Episode 11 – COVID-19 | Considerations for Calculating and Documenting Forgivable PPP Loans
COVID-19 Podcast Episodes

 
 
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The Paycheck Protection Program is one of the most highly sought-after relief loan options provided from the federal government to aid small businesses heavily impacted by the economic distress caused by the COVID-19 pandemic. Join CRI Partners Heather Jourdan and Alan Jowers as they dive into the calculations related to the forgivable PPP loans and the documentation required to support those calculations.


Intro:

From Carr, Riggs & Ingram. This is It Figures, the CRI podcast, an accounting advisory, and industry-focused podcast for business and organization leaders, entrepreneurs and anyone who is looking to go beyond the status quo.

Alan Jowers:

Hello and welcome. Glad you can join us today. My name is Alan Jowers. I am a partner in the Destin, Florida office of Carr, Riggs & Ingram and with me today is Heather Jourdan. Heather, why don’t you introduce yourself?

Heather Jourdan:

Hi, everyone. My name is Heather Jourdan. I’m also a partner. I’m in the Niceville, Florida office of Carr, Riggs & Ingram.

Alan Jowers:

And Heather and I have been assigned to a firm-wide task force on the CARES act which was passed by the US Senate in response to the Coronavirus epidemic that has happened and we’ve kind of lived and breathed PPP and EIDL loans and all these things that you’ve heard about relating to the CARES act for the past three or four weeks now. We’ve been holding daily briefings amongst our task force and trying to keep our people internally informed and then also trying to help our clients through things such as this podcast and also some quick hits webinars and articles on our website and things like that. So we’ve been involved with PPP now since its inception and have really dived into the details. And what we want to cover today and a little bit more in-depth format is the PPP program, the Paycheck Protection Program, and specifically the forgiveness piece of that. So, we’ve been through a process now where a lot of people have these loans, they’ve been funded or they’ve been approved by the SBA through their bank, and now they’re looking at exactly what needs to happen from a forgiveness standpoint because these PPP loans come with a level of forgiveness. So if you spend money, if you spend the money from the loans on items that the federal government has made available to you, then those amounts can be forgiven and the loan does not have to be repaid. So Heather, talk real briefly about the different types of expenses that can be included in the forgiveness amounts relating to PPP.

Heather Jourdan:

The first main expense that the point of this money is supposed to cover is your payroll costs. And payroll costs are your salary wages, commissions, or other compensation that are paid to your employees. This is their gross wages. So, it does include any employee portions of taxes and any employee deferrals for retirement plans, any employee payments for health insurance. It also can include the employer costs that the employer spends on behalf of the employee for healthcare coverage, that’s the insurance premiums that they pay for them and any contributions that the employer pays for their retirement costs. There is also a portion of the funds that can be spent on interest payments on mortgage obligation. It can be spent on rent costs, it can be spent on utilities, and that includes electricity, gas, water, phone, internet. So those are the main categories of costs that can be used to make this loan forgiven.

Alan Jowers:

Right, and there’s a percentage cap on the non-payroll items, is that correct?

Heather Jourdan:

That’s correct. So, the maximum you can spend with these funds on the non-payroll costs for your rent, utilities, and your interests is 25%. So, if you look at the loan amount that you’ve gotten, you need to multiply that by 25% and that is the maximum that you can spend on those non-payroll costs.

Alan Jowers:

Right. So you’ve got a loan of a $100,000 just to make the math easy. Then the most you could spend on the non-payroll is $25,000. Obviously the remaining 75 is what they want you to spend on payroll. And I think that’s in keeping with what the federal government wants to do. They want the employees of these small businesses to be receiving paychecks and to stimulate the economy in that way. So they do want the bulk of that money to go to the payroll costs, which as you said, includes healthcare, includes retirement. And what’s the period for these costs? The forgiveness period.

Heather Jourdan:

So the forgiveness period starts the minute that you are funded with your PPP loan. And it lasts for the next eight weeks. So you have from that time when you get the money, an eight week period, to document and to spend that money on these qualified payroll at 75% and non-payroll costs that are no more than 25%.

Alan Jowers:

So you get your notification that you have been approved by the SBA for your PPP loan and that the bank has a certain number of days to fund that loan to you and then once you receive that money, that’s when the eight week period starts. But I think, and maybe you’ve heard the same thing I have. It seems like there is some concern over that eight week period, particularly if you have businesses that are in some shape of being shut down. If they get their PPP loan, but yet they’re not allowed to open. I think there’s some people that are saying they would like that eight week period to be deferred. Is that something that you have heard as well?

