ppp flexibility act of 2020 · 6/12/2020 · • 35 years of tax practice experience • emphasis...

PPP Flexibility Act of 2020Hold the Old or Grab the New?

Rethinking the Game From Scratch

Bradley Burnett, J.D., LL.M. (Taxation)

Bradley Burnett Tax Seminars, Ltd.BradleyBurnettTaxSeminars.com

[email protected]

© 2020 Bradley Burnett Tax Seminars, Ltd.2

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Today’s Speaker: Bradley Burnett, J.D., LL.M.• Practicing Colorado tax attorney • 35 years of tax practice experience• Emphasis is on tax planning and tax controversy resolution• Prepares a handful of tax returns• Delivered more than 3,000 presentations on U.S. tax law in 6 countries• Authored texts of 40 CPE courses• Served as adjunct professor at University of Denver School of Law Graduate Tax

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• Appeared on Denver NBC television affiliate KUSA Channel 9• Received Illinois Society of CPAs Instructor Excellence Award• Top-rated, most requested instructor for CPA Society annual tax conferences five

times

PPP Flexibility Act of 2020Hold the Old or Grab the New?

Rethinking the Game From Scratch


Bradley Burnett Tax Seminars, Ltd.BradleyBurnettTaxSeminars.com

[email protected]


Disclaimer

• This presentation and accompanying course materials are designed to provide accurate and authoritative information as to the subject matter covered

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06/12/20 © 2020 Bradley Burnett Tax Seminars, Ltd. 9

Paycheck Protection ProgramFlexibility Act of 2020


BradleyBurnettTaxSeminars.com


PPP Round 2Current Status as of 06/06/20

1. Approved Loans 4,531,8832. Approved Dollars $511,382,171,9793. Average Loan Size $112,8414. # of Participating Lenders 5,4585. Estimated Funds Remaining $147,617,828,1266. Amount Approved 05/30/20-06/06/20 $1,147,673,054

https://home.treasury.gov/system/files/136/SBA-Paycheck-Protection-Program-Loan-Report-Round2.pdf


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Paycheck Protection Program Flexibility Act of 2020

1. Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) (P.L. 116-142 (06/05/20))

a. Passed House on 05/28/20 – Vote 417 to 1b. Senate – Passed by voice vote w/o amendment on 06/04/20c. Signed by President (06/05/20)d. 3½ pages long, 5 sectionse. Stretches out time to spend for forgiveness from 8 to 24 weeks

2. May want to grab prior law 8 wk period, not new 24 wk period3. Timing of forgiveness app is compelling question4. Treasury owes us new guidance, new Forgiveness App5. Yet another PPP bill heating up in Congress



PPP Flex Act of 2020Treasury / SBA Reaction

1. Joint Statement of Treasury and SBA (06/08/20)

a. 06/30/20 remains last date on which a PPP loan application can be approvedb. Expect new guidance and Forms promptly2. Interim Final Revisions of 1st Interim Final Rule (IFR (06/11/20))- Amplifies a few Flex Act basics / We need much morehttps://home.treasury.gov/system/files/136/PPP-IFR-Revisions-to-First-Interim-Final-Rule.pdf

3. New PPP Loan Application Form 2483 (06/20) (issued 06/11/20)https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Fillable.pdf


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Prior Law H.R. 7010Loan Term 2 years after borrower

applies for forgiveness(only for loans received

before 06/05/20) (could be mutually extended to up to

5 years if borrower and lender agree*)

5 years* after borrower appliesfor forgiveness (only for loans

received** after 06/04/20)

** Based on date SBA assigns loan number


** Joint Statement of Treasury and SBA (06/08/20)

* PPP Flex Act §2



Prior Law H.R. 7010Deferral No payments by borrower

(of principal, interest and fees on PPP loans) for 6

months from date of disbursement of loan*

No payments by borrower (of principal, interest and fees on PPP

loans) until

1. Date SBA remits borrower’s loan forgiveness amount to lender, or

2. If borrower does not apply for loan forgiveness, 10 months after

end of borrower’s loan forgiveness covered period**


** Flex Act §3(c) (retroactive to 03/27/20), Joint Statement of Treasury and SBA (06/08/20)

* Interim Final Rule (IFR 1) (04/02/20)



Prior Law H.R. 70108 WeekCovered Period

8 weeks* after PPP loan proceeds received (CP) (or

alternative 8 week period** (APCP) (delayed

start date))

Extended to earlier of 24 weeks after proceeds

received or 12/31/20***

Election of current law 8 week period (only possible for loans

received before 06/05/20)****

No APCP in Flex Act


* CARES Act §1106(a)(3) ** IFR Loan Forgiveness §3 a.ii. (05/22/20)

*** Flex Act §3(b) strikes out and replaces CARES Act §1106(a)(3)

**** Flex Act §3(b)(3) adds new CARES Act §1106(l)


Post Flex ActBurning Questions




1. Will APCP (alternative payroll covered period) (starts on 1st pay date after PPP loan proceeds received) be available for 24 week period?

2. If spend out PPP on payroll costs early, must I wait until end of 24 weeks to file forgiveness app?

a. Forgiveness early helps borrower to eliminate loan from books so can go out and borrow more

b. Mnuchin (on 06/10/20): “I think the majority of this money is going to be forgiven in the next few months, and that’s our intent.”

c. Issue: Though PPP spent on payroll, still must face percentage reduction test on 12/31/20




3. If drop in employee pay or headcount (between 02/15/20 and 04/26/20), must I wait until 12/31/20 to file forgiveness app?

a. If reduction in pay (or hours) during 8 week period, may need to wait until 12/31/20 to avoid reduction in forgiveness

b. This is a long time to wait.c. Uncertain as to whether can ramp back up (hire employees back) on 12/31/20d. Causes havoc with 2020 income tax return (because uncertain as to deductibility of

expenses funded by PPP)




4. Must an independent contractor (IC) wait 24 weeks to obtain complete forgiveness?

a. IC automatically gets forgiveness for portion of 2019 net profit (Schedule C line 31 (or Schedule F line 34))

b. Under 8 week rule,




Prior Law H.R. 7010Reduction in

Headcount (FTEE)

