bill was paid after the end of the covered period, you can still include a portion of that utility bill in your forgiveness calculation because a portion of that bill was attributable to the utility incurred during the covered period. However, just like your salary, you have to prorate it. You have to do the proration to see how much of that utility bill can be included in the forgiveness calculation.
For your rent and the mortgage interest, the requirement is that the agreement must have been in place as of February 15, 2020. For rent, the rent must be for the real or personal property used by the business. For the interest, the interest must be secured by the real or personal property. The interest you pay on the business line of credit does NOT qualify for forgiveness. The insurance you pay on the facility, the mortgage interest, or interest you pay on your equipment loan, DOES qualify for forgiveness. Again, the loan agreement or the lease agreement must be in place as of February 15, 2020. If you refinance your mortgage, that is okay. If you refinance your mortgage after you received the PPP loan, it still qualifies because the original loan was in place on February 15, 2020.
If you sublease or share your office space with someone else, you can only include the amount of rent attributable to your portion in the forgiveness calculation. For example, if you pay $10,000 monthly rent to your landlord, but you lease a quarter of the space to a subtenant, you can only include 75% of the rent you paid in the forgiveness calculation. In the most recent guidance issued by the SBA, they discussed this self-charged rent. Many of our clients have an operating company, the same owner also owns an LLC, which owns the property that was occupied by the operating company, and the operating company paid rent to the LLC, who owned the facility. That rent qualifies for forgiveness, even though the rent was paid to the related party. However, there is a rule stating that the amount of rent paid to the related party cannot be more than the amount of the mortgage interest that was owed on the property by the related party during the covered period.
Furthermore, if the tenet or operating company paid a mortgage interest to the related party, that is not allowed. Only the rent paid to the related party is allowed for forgiveness. Any mortgage interest paid to a related party is NOT eligible for forgiveness. The purpose of this rule is that the government will allow a payment made to a third party for the forgiveness, but if you are paying mortgage interest to a related party, basically to yourself, then it is considered paying yourself.
Qualified costs also include utilities that were in place as of February 15, 2020. Utilities include electricity, gas, water, telephone, internet access, and some transportation. There is some confusion about what is considered qualified transportation costs for the forgiveness calculation. Qualified transportation costs are transportation charges related to a utility, not transportation costs for an employee vehicle like the gas or mileage. Those types of transportation costs cannot be included in the forgiveness calculation. Again, the requirement is that the service has to be in place as of February 15, 2020.
Perhaps you had a past due utility bill, but you paid it during the covered period, you can include that in the forgiveness calculation. There are certain types of utilities that do not qualify for the forgiveness calculation, such as trash pickup, recycling pickup, VPN service, or you paid an outside consulting firm for IT support. Those utilities cannot be included in the forgiveness calculation.
According to the additional guidance from the SBA, you can include your home office expense in the forgiveness calculation, but only the amount you stated on your 2019 return for you home office expense deduction. If your business is new, then you can only include the home office expenses that you estimate to be deducted on your 2020 tax return.
The change that came out of the June 5 Flexibility Act is that you must spend at least 60% of your PPP loan on qualified payroll costs. Qualified payroll costs include salary, healthcare, retirement plan contributions, and state and local tax. As long as you spend 60% of the funds on qualified payroll costs, then there should be no reduction in your forgiveness, unless you have a reduction in your full-time employee head count and/or a reduction in salary level.
The first rule, or requirement, is that you cannot have a reduction in your full-time employee head count. If you do, then your loan forgiveness will be reduced. So what is the calculation? I will now discuss the formula to figure out if you have a reduction in your full-time employee head count.
You have two options: (1) to use either the period from February 15, 2019 to June 30, 2019 as your base period, or (2) the first two months of this year as your base period. If you are in a seasonal business, then you also have the option to use the period between May 1, 2019 to September 15, 2019, or any consecutive 12-week period as your base period.
Therefore, which period to use as your base period will depend on which option will give you a lower requirement. Basically, you have to calculate the average number of full-time employees during your covered period and compare it to the base period that you used to see if you meet the requirement.
How do you calculate your headcount? For each employee who works more than 40-hours a week, that employee counts as 1.0 (one). For people who work 40-hours or less, then you have to do the calculation. If one employee works 30-hours a week, then that employee counts as 0.75. You would take 30, divided by 40, to come up with 0.75.
If you have many employees who work less than 40-hours per week, it may be very time consuming to do all the calculations. In this case, you can also use the simplified method. If you use the simplified method, you will use 0.5 for any employee who worked less than 40-hours a week.
Using the simplified method would be more beneficial for employers who have many employees who work less than 20-hours a week. If you have many employees who work 10-hours a week, by using the simplified method, you can use 0.5 for all of them. If you were to use the regular method, for those employees who worked 10-hours a week, they will only be counted as a 0.25.
There are some exceptions. If you do have a reduction in your headcount, but you meet the exception, or safe harbor, then there should not be any reduction in your forgiveness. If the employee voluntarily resigned or was terminated for cost, or the employee voluntary asked for a reduced schedule, then you meet the safe harbor. You do not have to reduce your head count for that employee. Another safe harbor is that you have until December 31, 2020 to rehire the employee. Later in this presentation, I am going to talk about timing for submitting your forgiveness application.