Heather Jourdan:

Absolutely. Especially for those industries like restaurants, certain doctor’s offices that have not been able to perform their normal services but could only maybe do emergency services. So they essentially have to shut down a portion, if not all of their practices or their locations. There has been talk of maybe expanding that eight weeks or changing the date when that eight week begins, based on your specific state and when you’re shut down orders were maybe lifted and you were able to get back to work. It’s going to take some time for those types of businesses to bring their employees back after they had been laid off. So there is definitely some talk out there of changes to the goals behind the eight week period. So we’ll just have to wait and see if future guidance is released regarding that.

Alan Jowers:

Absolutely. And I think you hit on a very important point that we want to pass along to the listener and that is that a lot of these rules, they just haven’t been written yet. This was a program that came on very quickly and I think the treasury department in Washington rightly focused on getting the money out as quickly as they could and writing the rules relating to the application process. And so now they’re kind of turning their attention to the rules that are written associated with the forgiveness. And there are some stipulations obviously in the act itself and that’s where we’re getting some of this information from. But certainly, there needs to be some additional details to get fleshed out. And I think that could be one of the items that does get fleshed out for those businesses and entities that have circumstances that are effectively precluding them from hiring employees. How are they supposed to pay the employees during this eight-week period? But there’s a handful of things that can also affect the forgiveness. And we’ll talk a minute about the number of employees and about compensation. But talk a little bit about how the rent and the utilities or the mortgage payments, those had to be in place by a certain date in order for them to count as far as forgiveness in this program.

Heather Jourdan:

That’s right. So those particular things needed to be in place prior to February 15th. So you can’t just come and act as if this just happened and put a lease in place and start paying rent and have that count towards your qualifying costs. Those had to be in place prior to February 15th of 2020.

Alan Jowers:

Okay, great. And do we know of anything right now about any stipulations about third parties or can these rental agreements be within related parties? I don’t think that I had seen anything that precludes that, but perhaps that’s something that may come down as the rules get, get written out.

Heather Jourdan:

It may, I don’t want to say anything particularly that excludes any related party. We’ve got a lot of situations where one entity, essentially a doctor, one entity owns the facilities that the doctor’s practice in and the practice happens to be in a different entity and the payroll is going to be paid to that practice entity. And I haven’t seen anything that restricts you from having any leases in place between related parties.

Alan Jowers:

Okay, great. I know that right now we have identified two different sets of circumstances that could reduce the amount of forgiveness that you get even if you make the payments for those required items that we talked about earlier. One is, if you have a reduction overall in your workforce. And the second item is if you have a reduction in the level of compensation that you are paying to any of your employees. Why don’t you talk about that for a second? Just flesh those concepts out a little bit.

Heather Jourdan:

Sure. So the first one, the reduction in number of employees is called the full-time equivalent employee test. And so what it does is, it looks at a comparison period. So you can choose whichever one is best for your particular situation of looking at February 15th through to June 30 of 2019, and you go through a calculation of how many full-time equivalent employees did I have during that period. And as a side note, the SBA has not come out and specifically told us how to calculate full-time equivalent employees. What we’re going with is the same rules that kind of happened with the affordable care act and that you look at 30 hours a week, at least 30 hours a week as a full-time employee, and anyone that’s working less than that, you would add up hours and then divide by that 30 hour week total to see what equivalent that results in. So, you calculate that full-time equivalent number for that comparison theory for February 15th through June 30 or alternatively you can choose January 1, 2020 through February 29, 2020 if that makes any sense for you. And then you compare them to the number of full-time equivalents that you have over that eight week period when you’re using your PPP money. And if that number of employees has reduced, then there’s a ratio calculation that you have to do that will negatively affect your forgivable portion of the loan. The second reduction is the reduction in compensation. So your loan forgiveness can be reviewed if any employees, total pay is reduced more than 25% from the total in the most recent full quarter they worked. So if you were paying someone a certain amount of money and maybe you reduced their hours and now they’re making less than 75% of what they were making before. If it goes down more than 25% and that amount of that reduction is greater than 25%, it is going to be directly subtracted from your forgivable portion of the loan.

Alan Jowers:

And so really what the federal government is saying is, we want you to pay the same number of employees you were paying prior to the Coronavirus. And we would like you to pay them not much less than what they were making prior to the Coronavirus.

Heather Jourdan:

That’s exactly right.

Alan Jowers:

And there is a stipulation that if your workforce has been reduced, well basically in March and April, but yet you get your workforce back up to full strength by the end of June, then you should be okay. Is that correct?