Rehire Safe Harbor

No headcount reduction if rehire by 06/30/20*

06/30/20 test retroactively eliminated*

The rehire safe harbor has not been eliminated by Flex

Act. However, the rehire target date has been

extended to 12/31/20

No headcount reduction if rehire by 12/31/20**


* CARES Act §1106(d)(5)

** Flex Act §3(b)(2)) retro axing 06/30/20



Prior Law H.R. 7010Reduction in Headcount

(FTEE)Safe Harbor

No reduction in forgive if:

1. Employee refuses to return to work (both offer job and refusal

in writing) and rat ‘ee out to SUTA,

2. Fire employee for cause,3. Employee voluntarily

resigned, or 4. Employee requested

reduction in hours*

No reduction in forgiveness if drop in headcount from 02/15/20 to 12/31/20 if:

Borrower both:1. Unable to rehire individuals

who were employees of the borrower on 02/15/20, and2. Unable to hire similarly

qualified employees for unfilled positions by 12/31/20**


** Flex Act §3(b)(2) retroactively adding to CARES Act new §1106(d)(7) * IFR §5(g) (05/22/20)



Prior Law H.R. 7010Reduction in Headcount

(FTEE)Safe Harbor

Employee refuses to return to work (must both offer job and

refusal in writing) and rat out to SUTA, fire employee for cause,

employee voluntarily resigned or employee requested reduction

in hours*

No reduction in forgiveness if drop in headcount from 02/15/20 to

12/31/20 if:

Company unable to return to same level of business activity operating

at < 02/15/20 due to compliance w/ orders issued

03/01/20 to 12/31/20 by 1. HHS, 2. CDC, or 3. OSHA related

to worker or customer safety requirements re: COVID**

State or local agency orders not eligible for safe harbor


** Flex Act §3(b)(2) retroactively adding to CARES Act new §1106(d)(7) * IFR §5(g) (05/22/20)


Status of Forgiveness Reduction Safe HarborsAfter PPP Flex Act

1. Prior to Flex Act, 5 safe harborsa. Rehire by 06/30/20, orb. Employee refused to return to work, fired ‘ee for cause, ‘ee voluntarily resigned or

‘ee requested reduction in hours*2. After Flex Act, safe harbors:a. Rehire by 12/31/20,b. Unable to rehire or rehire same quality, orc. Company unable to return to 02/15/20 business level due to compliance w/ certain

fed govt or CDC order re: Covidd. * Unknown: Do safe harbors (granted by Treasury) referenced in 1.b. above still

exist?




Prior Law H.R. 701075/25 Test (2nd 75%

Test)

At least 75% of potential forgiveness amount must be

used for payroll costs*

Eliminated

60/40 Test

(Cliff Rule?)

Did not exist To get forgiveness, must use at least 60%** for payroll costs

For full forgiveness, must use at least 60% of PPP loan for payroll costs, and < 40% of forgiveness amount may be attributable to nonpayroll costs***

If use < 60% for payroll costs, will not receive full forgiveness***


* Did not exist in CARES Act Treasury introduced in IFR 1 (04/02/20) ** Flex Act §3(b)(2) adds new CARES Act §1106(d)(8) *** IFR §1(o) (06/11/20)


PPP Flex Act60% Test – Newly Released IFR

1. IFR (Revision to 1st IFR (06/11/20)) §III, 1., o.2. For full forgiveness, use at least 60% for payroll costs and not more than 40% for

nonpayroll costs3. If use 59% for payroll costs, will not get full forgiveness. Instead, partial forgiveness.4. Example: If $100,000 PPP loan, and during covered period spends $54,000 (or 54%) on payroll costs,

then (because used less than 60% on payroll costs), max forgiveness $90,000 ($54,000 in payroll costs constitute 60% of forgiveness amount and $36,000 in nonpayroll costs constitute 40% of forgiveness amount)



Paycheck Protection Program Flexibility Act of 2020Prior Law H.R. 7010

Deferral of Employer

Social Security Tax

No deferral of newly incurred employer social

security after PPP forgive date*

Deferral of employer socialsecurity available regardless of

PPP forgive**


* CARES Act §2302(a)(3)

** PPP Flex Act §4 striking CARES Act §2302(a)(3) retroactively to 03/27/20


PPPSeminar Objectives

1. PPP – How much to borrow?2. PPP – How to use?3. PPP – How to maximize forgiveness?4. How much to repay?5. Guidance – Discombobulated / Moving target 6. The clock is ticking- But wait, which clock? 7. How to play forgiveness game - Avoid hits- Eye to future



PPP Loans The Law of the Street

06/12/20

1. The law of the law vs.

2. The law of the street vs.

3. The law of later

© 2020 Bradley Burnett Tax Seminars, Ltd. 29


Navigating to PPP ForgivenessThrough a Maze



Beware Taking a HitInside the Maze



If Get Hit by DodgeballPart (or All) Forgiveness Lost

• Ways to get hit1. Borrow incorrectly (not needed, too much, wrong person)2. Spend on non-allowed uses3. Spend on allowable, but non-forgivable uses4. Spend at wrong time (outside covered period)5. Drop in pay (salary or hourly wage reduction) (fail 1st 75% test)6. Drop in headcount (FTEE reduction)7. Spend disproportionately on non-payroll (fail 2nd 75% (or 60%)

test)8. Fail to prove qualify for forgiveness (prove it or lose it)



Hit 1Borrow Incorrectly

• Borrow Incorrectly

1. Not needed2. Adequate sources of funds available elsewhere3. Borrowed too much (more than rules allowed)4. Wrong person borrowed the money

- Best advice: Pay it back promptly, hire a great lawyer (“Send lawyers, guns and money” Warren Zevon)



Paycheck Protection ProgramGood Faith Certification Required

• Good Faith Certification Required

1. “Funds will be used to retain workers, finance payroll expenses, make mortgage, rent and utility payments”

