Understanding PPP Loan Forgiveness Forgiveness Guidance provided but

Understanding PPP Loan Forgiveness: Forgiveness Guidance provided but still more questions than answers

Topics to be covered PPP Loan forgiveness rules as we know them right now Areas still unclear Changes that could have impacted your initial strategy

PPP Loan forgiveness rules as we know them right now Covered Period Eight (8) weeks after PPP loan proceeds are received “Alternative payroll covered period” that starts the first day of your first pay period after you received your PPP Loan Proceeds-This is only applicable for payroll costs though not the other forgivable expenses Paid or incurred expenses The SBA has added guidance to permit the borrower to include eligible payroll and non-payroll expenses paid or incurred during the applicable eight-week covered period. This guidance has the potential to be a significant benefit to borrowers.

PPP Loan forgiveness rules as we know them right now Allowable Expenditures Payroll Costs (must be 75% or more of total loan expenditures) Salary, wages, commissions, or similar compensation Cash tips or equivalent (you can determine an appropriate amount of what tips would have been) Vacation, family or sick leave (excludes payments under FFCRA) Group health insurance Retirement benefits State or local payroll tax (State Unemployment or State Required Disability, city payroll taxes, or School District Taxes as an example) Mortgage interest (for debt secured prior to February 15, 2020) Includes both real and personal property (equipment loans)

PPP Loan forgiveness rules as we know them right now Rent (for lease/rent agreement was in effect prior to February 15, 2020) Includes real and personal property leases (as an example equipment leases) Rent only, not CAM, or shared other expenses such as taxes No prepayments of future rent-paid or incurred and paid during normal cycle Utilities Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”). Non payroll expenses cannot exceed 25% of the PPP loan, if it does, that portion is not forgiven

PPP Loan forgiveness rules as we know them right now The instructions limit the use of the 75% payroll cost test the SBA proposed to apply solely to the maximum forgiveness amounts. Some lenders had indicated that there was going to be a 75% cliff rule— 75% of the loan proceeds had to be used for payroll costs or there would be no portion of the loan forgiven. The SBA instructions indicate the agency has not decided to implement such a rule. Payments to independent contractors are not eligible forgiveness. For selfemployed individuals, until told otherwise, previously issued interim final rules provide that forgiveness related to payroll costs is purely mechanical, and is based on 8/52 of Line 31 of the individual’s 2019 Schedule C, rather than any amounts paid or incurred in 2020.

PPP Loan forgiveness rules as we know them right now Must use 40 hours as guide for calculating the Average FTE amounts To determine the average full-time equivalent employees (FTEs) for the 8 week covered period (or the alternative payroll covered period, if elected), for each qualifying employee, determine the average number of hours worked per week and divide by 40, before rounding to the nearest tenth. The maximum amount for each employee is 1. 0. Alternatively, you can skip the math and use 1. 0 for every employee who worked 40 hours per week and 0. 5 for every employee who didn’t meet that standard. Either way you get there, you will ultimately arrive at the average FTE throughout the relevant covered period.

PPP Loan forgiveness rules as we know them right now Salary/Wages reduction calculation if convoluted but it’s the average annual salary or wage during the covered period vs the annual salary or wage for EACH employee during Jan-March 2020 BUT…there is a safe harbor The second exception may allow a borrower to escape penalty for an FTE reduction if the employer had reduced its FTEs for the period from February 15, 2020 to April 26, 2020 as compared to FTEs on February 15, 2020 and then later restores the FTE level back to the February 15 level by June 30, 2020. Note that for any borrower receiving PPP loan funding on or after the date the application was issued, the June 30 date is going to be before the date that the applicable covered period ends. The application was released less than 8 weeks before June 30, 2020.

Areas still unclear For owners pays/partnership SE Income/or Shareholder pay. Do the attribution rules apply to spouses and/or kids of the owners What happens if you are still in shelter at home orders What are the attribution rules as they relate to related parties What are the rules for minority interest owners. Does the income requirement from 2019 still apply? What about a percentage rent obligation What about NNN leases? We are still assumes CAM is not included

4. Best Practice Strategies to maximize the amount to be forgiven Look at potentially hiring your immediate family members to replace employees who may not be needed yet. We are still waiting on guidance on this. Be sure to pay your retirement match on each pay day Be sure to include an estimate for tips for tipped employees who are not working or who are working but not working in the same role with your dining area currently closed In some circumstances it may be more beneficial to operate with a reduced workforce and convert a portion of the loan to a two-year, low interest loan or immediately repay any unforgiven portion of the loan without penalty.

Changes that could have impacted your initial strategy Income for partners, self employed individuals, and shareholders forgivable is limited to 2019 compensation. If you haven’t filed your 2019 tax return if you are a sole proprietor or partnership you can still probably look at ways to maximize this. If you are an S or C Corp owner you may be stuck based on your 2019 W 2 Depending on guidance hiring kids and spouses may not have been a great idea. Nothing is saying it cant be done but no guidance has been given yet If you were planning on bonusing yourself up to the limit right away and in the prior year your income was below 100 K you may need to determine alternative ways to maximize your forgiveness amount.

Anticipated changes Although the bill in its current state will not pass. Some of these proposed changes to PPP are likely to pass but it may be too late. Extend forgiveness period to 24 weeks from 8 weeks. Deadline to rehire workers would change from June 30 to December 31 The Loan would change from 2 to 5 years The 75/25 requirement would be eliminated My last word of advice. Although the idea of a 100% forgivable loan is nice, prepare yourself mentally that some piece of the loan will NOT be forgiven. Use extra caution is spending money for your team to not work. I know the reason for the program is to put people back to work but remember your number 1 priority is making sure you come out of this.