Join our multipart livestream series to engage in the latest changes related to these uncertain times. You’ll hear strategies for navigating what these developments mean for you. Topics include issues related to legislation, liquidity, workforce, and other relevant topics.
- Leslie Boyd, CLA Principal
- Chastity Wilson, Managing Principal of National Tax Office
- Jack Rybicki, CLA Managing Principal of Industry, Real Estate
- Todd Sprang, CLA Principal
- Omar Nashashibi, Strategic Consultant, The Franklin Partnership
In case you missed it:
Questions and Answers:
Is Paycheck Protection Program (PPP) calculated on a cash or accrual basis?
It is unclear. The guidance says “paid and incurred.” We believe it is a little bit of both. Forgiveness guidance should be coming soon.
If we had an application before first round of funding ran out, do we need to do anything else to get this new funding?
Reach out to your banker to discuss the state of your application.
Our business has not had a downturn in volume and may even show an increase. Could this be construed as a violation of the PPP loan certification stating a negative impact due to Covid-19?
We believe it would be a violation.
If my business is shut down by government mandate until 5/28, can I extend my PPP?
No. You should pay your employees now as reporting to work is not a requirement. Once you get the PPP loan, you have 8 weeks to spend it. Employees can't both be payroll and unemployment.
Has the Department of Treasury released any further guidance on counting fuel cost as part of the 25%?
If our loan is not approved in this round even if submitted to the SBA — will we need to re-apply if there is a third round of funding?
Yes, we believe so, unless you get an approval number.
Can we give employees a payroll bonus with the PPP funding?
Yes, but keep in mind the $100k annualized limit.
Can profit-sharing paid in May for last year be included in PPP payroll expenses?
It is unclear. The guidance says “paid and incurred.” We believe it is a little bit of both. Forgiveness guidance should be coming soon.
Are operating lease payments forgivable as “rent” payments?
Yes, lease payments are eligible costs for loan forgiveness.
Are we looking at the same 8 week period as last year? What if your organization can't get back to the same staffing levels?
The look back periods for full-time equivalent employees are the lessor of: Feb 15 to June 30, 2019 or Jan/Feb 2020.
Can PPP funds be used to support 2019 401(k) contributions made in 2020?
Payroll costs include payment of any retirement benefit. It is unclear. The guidance says “paid and incurred.” We believe it is a little bit of both. Forgiveness guidance should be coming soon.
Can businesses apply for both Economic Injury Disaster Loans and PPP?
Yes, you can apply for both EIDL and PPP. The proceeds can't be used to pay the same costs though.
Are 401(k) matching payments considered qualified benefits? What if matching occurs at the end of the year? Will accrued amounts be forgiven?
The forgiveness guidance for the accrued amounts is not clear yet. We should have more guidance in the near future.
Our PPP application has a “ready to submit to SBA” status .Is it reasonable to expect that it will get funded if the SBA approves it? What is an expected timeline?
There can be no assurances based on the volume of applications in the pipeline with the SBA already. Call your banker and make sure they get you submitted ASAP
What happens if we have employees laid off, receive PPP money, and do not pay the employees?
You will only be forgiven on the amounts you spend. You are not required to bring back employees.
Our PPP loan was approved and submitted to SBA prior to money “running out.” Does this put us first in the queue to receive funds in next round?
It is reasonable to think you are in the group of 800,000 loans Omar mentioned. However, there can be no certainties. Only time will tell.
Is there any clarity on the calculation for FTE's? Sometime during the 8 weeks or June 30 or both?
They language is very conflicting. We think you should wait for the final forgiveness guidance.
Can worker’s comp be included in the forgiveness calculation?
We do not believe so based upon the current guidance.
Are the amounts that businesses are forgiven on the SBA loans going to be taxable on their 2020 income taxes?
No, the forgiveness is not taxable.
When can we expect to hear an answer on whether recognizing payroll costs will be on an accrual or cash basis?
Treasury had 30 days to come out with guidance. That window ends 4/26, so we hope to see something soon
Is employer FICA claimable in the 8 week period?
Employers Responsibility FICA is not includable.
Do 401(k) employer contribution and defined benefit plan contributions for 2019 qualify for forgiveness if paid within the 8 week period?
We believe the costs have to be incurred and paid in the window.