2. Current uncertainty makes loan necessary to support ongoing operations3. No ability to access other sources of liquidity sufficient to support ongoing

operations in a manner not significantly detrimental to the business (FAQs #31 (04/23/20), #37 (04/28/20))

4. Take this extremely seriously to avoid perjury- Don’t double dip, misrepresent, spend out of bounds, fail to trace proceeds to

allowed expenses, fail to prove



PPP Loan Forgiveness App Form 3508

• https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf


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PPP Loan Forgiveness App Form 3508 Certifications



PPP Loan Forgiveness App Form 3508 Schedule A



PPP Loan Forgiveness App Form 3508 Schedule A Worksheet




1. Guidance (statute, Treasury rules) messy, incomplete2. No history (because brand new loan program)3. No one quite knows extremely important details4. Forgiveness Form, Instructions are cart before horse- Just jump right in to number crunching with no guiding narrative or Interim Final Reg

(IFR) to back it up5. Forgiveness approach to date is bass-ackwardsa. Oxford = Contrary to what is usual, expected or logicalb. Webster’s = In a backward or inept wayc. Urban Dictionary has yet quite another definition



PPP Loan Forgiveness App Form 3508 The Cart Before the Horse



PPPState of the Union

1. From beginning, PPP fraught w/ ambiguous SBA guidance 2. Guidance doled out in piecemeal fashion- Makes it difficult to plan to max forgiveness3. Compels us to resolve uncertainties based on common sense4. Unanswered questions remain5. Forgiveness regs issued 05/22/20 11 pm ET6. Many people want “the answer” (in places, there’s no such thing)7. Today’s presentation will queue up questions, (range of) choices, judgment calls we

face and odds of success8. If you’ve got time, wait to make your move (don’t jump gun)- Don’t take irreversible action based on incomplete guidance



PPPMechanics / Timing of Loan Forgiveness

1. Treasury issued Regs “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” (05/22/20)

https://home.treasury.gov/system/files/136/PPP-IFR-SBA-Loan-Review-Procedures-and-Related-Borrower-and-Lender-Responsibilities.pdf

2. No forgiveness app submitted or loan forgiven until > 8 weeks after PPP loan proceeds received

2. Forgiveness app submitted by borrower to lendera. Borrower computes forgiveness amountb. Borrows certifies much appropriate behavior


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4. Lender reviews forgiveness app (IFR re: forgiveness (05/22/20))

a. Lender reviews1) Certifications2) Documentation3) Computations

b. Lender may request more payroll documentation if local payroll provider or in-house payroll

c. 60 days to make determination after all documents received- If requests more documents, gets 60 more daysd. May approve in whole or part or deny altogether




5. SBA then gets to take a squint (IFR re: forgiveness (05/22/20))

- SBA has 90 days to approve (or not) forgiveness6. Above process can take up to 150 days (or more)- Loan payments may come due while waiting7. If directed by SBA, lender will deny forgiveness w/o prejudice- In turn, SBA may take a very long time to review8. SBA may review loan regardless of whether a. Forgiveness applied for or notb. Loan amount $2M (or less) (or more)



SBA Review of Loans $2M and Under

9. FAQ #39 (05/27/20) “Question: Will SBA review individual PPP loan files?” Answer: “Yes.

a. “In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan.

b. “SBA will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.

c. “Additional guidance implementing this procedure will be forthcoming.” 10. IFR re: Procedures for SBA Loan Review (05/22/20) “1. SBA Reviews of Individual PPP

Loansa. Will SBA review individual PPP loans? Yes. SBA may review any PPP loan, as the

Administrator deems appropriate.”




10. SBA has up to 6 years to launch review

10. What may SBA review?

a. Borrower eligibilityb. Appropriateness of loan amountc. Spending (or not) on allowable usesd. Forgiveness amount



SBA ExamsIf You Refuse to Play Ball




11. If refuse to play balla. No forgivenessb. Personal liability c. Possible fraud1) Civil2) Criminal

12. If play ball and lose, appeal process availablea. Exact process soon to be announcedb. Not sure if must pay before appeal



PPPHot Off the Press

• Interim Final Rule – Requirements – Loan Forgiveness (05/22/20 11 pm ET)https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf

1. Can get more than 8 (24) weeks expenses2. Guidance (and confusion) re: owner employees3. What about bonuses?4. Employer must rat out some employees to SUTA5. Mechanics of 1st and 2nd 75% tests (2nd test changed to 60%)

6. Safe harbor to protect employer from employee drop outs7. Timing of loan forgiveness process


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Loans



Paycheck Protection ProgramLoans

• Loan program to any business, §501(c)(3) non-profit, veteran’s org or tribal business with 500 or < employees (prin. residence in U.S.) (CARES Act §§1102, 1106)

1. Designed to keep workforce together2. Borrow PPP, spend on (mostly) payroll costs3. May be forgiven in whole or part if pay (mostly) payroll4. Self-employed qualify for themselves



PPP LoansThree Aspects

• Three aspects of PPP loans

1. Source- Whether, when and how to apply

2. Use- Discipline to apply proceeds to allowable uses

3. Forgiveness- Achieving forgiveness by jumping through hoops



PPP Source

• How Much Can You Borrow?