Heather Jourdan:

That’s right. It’s allowing people some time to get that workforce back in and as long as you backup to where you were after June 30, 2020 date, then neither of those reductions would have to be taken against your forgivable portion.

Alan Jowers:

I think it’s one of those good things where they understand it’s going to take a little while for businesses to recover and to get their workforce back up to speed. So as long as you make a good faith effort and get your workforce back to where it was pre-coronavirus, they’ve kind of given you a little bit of leeway as well on that. So that’s good. A couple of last thoughts before we let people go. There’s been no guidance as we have mentioned specifically, but as far as documentation goes, what do you think is going to be needed for businesses to document some of these expected forgiveness amounts?

Heather Jourdan:

Right. I think some of the documentation you’re going to need to pull together to prove these expenses over that eight weeks, are going to be your payroll records, whether it be payroll summaries, pay subs, for all of the employees for all of the time periods that you have paid them within that eight week period. As far as rent and interest and utility payments, they’re going to want to see actual lease agreements, because they will have to prove that that lease agreement was in place before that February 15th, 2020 date. They’re going to want to see utility invoices and then documentation that you did actually pay those guys. So it could be passed with a check, payment with a check. You could have to provide a copy of the bank statement to show if you’re paying those things electronically and that money did actually come out of your bank and you did pay it.

Alan Jowers:

And likely you might have to provide some sort of payroll tax returns, like your 941 tax returns or as it relates to your healthcare benefits or retirement benefits. Probably the same sort of stuff, invoices, copies of checks, perhaps bank statements and things like that. And I know that there are several places including CRI CPA (cricpa.com), where you’ll be able to kind of run through a calculator and help to calculate you through the amounts of forgiveness that you can expect. One other little item, we’ve talked basically up until now about small businesses and nonprofit organizations where they pay employees. However, the PPP also applies to self-employed individuals. And the basis of the application for that is essentially your 2019 schedule C net profit. And that amount is limited to $100,000 just like salaries for individuals working in businesses is $100,000. How do we go about calculating forgiveness for the self-employed people when they are not necessarily paying themselves through payroll?

Heather Jourdan:

That’s right. So, as you said, the PPP loan amount was based on that 2019 schedule C net profit that’s subject to self-employment tax. The forgivable portion is going to be directly calculated based on that 2019 schedule C as well. So, what it’s going to do is look at that bottom line and that’s going to be a year’s worth of self-employment loan. It’s going to take that, divide it by 52 weeks, multiply it by eight weeks, and that’s going to be the portion of your loan that’s going to be forgivable based on payroll costs. You still can use funds for rent if maybe you have a warehouse that you store your goods if you’re a schedule C retailer or if you rent an office space that you work out of, that rent interest that are secured by real or personal property that you use in your business and utilities that you are paying on those locations as well.

Alan Jowers:

And I just ran through some quick math and it looks like if you’ve got a $100,000 limit, divided by 52, multiply it by 8, you get to a little bit more than $15,000 of forgiveness. So if the loan amount is associated with that and it’s a little bit more than $20,000 and you’ll get a little bit more than $15,000 of forgiveness and then that additional $5,000 is for those other things that you identified, rent, utilities and alike. And if you are a self-employed person and you do happen to employ people, then you can also include those employees as part of your loan and obviously as part of your forgiveness. So, I think that about does it for us. The only last thing that I would say to people and Heather, I’ll give you a chance to say a last thing as well. It’s just, as we have documented and talked about throughout this process since it started, we’ve included a slide in all of our presentations that just says TBD, to be determined. Because I think a lot of this still is information that is going to change and there are things that are going to be determined in the future that we just don’t know right now. I think that we will end up having some additional forms and some additional guidance that will come from the SBA, through the banks. That will give us some additional information as we go forward on the forgiveness provisions associated with PPP. Heather, do you have any last-minute things to say?

Heather Jourdan:

Yeah, I completely agree. I think we just need to keep our eyes open and keep looking for that guidance to come out to give us some better idea of how to document and what we’re going to have to provide over this eight-week period. We do have some time obviously. But people are still getting funded right now. We expect there to be a little more money coming into the PPP program, so we’re going to continue to see funding probably over the next couple of weeks, so just keep these ideas in mind of what you need to spend your costs on. And let us know if you need any help.

Alan Jowers:

Alright, well, we want to thank you again for joining us on this podcast, and if you would like any additional information, please visit our website, which is cricpa.com or you can contact your local advisor in the office that is closest to you. So we’d like to say thank you once again. Please stay safe and please stay healthy. Thank you very much. Goodbye.

Outro:

If you want more CRI insights or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures, the CRI podcast. You can subscribe to it figures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.