Can a company owner be added to payroll to increase FTE and payroll expense?
That would be a business/structure decision.
When stating health benefits/insurance for forgiveness, does that also include dental, vision, and life insurance or is it strictly health insurance?
It includes dental, vision, etc., It does not include life insurance or ADD or other income protection benefits.
Is forgiveness only on the employer paid portion of the benefits?
Is there an issue if a sole proprietor with no employees or loss of income applied for the loan/grant?
They have to be able to certify they are impacted. If they haven't been, they are subject to fraud charges.
Does the bank or SBA make determinations related to PPP forgiveness?
The bank will make a preliminary decision, then the SBA.
If we received PPP after most of our staff was laid off and went on unemployment due to lack of work, do we need to request that they get off of unemployment?
If you would like to 'spend' the money and qualify for forgiveness, yes.
If an employee who makes less than 100K gets a bonus, are the payments limited to an equivalent $100k for the 8 weeks or can you pay more just so their salary does not go over 100k for the year.
You just have to keep amount paid to less than $100k annualized (roughly $8k per month).
What we talked about:
Boyd: Good afternoon to our CLA family members, clients, community partners, and friends. Welcome back to our livestream series. We are grateful to have all of you join us and we wish you, your families, and friends health and safety during this time.
There are a lot of developments the last few days in Washington, DC, as well as lending and tax updates. We will have a few different guests over the course of our discussion today to tackle these important time sensitive topics.
Today, we will start by covering any breaking news related to the fourth piece of legislation passing through Congress: the Paycheck Protection Program and Healthcare Enhancement Act. We have Omar Nashashibi from the Franklin Partnership who is a Washington DC based lobbyist and strategist back for an update.
Omar, most people have been super interested in the update on the PPP and EIDL economic relief packages. What can you tell us about the status and key provisions of the funding?
Nashashibi: The PPP portion adds $310 billion for loans and another $11.3 billion for administrative fees. Of the $310 billion, $30 billion is for banks between $10 billion and $50 billion in assets, and another $30 billion for banks with fewer than $10 billion in assets. We are hearing that on Tuesday, Treasury and the Small Business Administration already began setting up a coding system for these banks under the set asides to prevent any delay.
Concern is very real in Washington that these funds will likely only last ten days, possibly two weeks. However, there are 800,000 loans already in the queue and the self-employed and independent contracts had barely begun applying. I’ve even heard one banker estimate the PPP may run out of funds in 48 hours.
The updates to EIDL provide another $10 billion in grants and $50 billion in loans. The $10 billion for EIDL grants can be used for an advance of up to $10,000 on a disaster loan and does not need to be repaid.
There is also language that allows agricultural enterprises (as defined by section 18(b) of the Small Business Act) with fewer than 500 employees to receive EIDL grants and loans.
It’s also interesting the bill provides $2.1 billion for salaries and expenses for the Small Business Administration through September 30, 2021. This is on top of the $675 million provided in the CARES Act, so Congress is expecting to be working on this issue for some time.
Boyd: Can you please give us a quick summary of the other key points the legislation addresses?
Nashashibi: Sure, the legislation includes $75 billion to reimburse hospitals and health care providers for health care related expenses or lost revenues attributable to COVID-19. Additionally, it includes $25 billion to increase testing for COVID-19:
- $11 billion for states, localities, territories, and tribes
- $1 billion for the CDC for surveillance, epidemiology, contact tracing, and other activities to support testing
- Nearly $3 billion for point-of-care and rapid diagnostic technologies with $600 million for Community Health Centers to support COVID-19 testing and another $225 million for Rural Health Clinics to support COVID-19 testing
The bill also requires a COVID-19 strategic testing plan that details how the Administration will increase domestic testing capacity, address disparities, and provide assistance and resources to states, localities, territories, and tribes.
Boyd: Thanks, Omar. Now that we understand the content, can you please let us know where it stands in Congress and what we should expect from timing?
Nashashibi: There are two votes today. The first was a vote on creating a Select Subcommittee on the Coronavirus Crisis that began at 1:30 Eastern. The final vote today is on the Paycheck Protection Program and Health Care Enhancement Act and should start in the next 30-45 minutes and conclude in the next hour or two. They will conduct the vote in groups to limit the number of people on the House floor at one time. The bill should go to the President tonight, or the morning at the latest, for his signature.