Loan cap = Lesser of

1. $10M, or2. Average monthly payroll x 2.5 *

* Plus, if applicable, refinancing into PPP of SBA EIDL loan made between 01/31/20 and 04/03/20



PPPUse

• Allowed use of PPP loans (Act §1102(a)(2)) The Big 5:

1. Payroll costs (Act §1102(a)(2), 15 USC §636(a)(36)(A)(viii))

2. Mortgage interest payments (but not prepayments or principal payments) (Act §1102(a), 15 USC §636(a)(36)(F)(i)(VI))

3. Rent payments (including rent under a lease agreement) (Act §1102(a), 15 USC §636(a)(36)(F)(i)(V))

4. Utilities (Act §1102(a), 15 USC §636(a)(36)(F)(i)(IV))

5. Interest on any other debt (incurred before 02/15/20) (Act §1102(a), 15 USC §636(a)(36)(F)(i)(VII))



PPPForgiveness

• Allowed forgiveness of PPP loans (Act §1106(b)) – Any below amount paid or incurred in 8 weeks beginning w/ date of loan origination:

1. Payroll costs (Act §1106(a)(8) refers to §1102(a)(2), 15 USC §636(a)(36)(A)(viii))

2. Mortgage interest payments (liability of borrower, mortgage on real or personal property and incurred before 02/15/20) (but not prepayments or principal payments) (Act §1106(a)(7)(B))

3. Rent payments (“lease agreement in force before 02/15/20”) (Act §1106(a)(4))

4. Utility payments (electric, gas, water, transportation, telephone or internet access for which service began before 02/15/20) (Act §1106(a)(5))



PPPUse vs. Forgiveness

Allowed (or Not) Item Use ForgivenessPayroll costs Yes Yes

Mortgage interest payments (but not prepayments or principal payments)

Yes No, unless specifics below met

Mortgage interest payments (liability of borrower, mortgage on real or personal property

and incurred before 02/15/20) (but not prepayments or principal payments)

Yes Yes

Interest on any other debt (only debt incurred before 02/15/20)

Yes No




Allowed (or Not) Item Use ForgivenessRent payments (including rent

under a lease agreement) Yes No, unless specifics

below met

Rent payments (“lease agreement in force before 02/15/20” *)

Yes Yes

06/12/20 © 2020 Bradley Burnett Tax Seminars, Ltd.

* Question: For a lease (with no written agreement in place) operational before 02/15/20, will a ”memorialize and ratify” lease document suffice?

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Allowed (or Not) Item Use ForgivenessUtility payments Yes No, unless

specifics below met

Utility payments (electric, gas, water, transportation*, telephone or internet access for

which service began before 02/15/20)

Yes Yes

Other (e.g., taco shells) No No


* Transportation is not defined. Is it transportation (away) of trash and sewage? Probably. Is it transportation of fuel (gas and diesel) to a remote location? Probably. Is it gasoline for a business vehicle? Maybe (IFR (04/14/20) re: sole proprietor indicates yes), but how to prove service began prior to 02/15/20? Repairs to business vehicle? Same issues.


PPPSource vs. Use vs. Forgiveness


Source Use Forgive (but 75%)

Period 2.5 months 8 weeks 02/15/20 - 06/30/20

Salary (max $100,000) X X X

Employee benefits (health ins, ‘erretirement plan contrib, SUTA)

X X X

Interest (debt < 02/15/20) X X

Rent (in force < 02/15/20) X X

Utility (service began < 02/15/20) X X

Interest on other mortgages X

Non-mortgage interest X

Other rent X

Other utilities X

Other

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Hit 2Spend on Non-Allowed Uses

• Spend on non-allowed uses – Consequences

1. Borrowing App Certifications violated- Possible fraud prosecution2. Loan becomes recourse- Possible personal liability of owners if personally benefited3. No forgiveness (must pay it back)



PPPMechanics of Use

• Mechanics of use of covered loans*

1. Deposit entire loan proceeds into separate bank** account***a. Directly pay allowables from that separate bank accountb. Track on a separate spreadsheet!!c. Perhaps track in separate set of books, then merge

* How the accountant saves the company ** Either new account or existing other (shell or savings) account *** Better yet, 2 accounts – 75% into payroll account, 25% into rent, etc.



PPPMechanics of Use

• Mechanics of use of covered loans

3. Less preferable method = From separate account, reimburse operating account for expenditures made from it

a. Carefully account in detail for exact items reimbursedb. Make accounting extremely careful (like w/ an accountable plan (under §62(c), §1.62-

2))1) Problem: People in chaos are not careful2) Imprecise transfers (to cover broad spending) leave you exposed

4. Think interest tracing rules (§1.163-8T and -10T) by analogy- There, if you don’t prove what spent loan proceeds on, you’re toast



PPPMechanics of Use

• Mechanics of use of covered loans

5. Other less direct approaches quite riskya. Burden of proof on borrower (taxpayer)b. Risks 1) Not all of loan forgiven2) Recourse debt may result 3) Origination fees may not be reimbursed by SBA4) Violates certification that $ will go to allowable uses – Possible fraud



PPPMechanics of Use

Approach Good Result ResultDrop loan proceeds in separate PPP bank

account(s), pay allowed items directly

Best best: Drop proceeds > 75% (60%)into PPP payroll acct, < 25% (40%) into

PPP other acct

Best approach Not bad if done correctly

Other less direct approaches Not as good Maybe OKFrom separate account, reimburse

operating account for items made from itNot as good Maybe OK

Drop PPP into general operating account Not best at all Potentially horrible result


Protect the permanent over the temporary – Temporary inconvenience is tolerable

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PPPPayroll Costs

Allowed (or Not) Item Use ForgivenessEmployee principal place of residence inside U.S.** Yes Yes

Employee principal place of residence outside U.S.** No No

Employee salary, wages, commissions, similar comp Yes YesPortion of individual ’ee salary exceeding $100,000

annual salary (prorated for covered period)No No

Wages paid by employee leasing company (e.g. PEO)* Yes Yes


(Act §1102(a)(2), 15 USC §636(a)(36)(A)(viii)(I)) * Treas. FAQ #10 ** Treas. FAQ #33, Treas. Reg. §1.121-1(b)(2))

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PPPPayroll Costs

Allowed (or Not) Item Use ForgivenessCash tips* or equivalent (based on employer records

or reasonable, good-faith employer estimate)Yes Yes

Allowance for separation or dismissal Yes YesVacation, parental, family**, medical** or sick**

leave (**but, not under Families First Act)Yes Yes

Sick, family or medical leave under Families First Act No NoPayment of group health care coverage, including

insurance premiumsYes Yes

Payment by ‘er of retirement plan contributions Yes Yes


(Act §1102(a)(2), 15 USC §636(a)(36)(A)(viii)(I)), IFR re: Forgiveness (05/22/20)