If you have a reduction in your head count right now, but are expecting that you might be able to increase your business activity later in the year, and you may have the ability to rehire those employees back, then it is probably better to wait until you have rehired those employees, to avoid any reduction in your full-time employee head count.
The other safe harbor exception that you can apply pertains to the following scenario: You have a reduction in head count and you try to rehire a former employee, but the employee refuses to come back for any reason, you then can try to hire a similar qualified employee to fulfill the position by the end of this year. However, if you cannot find a similar qualified person, then this also meets the safe harbor. In this situation, it is not considered a reduction in the full-time employee head count.
There is another safe harbor if you cannot return to the same level of business activity you had before February 15, 2020 due to compliance with state or federal regulations. For example, you are a restaurant owner and due to the CDC regulations or OSHA regulations regarding outdoor dining, you have to cut back your level of business activity and staffing, resulting in a reduction in head count, this meets the safe harbor and is not considered a reduction in head count.
We talked previously about the safe harbor that allows you to rehire the same employee before December 31, 2020. If your previous employee rejects your offer and you want to apply for this safe harbor, you must inform the California Unemployment Insurance office within 30 days after receiving your employee rejection of your offer to reinstate their position full-time. You must maintain written documentation to show that you offered to rehire the employee and your offer was rejected. If you can provide this documentation, this would not be considered a reduction in head count and should not reduce your forgiveness.
The second requirement is that you cannot reduce your employee salary. This only applies to employees who make a $100,000 or less on an annualized basis. If you have a highly compensated employee who makes more than $100,000 on an annualized basis, this rule does not apply. For people who make a $100,000 or less on annualized basis, you have to make sure that you do not reduce their salary by more than 25% during the covered period. Therefore, during the covered period, you cannot reduce an employee’s salary more than 25%, if they make $100,000 or less on an annualized basis, and the base period is the first quarter of this year from January 1 to March 31, 2020.
The calculation is that you look at all the salaries paid during the covered period. You take the salaries paid to those employees who make $100,000 or less, in the first quarter of this year, and then you analyze on the annualized basis. You compare the two to see if there is more than a 25% reduction in the salaries. If yes, then your forgiveness will be reduced.
There is also a safe harbor for salary reduction. If you had to reduce your employee salary during the period from February 15 to April 26, 2020 because of COVID, but you restore their salary by end of the year, then it is considered an exception and there should be no reduction on your forgiveness.
Guy Nicio, Partner – Chairman, Tax:
I think it is a good time to pause, as we have received quite a few attendee questions. I think some of these questions have already been answered pretty well during the presentation, but I will read a few now, so that everyone is up to speed. “Why wouldn’t everybody take 24 weeks rather than eight?”
Bella Wang, Tax Director:
Good question. For example, you used all of your PPP loan funds in eight weeks, and you do not have a reduction in your head count or a reduction in your employee salary level, but your business is still struggling. If, after the end of the 8-week period, you find that you need to layoff employees, if you used the eight-week period as your covered period, then anyone laid off after the end of your covered period (in this case, 8-weeks) will not affect your forgiveness. So this would be one situation where people would probably want to use the eight-week period because once the eight weeks is over, if there is a reduction in headcount, it will not affect your forgiveness.
Guy Nicio, Partner – Chairman, Tax:
This connects to Grace’s question, which is, “Can it be anything other than eight or 24, for instance, can it be 10?” I think the answer to that is no, you do not get to choose. It is either eight weeks or 24 weeks.
Bella Wang, Tax Director:
That is correct. You do not have the option to choose. It is either eight or 24 weeks. However, keep in mind that if you use the alternate payroll covered period for your payroll cost, if you look at the timeline, it could be longer 24 weeks or eight weeks.
Guy Nicio, Partner – Chairman, Tax:
Allie asked, “Does the date have to start immediately after the funding?”
Bella Wang, Tax Director:
Yes. The covered period starts on the day you received the funds. The other thing I want to mention is salary reduction. A question that was sent in prior to the webinar had to do with salary reduction. Say you have an employee who is paid hourly at $30 per hour. Before COVID, this employee worked 40 hours a week and now the employee has a reduced schedule and only works 30 hours a week, but the hourly rate is the same. If the hourly rate remained the same, this is not considered a salary reduction. Since this person went from 40 hours to 30 hours, it is considered a reduction in the full-time employee head count, not a salary reduction.
Guy Nicio, Partner – Chairman, Tax:
Lynette asks, “Is it Box 1 (one) W2 wages that you are using for this compensation calculation?”
Bella Wang, Tax Director:
It is actually the Medicare wages. It is pretty much in line with Medicare, because Box 1 can include some 401(k) contributions by the employee. So you look at the Medicare box. I believe it is box 5.
Guy Nicio, Partner – Chairman, Tax:
What is included in the utility bill? Is telephone and internet also considered? What about auto payments and interest or employee expenses?
Bella Wang, Tax Director:
No. No employee expenses, no reimbursed employee expenses, telephone, internet, electricity, auto allowance, or any taxable fringe benefits should be included in the forgiveness calculation.