Then the question is how quickly the SBA can flip the switch back on. After the President signs the bill into law, SBA will likely post an announcement with the exact time they will begin accepting applications again. Regardless of how long the funds last, Congress will not act again until they return on May 4 and then they will seek to restore some type of regular order – meaning we will have debate, votes, and political posturing – all of which will take time before they move another bill. I participated in a fundraiser on Zoom for a very senior House Democrat and he believes we will have at least a couple more COVID-19 bills in the coming months.
Boyd: Thanks so much, Omar. I think we’re all excited to see what happens with this and how quickly we can revitalize the PPP and EIDL programs. To speak to these lending programs and financing, we’ve brought back Todd Sprang to give us some updates. Welcome, Todd; let’s start with the PPP program from the lender’s perspective. We’ve heard a lot from the borrower’s side, but can you please fill us in on any updates as it relates to the lenders and things we need to know?
Sprang: Here are a few points that are relevant either if you’ve already funded or are in round 2 of the application process:
- Lenders have continued to process and approve applications during the gap period, but have not submitted them for SBA approval, so these applications are expected to hit system quickly.
- The legislation allocates funds to lenders of certain asset ranges which creates an interesting situation for SBA: how do they accomplish these “quotas”
- Lack of forgiveness guidance is frustrating lenders just as much as borrowers
- Borrowers’ reporting period is underway and they can’t forecast forgiveness and remaining loan balance
- Lenders are receiving borrower questions they can’t answer and they can’t forecast expected forgiveness and remaining loan balance. This is impacting their ability to manage their balance sheet and liquidity needs
Let me also discuss a few uncertainties that get a fair amount of discussion amongst both borrowers and lenders:
- Borrower accounting – is this a grant or is this debt and whether you’re subject to single audit
- Lender tailoring of note language and related enforcement
- Program compliance requirements and compliance risk. This is an area that lenders understood and had some apprehension based on past experience with SBA. There is an expectation that the SBA will come in and request borrower documentation to get an understanding of program compliance.
Boyd: Let’s pivot to Main Street Lending. We introduced this briefly a week ago, and it has not had nearly the visibility compared to the PPP or the EIDL. What are the key points to know here?
Sprang: Let’s start with an overview of terms of this program.
- Longer term instrument (4 year maturity with 1 year of deferred payments)
- Variable rate with SOFR base rate of essentially zero, so initial rate is 2.5%-4%. These are pretty good terms for a bridge loan in this type of environment.
- Loan amount is a minimum of $1 million with a cap of $25 million for the New Loan Facility and $150 for the Existing Loan Facility, but those caps also involve a calculation based on EBITDA and existing debt and undrawn debt that can lower the loan amount. • Certifications like PPP that restrict your use of the proceeds
- Can’t pay down existing debt • Restrictions on compensation, stock repurchase or capital distributions that exist within the CARES Act.
I want to also quickly summarize a few of the comment letter themes because they may give you an idea of the changes being lobbied for:
- Reduce minimum loan amounts below current $1 million
- Unadjusted EBITDA measurement
- Low or negative EBITDA entities won’t get funding
- Limits on distributions
- General comment – clarify definition of “debt”
Boyd: I’d like to take the last few minutes that we have with you to talk about any alternative sources of financing and lending updates. Can you give us any insight about these alternative lending sources?
Sprang: If the current solutions like EIDL, PPP or the Main Street Lending Programs don’t work for you because of eligibility issues or some of the restrictions, or future potential compliance requirements aren’t palatable to you, then maybe you’d be interested in alternative sources of funds that might cost a little more but afford you more autonomy. These options included preferred equity, mezzanine debt, convertible debt instruments or bridge loans.
These funds are available. They are sitting on the sidelines ready to go and the terms are better earlier in this cycle than they will be later.
Boyd: Thank you, Todd. I know we still have a lot more territory to cover and we’ll continue doing so as the legislation progresses and we have more people applying for and receiving funds through all these programs.
In addition to these alternative lending programs, we wanted to take some time to revisit some of the conversation we had with Chastity Wilson, our managing principal of the National Tax Office at CLA. Chastity, on Tuesday we covered a lot of ground with the discussion of the programs that are helping to manage liquidity in addition to the lending. We talked about a few key provisions of the CARES Act that can be used for tax credits related to the workforce. Today, let’s stay with the theme of leveraging the tax law to support taxpayer liquidity.