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* While tips are forgivable payroll costs, employer FICA and HI may be generated, which are not forgivable


PPP Payroll CostsEmployment Taxes

Allowed (or Not) Item Use ForgivenessEmployee salary, wages, commissions, similar comp Yes Yes

Fed (OASDI, Medicare (HI), FIT, RRTA) withheld from employee

Yes Yes

State / local (SIT, other) withheld from employee Yes YesEmployer OASDI and Medicare (HI) No No

Employer FUTA No NoPayment of state / local tax on ’ee comp (e.g., SUTA) Yes Yes

Workers’ Comp No No


(Act §1102(a)(2), 15 USC §636(a)(36)(A)(viii)(I))

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Seasonal BusinessEligibility for Loan / Payroll Costs

How to test for eligibility for PPP for a seasonal business? (Treas. FAQ #9 (04/07/20))

a. General requirement that business be operational on 02/15/20b. If not in operation on 02/15/20 (e.g., concessions at baseball park), business may be eligible if

either1) In operation on 02/15/20, or 2) For 8 week period between 02/15/20 and 06/30/20

Note: For seasonal business, to determine payroll cost time periods for data, see Treas. FAQ #14 (04/07/20)

PPP Additional Criterion for Seasonal Employers (04/28/20)https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Criterion-for-Seasonal-Employers.pdf


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Payroll CostsHot Spots

Are S Corp shareholder salaries included in payroll costs?

a. Salaries count as “payroll costs” in both statute and Treas. Interim Guidanceb. Not prohibited in Treas. Interim Guidance or elsewherec. These are compelling arguments for inclusion as “payroll costs”



PPP – SBA Additional GuidanceIndependent Contractors, Partnerships, Partners

• PPP Interim Final Rule - Additional Eligibility Criteria Requirements for Certain Pledges of Loans (04/14/20)

1. Details rules for computing loan eligibility for IC2. Clarifies how partnerships apply for comp of partners

https://www.sba.gov/document/policy-guidance--ppp-interim-final-rule-additional-eligibility-criteria-requirements-certain-pledges-loans


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Are guaranteed payments to partners included in payroll costs or not?a. Partnerships apply for partners1) “Self-employment income of general active partners may be reported as a payroll

cost”2) Cap of “$100,000 annualized”

b. Partners do not apply on own behalf

SBA Business Loan Program Temporary Changes: Paycheck Protection Loan – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (04/14/20) (p. 5)



PPP Payroll CostsPartnerships and Partners

Payroll Costs (Source) Use ForgivenessPartnership submits app to borrow for payroll cost

of “SE income” of “general active partners” 5

allowed Need

guidance

Appears to include guaranteed payments for services paid to partners

“ “

Appears to include all SE taxable income reported to partner by partnership

“ “

Does not appear to add health insurance premium or retirement plan contribution on top of SE income

“ “

Capped at $100,000 per partner (annualized) “ “Does not specify as to 2019 vs. 2020 “ “


SBA Business Loan Program Temporary Changes: Paycheck Protection Loan –Additional Eligibility Criteria … (04/14/20) (p. 5)

77



May payers include in “payroll costs” amounts paid to independent contractors (ICs)?

a. “No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation” (Treasury Interim Rule p. 11)

b. Answer: No. Any amounts paid by business to IC excluded from business’s payroll costs. (Treas FAQ #7 (04/07/20))




Eligibility for PPP loan for sole proprietor

a. Must be in business on 02/15/20b. SE incomec. Principal place of residence in U.S.d. Filed 2019 Form 1040 Schedule C- If no 2019 Sch. C, special rules soon (not available yet)*- If did not (or not entitled to) claim expense on 2019 Sch. C, not permissible use

during 8 weeks after receipt of loan proceeds (Treas. Temp. Changes (04/14/20) (p. 9), but also see p. 5)

* Law of the street – Some will apply even if no 2019 Schedule C – Some banks will go along with it




Compute PPP loan amount for sole proprietor (IC)

e. To prove eligibility for IC

1) 2019 Form 1040 Schedule C*2) One or more Form(s) 1099-MISC received3) Invoice, bank statement or book of record establishing IC4) 2020 invoice, bank statement or book of record establishing in business on

02/15/20

* Treas. Temp. Changes (04/14/20) p. 5 indicates SBA will issue additional guidance for individuals with SE income who (i) were not in operation in 2019, but who were in operation on 02/15/20, and (ii) will file 2020 Sch. C




Compute PPP loan amount for sole proprietor (IC)

a. Two types of computations (Treas. Temp. Changes (04/14/20) (p. 6))

1) IC w/ no employees2) IC w/ employees

b. For IC alone 1) To compute, divide 2019 Schedule C line 31 net profit (or $100,000 if less) by 12,

multiply by 2.5

2) Add EIDL loan (01/31/20 – 04/03/20) refinanced



PPP SourcePayroll Cost Independent Contractor

Allowed (or Not) Item Use ForgiveIf 2019 Schedule C (filed or not)

2019 Schedule C line 31 net profit (or $100,000 if less) divided by 12, multiplied by 2.5

5 uses Need guidance

Does not appear to add health insurance premium or retirement plan contribution on top of line 31 total

If not in business in 2019Either: 1. Wait for later guidance (bad idea), -or- - -

2. Make reasonable projection * 5 uses Need guidance


* Plus, add in payroll costs for IC’s employees

82


Covered ExpensesHot Spots

Are self rentals included in covered expenses or not?

a. Rentals allowed in covered expenses by statute and Treasuryb. Self rentals not prohibited either placec. These are compelling arguments for inclusion as covered

expensesd. These bother me:1) Newly (after 02/15/20) executed self leases2) High (above commercially reasonable) self rents



Paycheck Protection ProgramLoan Particulars

1. Loan nonrecourse- Becomes recourse if proceeds used for unallowed purpose2. No personal guarantee or collateral required3. No requirement that loan not available elsewhere4. MAKE SURE APPLICATION OF LOAN PROCEEDS ARE A VERY CLEAR MATCH TO