Guy Nicio, Partner – Chairman, Tax:
I just thought we would take a few questions to break up the session. We have more questions, which we will answer at the end of the presentation or at other points in the presentation that are appropriate.
I also want to let everyone know that we are going to be providing and making available to everyone the PowerPoint presentation, as well as the recorded webinar, which will be on our website.
Bella, thank you for letting me interject with a few questions. Please proceed with your presentation.
Bella Wang, Tax Director:
Okay. So this is a quick summary on how the forgiveness is calculated. Again, this is just a quick reference slide that you can go back to, to refresh your memory. This is a lot of information to digest and we want to make this as informative as possible.
You can see that you have the payroll costs and the non-payroll costs. The payroll costs must be at least 60%. You then calculate the total eligible costs you paid during the covered period. You take your total eligible cost, minus the salary reduction. For example, your loan is $2 million, but your total eligible costs are over $3 million, which bigger than your loan amount, and you have a salary reduction of $100,000. So even after subtracting the salary reduction, that amount is still larger than your loan amount, which will not give you any reduction in your forgiveness. However, if you have a reduction in head count, then that will reduce your forgiveness amount because you get to take a percentage of that full-time employee reduction.
One thing to keep in mind, and this is something you may want to consider should you need to reduce your payroll costs, is which one are you going to reduce – your headcount or your employee salary level? Sometimes reducing the salary level is a better option because you get that 25% room there. So instead of cutting your head count by 25%, if you cut your employees salary level by 25%, but keep all of your employees, then you probably can get 100% of your loan forgiven.
So now, you have used all of your money and you are ready to submit your application. What do you need to do? What items do you need to have prepared for the forgiveness application? There are two forms, or applications, available. There is a form 3805 and a 3805EZ. After you submit the form with all the supporting documentation to the lender, to your bank, the bank has 60 days to approve or deny your application. If the lender, the bank, approved your application, they will then forward your application with all the supporting documentation to the SBA. The SBA has 90 days to review and approve or deny your application. So in total, we are talking about 60 days, plus 90 days, so that can easily run to 150 days before you may get final approval from the SBA from the day you submit your application.
Many borrowers also received EIDL grants when they applied for the PPP loan. Many of our clients received a $10,000 EIDL grant. For example, if you received a $1 million loan, but part if that $1 million included the $10,000 EIDL grant, then on the forgiveness application, you would state that you received $1 million, minus the $10,000 EIDL grant. Your PPP loan forgiveness is actually on the total loan amount, minus the amount of the EIDL grant that has already been given to you.
The 3805EZ is a much easier form. It is only three pages and there are only a few numbers that you need to provide. I will show you the form later during my presentation. It has been estimated that it will probably take less than a half hour to fill out. The big question is who can use the EZ form?
First, if you are a self-employed individual and have no employees, you can use the EZ form. Or, if you do have an employee, but there is no reduction in the full-time employee head count and no reduction in salary level, then you can use the EZ form. The third situation is if you have an employee and you did not have any reduction in the employee salary level, but you do have a reduction in your full-time employee head count, but the reduction is due to a CDC or OSHA regulation, then you also qualify to use the EZ form in that situation.
This is the EZ form. As you can see, the top portion is just general information about the business, as well as information about your loan. On the EZ form, you need to provide the bank with your payroll costs, interest, rent, and utilities you paid or incurred during the covered period. Once you figure that out and make sure that your payroll costs, on line 1, are at least 60% of your total qualifying costs incurred during the covered period, then you meet the 60% test, and you are done. Then your loan should be forgiven.
As you can see on the application, you have to certify that all the information you submit to the lender is true and correct and that you used all of the money for qualified costs. Again, you have to certify that you did not reduce any of your employees’ salary levels. If you have no reduction in your full-time employee head count, then you should be fine. If, however, you do have a reduction in your full-time employee head count, but you meet the second requirement and were unable to operate from February 15, 2020 to the end of the recovery period because of a CDC regulation, then you meet the safe harbor. In that case, you can use the EZ form.
The regular form, Form 3805, is much longer and more complicated. On the regular form, you have to provide a calculation for your full-time employee head count and a calculation for your employee salary level. You can see that on the regular form, the same information is requested on the first page, but there is more information you need to provide. You have to provide the total payroll costs, the interest, the rent, utilities, and everything you paid or incurred during the covered period. Then you have to provide the calculation for your full-time employee head count and the calculation for your employee salary level.
This is where many people struggle with the application. What is the correct calculation to provide here? Again, if you need help, we are here to help you. We can help you figure it out how to do those calculations and help you submit the application to maximize you forgiveness.
Here is a quick snapshot, a summary, of the timeline. You can see that your covered period starts on the date the loan was funded. If you received your loan before June 5, 2020, you have 8 or 24 weeks to choose as your covered period.
If you choose 24 weeks and at the end of the 24 weeks, you use up all of your funds, you then have 10 months to submit your application. If you used the 24-week covered period, your covered period ends on September 30, 2020. From September 30, 2020, you have 10 months to submit the forgiveness application to your lender.
Once you submit your application to your lender, the lender has 60 days to review your application. After the lender approves it, they will submit it to the SBA. The SBA has 90 days to review the application. The SBA will come back to the lender, your bank, and say, “yes, this application is approved.” Then, the SBA will remit the loan forgiveness amount to the bank and the bank will tell you that your loan is forgiven, and then you will not have to pay the loan back.