Let’s start with the payroll tax deferral. Can you comment on timing of the deferral and repayment?
Wilson: The deferral of employer Social Security tax has broad applicability. The deferral is essentially available to any employer, including tax exempt and governmental entities. Unlike a lot of other COVID-19 provisions, there is no restriction on the size of the employer.
The deferral is available for deposits due on or after March 27, 2020 through December 31, 2020. 50% of Social Security tax deferred during this period will be due on or before December 31, 2021 and the remaining 50% due on or before December 31, 2022.
The one limitation: employers who receive a PPP loan and receive full or partial forgiveness on the loan cannot defer Social Security tax. However, the IRS has clarified that employers can defer Social Security tax until the date they receive a decision from their lender forgiving the loan.
Boyd: Thank you – I think that is important to emphasize because there can be some interplay of this, even for those who are pursuing PPP forgiveness. Can you also focus on another time-sensitive area which is net operating losses? What do people need to know right now?
Wilson: The CARES Act substantially changed the NOL rules. Starting in 2018, businesses and individuals could no longer carry back NOLs. Additionally, NOLS could only offset 80% of taxable income. The CARES Act has temporarily suspended these rules.
Taxpayers that incur a NOL in 2018, 2019, or 2020 can now carryback the NOL five years and there is no 80% of taxable income limitation. The reasons these carrybacks can be valuable is they can generate permanent tax saving because the losses can offset income that was subject to higher maximum tax rates that were in place prior to tax reform.
What people need to know now is the ability to use Form 1139/Form 1045 to get a quick refund. For example, if you incurred a NOL in 2018 and can now carryback that NOL back, you can file a Form 1139 (for Corporations) or Form 1045 (for individuals) and the IRS will generally issue the refund within 90 days. For calendar year 2018 losses that are being carried back, form 1139 or form 1045 is due on or before June 30, 2020. If a taxpayer doesn’t use the quick refund process, they will have to file an amended return and the IRS’s general guidance is it can take a minimum of six months to process an amended return. Based upon the current state of IRS operations, service centers are not processing mail, so it is likely it will take more than six months for the IRS to process amended returns.
Boyd: What are two or three strategies taxpayers can consider to create or enhance NOLs?
Wilson: There are actually several strategies that a taxpayer can consider to create or enhance; it really depends on the taxpayer’s specific facts and circumstances, but I will highlight the top three strategies we see our client implementing.
- Accelerate equipment purchases – You can generally expense the cost of new or used equipment purchased in the year the asset is placed in service. Taxpayers can consider acquiring and placing equipment in service before the end of the tax year to increase the amount of the loss.
- Analyze tax asset depreciation methods and lives – The CARES Act allows taxpayers to immediately write-off the cost of certain improvements to commercial property made in 2018 and later years. This is called qualified improvement property. There was a glitch in prior legislation that unintentionally excluded QIP from bonus depreciation (immediate deduction, called bonus depreciation). The CARES Act has fixed this glitch and allows taxpayers to include QIP in bonus deprecation. If you improved your commercial property in 2018, 2019, or 2020, there may be an opportunity to expense the costs, increasing your tax loss.
Another option is to consider a cost segregation study. Real estate and its components can be classified into several different categories of assets, some with a depreciable life of just five years. If you own real estate for use in your business or for investment, you may be able to accelerate deductions by performing a cost segregation analysis to determine the appropriate tax life of the various real estate assets. •
- Write off old or uncollectible receivables and harvest tax losses – Accrual method taxpayers may write off uncollectible trade accounts receivables when the possibility of collection becomes remote or uncertain. Before the end of the tax year, you can carefully analyze trade receivables and write off any uncollectible accounts. Also, if you have underwater investments there are strategies to generate a tax loss on those investments.
Boyd: Thanks, Chastity. This really helps pull together the full picture of both the tax planning, refunds, and savings opportunities that can be used either instead of or alongside of the various lending programs.
That’s all we have time for in this session. Please make sure to come back for future livestreams where we provide more information on these topics and any additional legislative changes and opportunities for your organization. Thank you all and have a wonderful afternoon.
- Webinar: Economic Relief Update