PERMITTED USE5. Good faith certification required



Recourse vs. Nonrecourse



Paycheck Protection ProgramIncome Tax Effect of Nonrecourse Loan

1. PPP loan nonrecourse (but, recourse if proceeds used for unauthorized purpose(s))2. If loan used for covered purpose, it remains nonrecourse3. Any operating loss funded by loan may not be deductible right away a. §465 at-risk, §752 basis or S Corp basis rules may not allow basis allocation or current write-offb. Structure, if possible, for maximum immediate deduction c. Subsequent income tax-free debt forgiveness also potentially threatens deductibility of expenses

funded by forgiven portion (§265, tax benefit rule, court cases) (Congress needs to clarify)



Paycheck Protection ProgramLoan Forgiveness Taxability

• Loan Forgiveness Taxability (Act §1106)

1. Any amount forgiven does not have to be paid back2. Any amount forgiven is excluded from gross income- This is incredible!! 3. Is related payroll expense deductible?a. IRS says “NO” in Notice 2020-32 (04/30/20) citing application of IRC §265 to §162 and

§163 expenses b. I’m not convinced IRS got it right (in Notice 2020-32) (see Shepard, Lee A., “Paycheck

Protection Program Business Expenses”, Tax Notes Today (04/27/20)

c. Need Congressional guidance



Paycheck Protection ProgramGeneral Terms

1. Interest rate – During covered period, covered loan interest rate 1% (by statute, not to exceed 4%)

2. Payment deferment – 6 month deferment includes principal, interest and fees3. Origination fees – Lender reimbursed by SBA 4. Forgiveness of all or portion of loan available5. Remaining balance after forgiveness guaranteed by SBA- Maturity 2 years from date loan forgiveness applied for



Paycheck Protection ProgramLoan Forgiveness

• Principal (and interest*) forgiven in amount equal to covered costs incurred during 8 weeks from loan origination (covered forgiveness period):

1. Wages, etc., payroll costs2. Mortgage interest for qualifying debt existing < 02/15/203. Rent 4. Utilities

* IFR (Revision to 1st IFR (06/11/20)) §III, 1., o.



PPPSource vs. Use vs. Forgiveness


Source Use Forgive (but 75%)

Period 2.5 months 8 weeks 02/15/20 - 06/30/20

Salary (max $100,000) X X X

Employee benefits (health ins, ‘erretirement plan contrib, SUTA)

X X X

Interest (debt < 02/15/20) X X

Rent (in force < 02/15/20) X X

Utility (service began < 02/15/20) X X

Interest on other mortgages X

Non-mortgage interest X

Other rent X

Other utilities X

Other (e.g., taco shells)

90


Hit 3Spend on Allowable, But Non-Forgivable Uses

• Spend on allowable, but non-forgivable uses – Consequences

1. Borrowing app certifications not violated - Thus, no fraud prosecution2. Loan remains nonrecourse3. No forgiveness (pay back w/in 2 years of date submit forgiveness app)



PPP Three Aspects + One

• Three aspects (plus one) of PPP loans (SUFR)

1. Source- Whether, when and how to apply 2. Use- Discipline to apply proceeds to allowable uses3. Forgiveness- Achieving forgiveness by jumping through hoops 4. Repayment- If not proper use or not forgiven, must repay



PPP LoanAccounting Entries

1. Upon receipt of PPP loan proceedsDebit Cash Credit PPP Loan (long term liability account)

2. Upon spending of proceedsDebit Expense Credit Cash

3. Upon forgiveness Debit PPP loan Credit PPP loan forgiveness (other income acct)

- Other than creating above 2 new accounts, keep chart of accounts, P&L and balance sheet the same



EIDL LoanAccounting Entries

1. Upon receipt of EIDL loan proceedsDebit Cash Credit EIDL Loan (long term liability account)


3. No forgiveness (except for EIDL advance (see next slide))4. Upon repay of loan

Debit EIDL loan Credit Cash

- Other than creating above 1 new account, keep chart of accounts, P&L and balance sheet same



EIDL Loan AdvanceAccounting Entries

1. Upon receipt of EIDL loan advanceDebit Cash Credit EIDL Advance (short term liability account)


3. Upon forgiveness*Debit EIDL advance Credit EIDL loan forgiveness (other income account)

- Other than creating above 2 new accounts, keep chart of accounts, P&L and balance sheet the same

* EIDL advance reduces PPP forgiveness



The Whole Point of PPPGovernment Wants Wages To Be Paid



Hit 4Spend Outside of Covered Period

• Spend at wrong time (spend outside covered period)

1. Form 3508 Instructions: Borrower may choose either:

a. Covered period (CP) – 8 week* (56 day) period starting w/ day PPP loan proceeds received, or

b. Alternative payroll covered period (APCP)** – 8 week (56 day) period starting w/ 1st

day of 1st pay period following receipt of proceeds (only available if biweekly or more frequent payroll schedule)

* Flex Act lengthens to 24 weeks (168 days) ** Note: APCP not referred to in PPP Flex Act



PPP Payroll CostsStatutory Construction

1. Rules of statutory construction: What does the statue say? What doe the statute not say?

2. CARES Act §1106(b) says a borrower is eligible for forgiveness for “costs incurred AND payments made during the covered period”

- This somewhat unclear language is source of much confusion

3. Example: May a 2019 yet unpaid employer pension (or profit sharing, etc.) obligation count as forgivable “payroll cost” if paid within covered period (CP or APCP)?

a. Argument: Yes, if it’s paid in the covered periodb. Argument: No, it’s not both paid & incurred in covered period



PPP LoanFill Up Bucket First With Safe Stuff

1. Fill up forgiveness bucket first with non-controversial spending on forgivable uses

2. If at end of forgiveness period, still room in bucket (more forgiveness to be achieved), add in less certain PPP expenditures to forgiveness request



Filling the BucketHow Hard Is Too Hard to Push?