If 100% of your loan is not forgiven, say, only 90% of the loan is forgiven, then the lender will tell you when you have to start making the repayment. You have until end of your loan maturation date to pay off the entire PPP loan. The maturation date also depends on the date you received your PPP loan. If you received the loan before June 5, 2020, your loan period is two years, unless you negotiate something different with the bank. You can negotiate the terms and extended repayment from two years to five years, if your bank approves. This is only if you received your PPP loan before June 5, 2020.
If you received your PPP loan after June 5, 2020, then your loan terms should be five years. If your term is five years, you have until the end of that five-year term to pay off your PPP loan. Keep in mind that you will accrue interest. The interest will start accruing from the day you received the PPP funds.
What kind of documentation will be required when you submit your application? Of course, the big part of your forgiveness amount is your payroll cost. The bank will require that you submit your payroll tax return, such as the quarterly payroll report and the 941, along with all the state payroll reports that you submit it to the California Employment Development Department. They will want to see bank statements to prove that the payroll was paid from your business checking account. If you pay your employee with a manual check, they will want to see copies of your cancelled checks.
They also will need to verify the number of full-time employees you had during your covered period, so they will request to see a copy of your payroll tax return, which usually shows the number of full-time employees you had during the covered period.
Non-payroll costs such as interest, utilities, and rent. For the interest, they will want to see a copy of your loan amortization schedule, copy of the cancelled check for proof of payments, or bank statements to show that the payment was taken from your account for the interest payments. Same thing with the rent and utilities. The bank will want to see the lease agreement and other proof of payments.
As you can see on the previous slide, the application asks you to certify on penalty of perjury that all documentation submitted is true and correct. Again, this is a part of the application. You have to certify that everything you submitted is true and that you did not lie on your forgiveness application. Also, keep in mind; you do not want to exaggerate your expenses because it could be a very hefty penalty if you exaggerate your expenses on the application.
Also, be prepared for an audit. We were told that if the loan amount is more than $2 million, it is highly likely that you will be audited. If the loan amount is less than $2 million, you can still be audited. The chances may be a bit less, but again, you could be audited, so make sure that you have all of the supporting documentation, in case of an audit. Make sure that you keep all documents for at least six years.
Now I am going to turn it over to Kelly Buck, who is going to go over the accounting rules for PPP loans from the financial statement perspective.
Kelly Buck, Senior Manager, Audit & Assurance:
Thank you, Bella. I am going to spend a few minutes talking about the financial accounting aspect and how the PPP loan is going to show up in your financial statements.
One thing I want to mention is how you are going to recognize the different aspects in your trial balance. What we recommend is setting up some internal accounts in your trial balance, so that you can track the cash, the liability, and then, at the end of the period when the loan is forgiven, the gain portion. That way you can mark each transaction that comes in for your PPP funds and be able to clearly identify the activity. Taking these steps will help you in providing accurate information for the loan forgiveness application to your bank, and/or if you are audited.
In terms of how this should be presented in the financial statements, at this point we have received only one set of guidance from the AICPA. It is a technical Q&A, which came out a few months ago. This is what the industry is using to determine how to recognize the loan proceeds in the financial statements. I have seen a few white papers from some of the big four accounting firms about their interpretations, but basically the papers I have read refer to the guidance I mentioned earlier from the AICPA.
There are two models that it presents and I want to talk about how you would present it at a fiscal period, such as a mid-year, June 30, or if you have a different fiscal period for your operation, how you would potentially need to present it. Many of you received the funds in April or May, and are incurring the expenses over eight or 24 weeks, which could be six months and could cross a fiscal period where you would need to present financial statements to the board or to your bank. You might also need to present financial statements where you have not necessarily spent all the money yet.
If your loan period or your 24 weeks ends at the end of September, you may not receive legal forgiveness until after December year-end. This could be something that ties into the December year-ends, as well.
Under the technical guidance, there are two models to present the loan proceeds. The first one being the debt model, which would be as you would anticipate, where the liability is recognized as debt. It is kept as a debt throughout the period until you get legal documentation from the bank that the loan is forgiven, which is going to be all the way at the end of the process, after you have applied, and get that final piece of paper from the bank.
You can see in the example that you are usually going to spend the expenses at a different time then when you are going to recognize the end gain, so it is going to have an impact on the financial statements. Keep that in mind, especially when you are presenting to the board or to the bank, so that they are aware that you might have expenses and gains in different periods. The good thing about this model is that you are not going to recognize gain in the wrong period, if there is additional guidance, or if a portion of your loan is not forgiven.
The other method is called the conditional grant model. This is not necessarily something that many for-profits are used to. It is more of a nonprofit model. However, the guidance does allow for-profits to use this model and the analogous method where the grant is, in substance, a government grant that is intended to be forgiven. If you are going to use this model, you want to make sure that your intent is to use it for the qualifying costs and not for loan purposes.
In this model, you recognize the forgiveness of the loan as payroll costs, or as the qualifying costs are incurred. In the financial statements, you are going to have a gain and expense of the same amount in both periods. Obviously, when you are looking at a fiscal period, this helps match the revenue and expenses and may offset the loss of revenue from other sources a little. On the negative side, it does require management to make an estimate at the fiscal period, or at whatever timeline you are looking at, of what is going to be forgiven. Obviously, that means it will be an estimate, which incurs some risks. So, keep that in mind.
The last thing I want to mention before I hand it back to Bella is you want to make sure that you keep in mind your intent of use of the funds. If you are intending to use them for qualifying costs, then the conditional model may be something you may want to consider. If you are intending to use them as a debt or as loans to help your operations, then you should definitely use the debt model.
Bella Wang, Tax Director:
Thank you, Kelly. We have received many questions about the income tax impact if the loan is forgiven. Based on what we know, that California is conforming to the federal rule, if your PPP loan is forgiven, the forgiven amount is not taxable, but all the expenses you paid by using the funds are also not deductible. So on your books, you received the money, you record it as a liability, eventually, when the loan is forgiven, you will reclassify that liability. You will reverse the liability and record it as income on your books, but at the same time, for tax purposes, the payroll, all the salary, the qualified costs you paid with that PPP loan is not deductible. That can create some additional taxable income on your tax return, which is something you need to keep in your mind.
If your loan is not 100% forgiven, you will have to pay the unforgiven amount back to the bank. We talked about the repayment schedule and that you have until the end of your maturity date to pay back the loan. If you received the loan before June 5, 2020, then you have two years, unless you negotiate with the bank. For a loan that was taken out after June 5, you have five years. You can defer the payment until the SBA has remitted their final determination to the bank. Once that final determination is made, and then you have to start repaying the loan, and the bank will let you know how the repayment should be made.
The last thing I want to cover in today’s presentation is the payroll tax deposit deferral. This came out with the June 5, 2020 Flexibility Act. Before the Flexibility Act, a business who received a PPP loan could not defer their payroll tax deposit. However, the Flexibility Act changed that, so even if you received a PPP loan and used it to pay your payroll, you can defer your employer share of the Social Security tax 50% until the end of 2021, and the remaining 50% until the end of 2022. This is a good option for a business to have – to be able to have additional cash on hand by deferring their payroll tax deposit. However, keep in mind that this is just a deferral. This is not forgiveness. You need to make sure that you reserve the cash because when the deposit is due at 50% at the end of 2021, you want to make sure you have enough cash to make that payment. The other thing to keep in mind is that if you decide to defer your payroll tax deposit, then any of the deferral amount will not be deductible on your current year return. If you defer that 50% to next year, then you will not receive any tax deduction on your 2020 tax return.
We are at the end of our presentation and now we will answer questions. This slide contains all of our contact information. Feel free to reach out to us if you have any further questions.
Guy Nicio, Partner – Chairman, Tax:
Thanks, Bella. Great job, Kelly, as well.
All right, so we do have quite a few questions here and I think as I mentioned on the chat room, we will try to get to as many of these as possible. However, due to the number of questions we received, it is possible that we will not get to all of them live today. Craig Ima, our Chief Marketing Officer, is going to download the questions and we will reach out to those of you whose questions were not answered live today.
We will go ahead and go through some of the questions we have. I am going to start with reading a few that we received in advance of today’s webinar. Without further ado, and again, many of these you may already have heard the answer to in the presentation, but we will go through them again quickly, just in case.
Question: Do we apply for forgiveness through the bank or institution from which we received the loan?
Answer: Yes, that is correct. You submit the forgiveness application to the bank and the bank has 60 days to review that application. After that, they will forward the application to the SBA for final approval.
Question: How do you calculate the full-time employee (FTE) and what is the baseline period? Also for the covered period, is it eight weeks or 24 weeks, or can it be somewhere between eight to 24 weeks?
Answer: I think we already answered that question, but just quickly. For the full-time equivalent, you can use either February 15, 2019 through June 30, 2019 as your base period or 1/1/20 through 2/29/20, as your base period. You calculate your FTE during the base period the same way that you calculate your FTE during the covered period.
Bella Wang, Tax Director:
You have to make sure that you use this method. If you use the simplified method to calculate your FTE during the covered period, you have to use the simplified simplify method to calculate the FTE for your base period.
Guy Nicio, Partner – Chairman, Tax:
Thank you, Bella. The answer continues on with what is qualified, however Bella did a good job of covering that. Again, it is all in the slides there for you.
Question: Can you please clarify FTE definition?
Answer: That was covered in the presentation. 40 hours or more count as one, 30 hours is 0.75 and 20 hours as a 0.5.
Question: Will there be an appeals process to substitute other expenses if the SBA disallows some of the costs?
Answer: Yes, the borrower can appeal SBA’s decision by submitting a request to the office of hearings and appeals. The petition must be filed within 30-calendar days after the earlier of: (1) the final decision received from the SBA; or (2) notification by the lender on the SBA’s final decision.
Question: Status of deductibility of expenses used for loan forgiveness, the status remains that it is not deductible for federal purposes.
Answer: I think we have heard guidance that even if they change it, it is not going to really achieve anything. It is going to basically remain tax neutral. Bella, do you have any elaboration on that?