PPP Loan ForgivenessIncurred and Paid

1. PPP loan forgiven if borrower uses all of loan proceeds for forgivable purposes and employee and compensation levels maintained (CARES §1106)

2. Forgiveness for amounts (incurred AND paid) over 8 week period following the date of the loan (CP or APCP):

a. Payroll costs b. Nonpayroll costs 1) Payments of interest on mortgage debt incurred < 02/15/202) Rent payments on leases in force < 02/15/20, and3) Utility payments under service agreements dated < 02/15/20



Payroll CostsIncurred and Paid

3. Eligible payroll costs (IFR, p. 9 (05/22/20)) (Form 3508 Inst., p. 2)

a. Forgiveness for payroll costs paid and incurred during 8 week (56 day)* CP and APCP * or 24 week (168 day)

1) Paid = On day paychecks distributed or borrower initiates ACH transaction2) Incurred = On day employee’s pay is earnedb. Payroll costs incurred, but not paid, during last pay period of CP (or APCP)

considered paid if paid on or before next regular payroll datec. Otherwise, payroll costs must be paid during CP (or APCP)





d. Example: Bi-weekly payroll schedule (every other week)1) 8 week covered period begins June 1 and ends on July 26 2) 1st day of 1st payroll cycle that starts in CP is June 7 3) May elect APCP for payroll costs starting June 7 and ending 55 days later (total 56

days) on August 1 4) Payroll costs paid during APCP eligible for forgiveness 5) In addition, payroll costs incurred during this APCP eligible for forgiveness so long

as paid on or before 1st regular payroll date occurring after August 1





e. Pay to furloughed employees count for forgiveness- For employees not performing work (but that remain on borrower’s payroll), payroll

costs are incurred based on schedule established by borrower (typically, each day employee would have performed work)





f. Some bonuses and hazard pay during covered period eligible for forgiveness

1) If an employee’s total comp does not exceed $100,000 annualized, the employee’s hazard pay and bonuses are eligible for loan forgiveness

2) My question: Is such payment in ordinary course of business?




3. Eligible payroll costs (IFR, p. 11 (05/22/20)) (Form 3508 Instr., p. 2)

g. Cash comp eligible for forgiveness for each employee may not exceed annual salary of $100,000, as prorated for covered period (i.e., $15,385* per employee)

h. Other payroll costs count on top of cash (PPP IFR 04/02/20)

1) Thus, payroll cost could actually be higher than $15,385*2) Payroll cost per employee = (Up to) $15,385* salary +

allocable health insurance + allocable employer retirement plan contribution

* No official guidance yet whether extended to $46,155 (i.e., $15,385 x 3)




3. Eligible payroll costs (IFR, p. 11 (05/22/20)) (Form 3508 Instr., p. 2)

i. Cap on loan forgiveness for owner-employee

1) Amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll comp can be no more than lesser of 8/52 of 2019 compensation (i.e., approximately 15.38%* of 2019 compensation) or $15,385*

2) Per individual in total across all businesses






j. Owner-employees

1) “Owner-employees” not defined. By default, does it mean S Corp (and maybe C Corp) shareholders -or- IC’s?

2) Capped by amount of their 2019 employee cash comp and employer retirement and health care contributions made on their behalf

- Apparently, this means up to $15,385*, plus a prorated amount of employer retirement and health care contributions






k. Schedule C

1) Capped by amount of their owner comp replacement, calculated based on 2019 net profit

2) No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers, as such expenses are paid out of their net self-employment income





l. General partners

1) Capped by amount of their 2019 net earnings from self-employment (reduced by claimed §179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235

2) No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including general partners, as such expenses are paid out of their net self-employment income



Nonpayroll CostsIncurred and Paid

4. Eligible nonpayroll costs (IFR, p. 12 (05/22/20)) (Form 3508 Instr., p. 2)

a. Eligible nonpayroll costs = Covered mortgage interest, rent and utility paymentsb. ”Must be paid during the covered period or incurred during covered period and

paid on or before the next regular billing date, even if the billing date is after the covered period” (IFR, p. 12 (05/22/20)) (Form 3508 Instr., p. 2)

c. Thus, it appears:1) Late rent, interest and utility payments paid in CP (or APCP) qualify2) Rent, interest and utility payments incurred during, but made after, CP (or APCP) qualify



Hit 5Drop in Pay (Salary or Hourly Wage Reduction)

• Drop in pay (salary or hourly wage reduction) (fail 1st 75% test) (IFR, p. 18 (05/22/20)) (Form 3508 Instr., p. 7, Sch. A Worksheet)

1. A reduction in employee’s salary (wage) will reduce loan forgiveness amount (w/ salary of $100,000 or less a year) (Worksheet Table 1, Box 2) if wages reduced by > 25% during 8 week covered period vs. period 01/01/20 thru 03/31/20

2. For each new employee in 2020 (and each existing employee not paid more than annualized equivalent of $100,000 in any pay period in 2019), borrower must reduce total forgiveness amount by total dollar amount of salary or wage reductions in excess of 25% of base salary (or wages) between 01/01/20 and 03/31/20 (the reference period)





3. Full-time employee’s weekly salary dropped from $1,000/wk during reference period to $700/wk during covered period

a. Continued to work full-time during covered period with FTEE of 1.0b. The first $250 (25% of $1,000) is exempted from the reductionc. Borrower seeking forgiveness would list $400 as salary/hourly wage reduction for

that employee (the extra $50 weekly reduction multiplied by eight weeks)





4. June 30 (12/31/20) safe harbor: For each employee, forgiveness not reduced if annual salary as of 06/30/20 (12/31/20) exceeds average annual salary between 02/15/20 and 04/26/20



Hit 6Drop in Employee Headcount (FTEE Reduction)

• Drop in headcount (FTEE reduction) (95% of complexity)

1. Drop in number of employees (or average paid hours)a. Full time equivalent (FTE) employee reduction calculation –

Measures number of employees dropped by businessb. Forgiveness reduced by % of employees (or paid hours) if:1) Average weekly FTEE during covered period is less than2) FTEE reduction during chosen reference period (either