Bella Wang, Tax Director:
I agree. It is going to be tax neutral. The only problem is that I have a few clients that, even though they have already paid all the expenses from the PPP loan, so all of the expenses paid are recorded as expenses, but that liability is still sitting on a balance sheet. If you are pretty sure that your loan amount will be forgiven, you may want to consider putting that on your income statement, so next year when you file your tax return, you will not be surprised why your income went up so much by the loan amount because you expended the cost, but you did not include the forgiveness.
Guy Nicio, Partner – Chairman, Tax:
Question: Can rent and utilities be used for 24 weeks, along with the salary?
Bella Wang, Tax Director:
Answer: Yes, of course. As long as you have the lease agreement and the utilities were in service before February 15, 2020, then you can include the rent/utility in the calculation. But, you need to make sure that the rent/utility and other non-payroll costs cannot be more than 40% of the loan amount.
Guy Nicio, Partner – Chairman, Tax:
Question: What about members’ wages for an LLC?
Answer: You are not supposed to have wages if you are a member of an LLC, but Bella if you have anything specific for this particular rule, please let the audience know.
Bella Wang, Tax Director:
Assuming the member is a not a managing member, but is basically performing services to the LLC in the capacity as an employee, which is why this member is receiving a salary from the LLC. In this situation, the member is an employee-member in the LLC, so you can include this employee-member’s wages, or salary, in the forgiveness calculation. You are still be limited to the amount of $100,000 on an annualized basis, divided by 52 weeks, times 8 or times 24 weeks.
Guy Nicio, Partner – Chairman, Tax:
I would say that for that particular question, that is something you might want to talk with whoever your business tax advisor is, because that member/wages question in an LLC can be tricky. Outside of the PPP Act itself, there are certain rules for LLC members where you might be getting guaranteed payments for certain services, rather than count them as employees. So I think it is important to review that rule outside of the PPP rules, that you can work that concurrently with what the PPP rules are.
Question: 2019 401(k) Safe Harbor contribution was paid during the eight-week period. Is it eligible for forgiveness?
Bella Wang, Tax Director:
Answer: Yes. If the 2019 401(k) Safe Harbor contribution was paid during the covered period, you can include that in the calculation.
Guy Nicio, Partner – Chairman, Tax:
The only thing that I want to make sure that we are clarifying there, I think that the way you described it in the presentation, Bella, was that it has to be prorated. So in other words, if they are pre-paying for an entire year, you do not get to take the entire amount in the calculation.
Bella Wang, Tax Director:
That is correct. So for health care benefits and retirement plan contributions, you have to prorate it and only include amount that is attributable to your covered period.
Guy Nicio, Partner – Chairman, Tax:
Okay. So just to be clear, it is not just on a cash basis, what you paid, but you have to basically calculate it based on the period that is covered, so it is a prorated number. Thank you for clarifying that.
Question: What supporting documents are required for providing full-time equivalents for both your look-back periods and the covered periods?
Bella Wang, Tax Director:
Answer: On the payroll tax return, I think for certain state payroll tax returns, you indicate the number of full-time employee you have. If you are using a payroll service company like ADP or Paycheck, they can probably provide a report showing the number of full-time employee you have. The payroll record will be the supporting documentation to show how many employees are full-time. If you have some kind of internal time sheet to show how many hours each employee worked, then that will be part of your supporting documentation.
Bella Wang, Tax Director:
Question: When did the owner-employees 5% or more calculation come into play? I have not read or heard that it will be calculated differently until today. We calculated based on maximum.
Answer: The 5% came out August 24, 2020, as part of the additional guidance by SBA. Even before the 5%, they did have this owner-employee limitation, the wage limitation in the Flexibility Act. When you are ready to calculate your forgiveness amount, you look at all your employees, including your owner-employees, and then for the owner-employees, you have to apply a much lower limitation to their wages that can be included in the forgiveness calculation.
Question: Regarding a reduction in the full-time employee headcount: What if the employee died, can we make that reduction?
Answer: If something happened to your employee, that is considered a voluntary termination of employment. You can hire another person to replace that employee; however, I think a situation such as that would be considered a safe harbor because it is a voluntary termination of employment. It would not be considered a reduction in the headcount.
Guy Nicio, Partner – Chairman, Tax:
Well, some might argue that it is not voluntary, but I guess for these purposes, we do get to follow that rule.
Question: What about bonuses? Can we include bonuses paid during the period?
Bella Wang, Tax Director:
Answer: Yes. You can include bonuses paid during the covered period. You do not want to exaggerate your expenses because you want to maximize your forgiveness. Again, you will have that $100,000 wage limit and the bonus paid during the covered period has to be reasonable and be supported.
Guy Nicio, Partner – Chairman, Tax:
Question: What is the deadline to submit forgiveness if selecting 24 weeks?
Answer: It is 10 months from the last day of the covered period and the covered period can end no later than December 31, 2020.
Bella Wang, Tax Director:
Correct.
Guy Nicio, Partner – Chairman, Tax:
Question: Do we need to wait for 24 weeks to apply for the forgiveness? What if we use up the funds before?