02/15/19 to 06/30/19 or 01/01/20 to 02/29/20)*

* For seasonal employers, either of above referenced periods or a consecutive 12 week period between 05/01/19 and 09/15/19. Form 3508 Instr. p. 5



Hit 6Drop in Employee Headcount (FTEE Reduction)

• Drop in headcount (FTEE reduction) (95% of complexity)

2. Computation of average FTEE (40 hrs/wk) (IFR, p. 17 (05/22/20))

a. For each employee, enter average number of hours paid per week, divide by 40, and round total to nearest tenth

b. Maximum for each employee is capped at 1.0c. Ex: 2 ‘ee’s. ‘Ee A 40 hrs = 1.0 FTEE. ‘Ee B 8 hrs = 0.2. Total 1.2 d. A simplified method that assigns a 1.0 for employees who work 40 hours or more

per week and 0.5 for employees who work fewer hours may be used insteade. Ex: 2 ‘ee’s. ‘Ee A 40 hrs = 1.0 FTEE. ‘Ee B 8 hrs = 0.5. Total 1.5f. Goal: For CP (or APCP), want lowest drop in FTEE factor possible



Hit 6Drop in Employees (FTEE Reduction)

3. FTEE reduction (prior PPP Flex Act) exceptions (IFR, p. 14 (05/22/20)) (Form 3508 Instr., p. 8 (FTEE reduction safe harbor))

a. Borrower made good faith written offer to rehire employee rejected by employee (Tommy declined to return)

b. To be eligible for good faith written offer, must prove1) Good faith, written offer during covered period2) For same salary (or wages) before cut3) Offer rejected by employee4) Documented rejection of offer5) Borrower ratted on rejecting employee to SUTA office




3. FTEE (prior PPP Flex Act) reduction exceptions (IFR, pp. 16, 22 (05/22/20)) (Form 3508 Instr., p. 8 (FTEE reduction safe harbor))

c. Employee during covered period (new PPP Flex Act goes even broader)

1) Fired for cause 2) Voluntarily resigned, or 3) Requested reduction in hours




3. FTEE (prior PPP Flex Act) reduction exceptions (IFR, p. 15 (05/22/20)) (Form 3508 Instructions, p. 8 (FTEE reduction safe harbor))

4. June 30 (12/31/20) safe harbor: No reduction in forgiveness ifa. Reduced FTEE levels from 02/15/20, andb. Restored FTEE levels by not later than 06/30/20 to levels in pay period that

included 02/15/20




5. When does PPP borrower need to measure FTEEs or average FTEEs?

a. 8 (24) week CP or APCP (PPP Flex Act no references APCP)b. 02/15/20 to 06/30/20 or 01/01/20 to 02/29/20c. Payroll that includes 02/15/20d. Average FTEs for 02/15/20 to 04/26/20e. 06/30/20 (12/31/20)f. If seasonal, other period of choice



Hit 7Spend Disproportionately on Non-Payroll

• 2nd 75% (60%) test: At least 75% of potential forgiveness amount must be used for payroll costs (IFR, p. 12 (05/22/20)) (Form 3508 Inst., p. 2)

1. Borrower fails 2nd 75% (new mandatory 60%) test if spends disproportionately on nonpayroll

2. Computationa. Divide payroll costs by 0.75 (60%)* (PPP Flex Act)- Example: $8,000 payroll costs divided by 0.75* = $10,667*b. Forgiveness amount cannot exceed amount computed in 1.

above ($10,667*)



PPP Loan ForgivenessComputation

• PPP forgiveness amount is lesser of:

1. PPP loan amount2. Forgivable costs reduced by salary/wage and FTEE reduction amounts; or3. Payroll costs divided by 0.75 (replaced by 0.60 (60% test))*

Example: Lesser of:1. PPP loan amount $12,0002. Forgivable costs reduced by salary/wage and FTEE reduction $9,8003. Payroll costs divided by 0.75* $10,667PPP forgiveness amount is lowest number $9,800



Hit 8Prove It or Lose It

• Fail to prove borrower qualifies for forgiveness (prove it or lose it) –Retain records supporting (IFR, p. 22 (05/22/20)) (Form 3508 Instr., p. 10)

1. Documentation submitted w/ forgiveness application2. Expenditure data, including payroll, interest, rent and utilities expenses and

documentation as to liabilities3. Computations (backup spreadsheets)4. Keep copies of all proof for 6 years



PPP ForgivenessUnanswered Questions

1. Special rules for self insured health plans?2. Special rules for self charged rent?3. Are 2019 employer retirement plan contributions payroll costs forgivable if paid in

covered period?4. Does payroll cost of S Corp shareholders include health insurance and employer

retirement plan contributon, over and above (prorata portion of) $100,000 salary (i.e., $15,385 or $46,155)?

5. Is forgiveness for S Corp owner/’ees limited to 2019 income?6. Will prorata portion of $1k be increased for 24 week period?7. If restore pay or headcount before 24 weeks, is safe harbor met?8. Can we submit post-06/04/20 forgiveness apps prior to 12/31/20?



Computing PPP ForgivenessIs Like Trying to Pin Jello to a Wall



PPP ForgivenessThinking Process

Out of bounds?1. Did I deserve to borrow PPP to begin with? If no, plan B*2. Did I borrow > law allowed? If so, plan B*3. Did I spend on allowed uses (green “X’s)? If no, plan B*

* Hire competent attorney, follow advice, likely pay back

Forgiveness?4. Did I spend on allowable uses (red “X’s)?5. Spend on red X’s w/in 8 week (or 24 week*) covered period (CP or APCP)? * APCP

may not be available for 24 week period



PPP ForgivenessThinking Process

Forgiveness?6. Maintain pay and headcount (or meet 06/30/20 (or 12/31/20) safe harbor)?7. Forgiveness amount at least 75% (or 60%) of payroll costs?8. Maintain required records for 6 years?

Keep Up With Change?9. Keep up with moving target rules10. Did Congress (or common sense) cut me a break?



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ppp flexibility act of 2020 · 6/12/2020 · • 35 years of tax practice experience • emphasis...

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