Bella Wang, Tax Director:
Answer: No, you do not. You do not need to wait for end of the 24 weeks to apply for forgiveness. If you have already spent all your money, there is no reduction in your headcount, and no reduction in the salary level, you can go ahead and submit your application now. Keep in mind, however, that if you submit your application before the end of your covered period, then something happens and you have a reduction in the headcount, then you will need to report back to the lender because your forgiveness application will need to be revised.
Guy Nicio, Partner – Chairman, Tax:
This is a good opportunity to talk a little more about this. I have had some discussions about this and I think, at least my position is, that the payroll costs are not deductible if the loan is forgiven. So the question is, what happens if your loan is not forgiven in the current year, and you have the payroll costs, do you deduct the payroll costs? In my personal opinion, and I think everyone’s may vary, is that you deduct them as long as that is the current fact at the end of the taxable year. So if the loan has not been forgiven, then I would deduct them, but that is not necessarily the conservative approach. So I have heard really both schools of thoughts on that. What do you think, Bella?
Bella Wang, Tax Director:
Most of the businesses are making quarterly estimates and that is the approach we are taking, or the position we are taking on the quarterly estimated tax payments that are being made right now. Since the loan has not been officially forgiven, then we will take the position that the expense is still deductible. But again, as you mentioned Guy, this is not a conservative approach. If, at end of the year, or next January, February, your loan is forgiven, now you have to pick up income or just allow your tax deduction on the expenses, and you have to be able to prepare that tax payment that will be due next year.
Guy Nicio, Partner – Chairman, Tax:
Yes, that is a planning opportunity, one that you should talk about with your advisors. All right. Bella, go ahead and pick another question.
Bella Wang, Tax Director:
Question: What if you made a reduction in your workforce in March, but did not rehire or fill that position, but kept the remaining workforce and have used 75% eight weeks or 60% 24 weeks of PPP on the payroll expenses? Will the PPP be forgiven entirely?
Answer: Actually, there is no 75%. The rule now is 60%. You have to spend at least 60% of PPP money on qualified payroll costs. If you spent your entire PPP loan on qualified payroll costs, but you have a reduction in head count, that will still reduce your forgiveness. Therefore, you need to make sure that if you do not meet the safe harbor, you have to try to fill that position before 12/31/20 this year.
Guy Nicio, Partner – Chairman, Tax:
Question: Does the paid or incurred apply to health insurance? For example, if we received PPP funds on 8/22/20 and paid the insurance premium on 8/25/20 for the month of August, do you need to prorate any of it?
Bella Wang, Tax Director:
Answer: Yes. The paid or incurred applies to health insurance, as well. If the premium that was paid on August 25, 2020, you can include that. You do not need to prorate it.
Question: Can we choose to rehire different employees by December 31, 2020 and not the ones we let go during the covered period to meet the safe harbor?
Bella Wang, Tax Director:
Answer: Yes, you can rehire different employees.
Guy Nicio, Partner – Chairman, Tax:
Question: Are independent contractors’ wages eligible?
Answer: They are not. That has been pretty clear from the beginning, not eligible for independent contractors.
Question: We have coupled planned layoffs and all agreements were signed before COVID, but the layoffs happened during PPP. What will affect headcounts?
Answer: I do not think that qualifies as a safe harbor, but Bella, go ahead.
Bella Wang, Tax Director:
Yes, that is true. That does not qualify for the safe harbor. If the layoffs happened during the covered period that will definitely affect your FTE calculation.
Guy Nicio, Partner – Chairman, Tax:
Question: We received funds on April 27, 2020. We had already prepaid May 2020 health benefits. Can we include health benefits that were paid before they received the PPP funds? And we paid our July 2020 health benefits prior to the end of their covered period; can we include all of the July 2020 health benefits?
Bella Wang, Tax Director:
Answer: You cannot include a health benefit that was paid before you received the PPP funds. These have to be paid during the covered period. The first one does not qualify, but any healthcare you paid after end of your covered period, but it has to be the first payment day after your covered period, then that will qualify and you have to do some kind of proration.
Guy Nicio, Partner – Chairman, Tax:
Question: As a follow-up on the covered period, if they choose 24 weeks, but exhaust their funds after 16 weeks, can they lay off employees at that time?
Bella Wang, Tax Director:
Answer: No, the 24-weeks covered period still applies. If you lay off employees during that 24-week period, even though you have used-up all of your funds, then that can still be considered a reduction in your FTE and can reduce your forgiveness.
Guy Nicio, Partner – Chairman, Tax:
So that is a good question, Bella. And one that I am not sure I know the answer to, because as you mentioned earlier, you can actually apply for forgiveness prior to the end of the 24-week period, if you exhausted these funds. So in this case, they might not know that they would lay off employees later and so their loan forgiveness application would not reflect that.
Bella Wang, Tax Director:
Correct.
Guy Nicio, Partner – Chairman, Tax:
So in that case, what would happen? Is this something that would be a self-reporting issue or if you are audited, basically, you would be subject to the recapture?
Bella Wang, Tax Director:
Exactly. Yes. There would be a charge-back, a recapture. So yes, that will affect your application. Again, most cases, you should reveal with us, or with your tax advisor, if you have uncertainty on whether you are going to keep all your employees. We would recommend that you wait until the end of your covered period to submit your application.
The only benefit is that, again, if you are a 100% certain that you will not have a reduction in your headcount or salary level, and you are ready to submit your application and everything is clean, by getting your application approved early, you can remove the liability from your balance sheet. It might be good for your financial planning and for banking purposes. As Kelly mentioned, from the financial perspective, if you have to present a financial statement to the board, to the outside reader, or to your investor, it is good to have that liability off your balance sheet, but in most cases, we do not recommend you to submit the application early, if you have any uncertainty.
Guy Nicio, Partner – Chairman, Tax:
Question: Does the FTE reduction percentage, if applicable, also apply to the rental and utility amounts claimed?
Bella Wang, Tax Director:
Answer: Going back to the formula, you calculate all of your total eligible costs paid, minus any salary reduction, and then you multiply the percentage of the headcount reduction. So yes, a reduction in headcount will affect the qualified costs, which include the rent and utilities. I hope that answered the question.
Guy Nicio, Partner – Chairman, Tax:
Question: How are temp-to-hire employees treated in the before and after calculation? For example, if a company has 10 temp-to-hire employees and furloughed them, would these employees count as reductions?
Bella Wang, Tax Director:
Answer: Yes. For those temp-to-hire employees, you look at the number of hours they work doing the week. If those temp-to-hire employees worked 30 hours, 20 hours, or 10 hours during the base period, and also during your covered period, if they are furloughed during your covered period, then that will affect your FTE calculation.
Guy Nicio, Partner – Chairman, Tax:
Question: Can you only submit forgiveness one time? What if you make a mistake on your application? Can your application be resubmitted or corrected?
Bella Wang, Tax Director:
Answer: That is a very good question. I think it will depend on the lender. If the lender is still in the process of reviewing the application, I think they may allow you to resubmit or correct the application. If the application has already been reviewed by the lender and forwarded onto the SBA, I do not believe you can resubmit it or correct it.
Guy Nicio, Partner – Chairman, Tax:
It is possible they may issue additional guidance on that in the future. It likely depends on which direction that mistake is going. My guess is if everything has been approved and the mistake is in your favor, action and guidance for an amended process, you will not be able to do that. But I would expect that if it is in the favor of the government, that they might want you to volunteer that information. Then it becomes a business decision of whether or not you submit that voluntarily, or you just understand the exposure under audit. That is something you would also discuss with your advisor.
Bella Wang, Tax Director:
That is the very important. The key is that you talk to us, or talk to your advisor, to make sure that your application is correct and accurate. If you are entitled to a higher forgiveness amount, and because of a mistake in your application, you lose the opportunity. Of course, it is not in your best interest to submit an application with mistakes in the first place, so again, definitely talk to us before you submit your application to the lender.
Guy Nicio, Partner – Chairman, Tax:
Question: What is the a cost to get help with the PPP loan forgiveness application from Windes?
Answer: A couple people have asked this. I think I have mentioned it, but obviously, the costs are completely dependent on the amount of complexity and time involved, based on how many employees you have and the types of expenses. We will provide you a quote based on those facts and circumstances. All you have to do is take note of our email addresses here on the screen. Please email myself, along with Bella, and we will schedule an appointment to go over the facts with you and provide a fee quote to assist you.
We have options in which we completely do it all for you, or where we are just in a supporting role and you do most of the work and calculations. We give you some guidance, direction, and we review your work, or anything in-between. This is available to anyone. Just reach out to us and take note of our email addresses here.
Bella Wang, Tax Director:
Question: Can an S corporation with only shareholder-employees use the EZ form?
Answer: Yes, if the S corporation does not have any reduction in head count, assuming, let’s say that there are two shareholders in the S corporation and both shareholders are still working for the company, and there is no reduction in headcount or the salary level, then yes, they can use the EZ form.
Question: Do you have to deduct the EIDL loan from the loan forgiveness?
Answer: Yes. For example, if you have a $1 million loan, that EIDL loan should already be rolled up into your PPP loan. On your PPP loan agreement, that $1 million is actually $990,000 because $10,000 of it is your EIDL loan. So when the bank reviews your application, they will automatically deduct the EIDL from your total loan amount and the $10,000 advance you received from EIDL, you do not have to pay back. It is a grant. The only thing you need to worry about is the $990,000, which is the PPP loan you are going to apply for forgiveness for.
Guy Nicio, Partner – Chairman, Tax:
All right, thank you, Bella. That is all the time we have today for questions. Please do not hesitate to email us with your questions that have not been answered.
We would like to thank everyone for attending, giving us the opportunity to share this information with you. We value all of our clients and network, and we appreciate your attention and your time today.
It is a complex area that continues to evolve. Guidance continues to be released, but it is very important to make sure that you do the calculations correctly to maximize your loan forgiveness. After all, it is a very difficult time with the current outlook and all the issues that we are going to be having in the economy from COVID-19. Loan forgiveness through the CARES Act is designed to be one of the tools that the government is giving us to be able to thrive in this time. So please allow us to continue to be your resource, to help you to get the best benefits from this particular incentive.
Thank you everybody for your time. We look forward to connecting with you again soon. Enjoy the rest of your day.
Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at solutions@windes.com.