CLA professionals answer your questions on the latest economic relief guidance.
In case you missed it:
Questions and Answers:
Do we have to wait until after the 24-week period before we can attest and request forgiveness?
You can apply prior to the end of the 24 weeks.
We received our loan at the end of May. Is commission that was earned during the first quarter and in 2019 but paid during the covered period, forgivable?
Is rent paid to related parties an allowable expense for forgiveness?
We haven’t seen any guidance on related party rents not being forgivable. We have only seen guidance that it must be paid subject to a lease agreement that was in place prior to February.
In the 1st Quarter of 2020, we had given bonuses in the amount of $22,500.00. In the 2nd Quarter, during the covered period, we gave bonuses in the same amount. Since the bonuses was consistent with both quarters and will be shown on my 941’s when we submit them for loan forgiveness, can they be included with the cost of payroll for purposes of forgiveness.
They should be able to since paid and incurred during the covered period.
If we decided to base our loan amount on a lower FTE count than what we actually had during the uncovered (pre-COVID) period (thus not taking the full amount that we could have), in order to receive full forgiveness, would we still need to meet the average FTE that we actually had on payroll at that time or only worry about meeting the FTE count used when calculating the amount of the loan requested?
In order to optimize forgiveness you would want to have your FTE count during your covered period be the same as your pre-COVID period. There are two pre-COVID reference periods. Once is from the beginning of 2020 (January and February) and the other references a 2019 covered period (March to June). If you have had layoffs but you restore your FTEs back to your pre-COVID reference period by 12/31/2020 you also can have this ratio not hurt your forgiveness calculation.
Do you have an update on the deductibility of expenses paid by forgiven loan proceeds? In the absence thereof and assuming you have a surfeit of qualifying forgivable expenses, can you choose to divide compensation to owners and salary/rent/utilities to result in the best after tax benefit.
Right now as we sit there is now guidance as to how the tax deductibility will be impacted so we have to assume that we will not be taxed on the forgiveness but the costs will not be deductible. There may be strategies to apply the costs to the forgiveness to best optimize the tax deduction but of course this strategy could evolve as we get more guidance.
I am having a hard time finding an answer about if I have to use both payrolls (monthly and weekly) for this. Our weekly payroll is job costed and our monthly payroll is overhead. In which I am wanting to only use the monthly payroll and not have our weekly field employee payroll involved at all.
There is nothing prescribed that indicates which payroll to include or exclude – certainly you would have some flexibility to decide which costs to apply vs. not apply based on many considerations including administrative convenience.
Is there any information of the second round of PPP that I can share with the client? If they already applied and approved in the first round of PPP, are they still eligible to apply for the second round?
We don’t believe right now they can get a second round of funds – there is some support to create legislation to allow for this – but currently nothing available to do this.
One of our employees opted not to return to work during the pandemic due to concerns regarding his chronically ill mother. How will that effect our forgiveness data?
Voluntary resignations do not impact your FTE count. Please document this.
After the PPP eligible period, can an organization decide to pay an employee bonus, and consider it retro pay that was earned during the PPP period?
That would be difficult because it wouldn’t meet the criteria as “paid” during the covered period.
If we go the 24-week route and use the funds at week ten, what dates do we use or is this not defined ye?
You are technically allowed to apply for forgiveness prior to the 24 weeks running out. However, this can get tricky because if you have a reduction in FTEs after applying but before the 24 weeks runs, we are not sure how the banks would handle any reductions.
Are state taxes withheld from Employees an includable expense for PPP?
Yes. You will use the gross wages.
The Forgiveness application instructions does not appear to require any specific documentation for a Self Employed Schedule C borrower to claim Owner Compensation. Is there any SBA guidance for this? Do you have any suggestions on what a lender should collect (if any) to support Owner Compensation?
There is not any guidance yet on this.
Owner compensation replacement, based on eight weeks of 2019 net earnings ($15,385 if you had net earnings of $100,000 or greater in 2019) or based on 2.5 months’ of 2019 net earnings ($20,833 if you had net earnings of $100,000 or greater in 2019).
Any word on related party rents?
Nothing yet. At this point no further guidance is available on whether or not related party rents are includable in the allowable costs to be considered for the forgiveness calculations. The potential issue is that related party rents are generally set at a level to cover the interest and principal payments for any debt on the facility, plus other costs such as real estate taxes, that are incurred by the related party. Had the building been included on the applicant’s books, only the interest on the debt would be an allowable cost under the PPP. We will update this once we have guidance from the SBA.
We just received an email to set up an account for our loan. We are not sure if we want to take the loan. How long do we have to respond and do the funds get dispersed soon after approval or can we take them at a later date?
There should be an expiration date listed.
If I opt to use the 24-week PPP forgiveness timeframe and I use up all of the loan funds in twelve weeks, can I apply for forgiveness at that time and not have to maintain the FTE’s through the entire 24-week period?
You can apply as soon as the funds are exhausted. However, they have not addressed what happens if you reduce your FTE count. We believe you are still on the hook for the FTE count through the 24 weeks. We will need more guidance on that.
If we go with the original eight week period for the PPP loan, I was told we have 60 days from that date to submit the loan forgiveness application. On your livestreams you have said lenders are not accepting them yet. You also mention that loans under $150k are being discussed about being fully forgiven. Our loans are under that amount. Should I wait to apply for forgiveness until this is all straightened out?
We now have 10 months until the covered period ends to apply for forgiveness.
What you missed:
Jen Rohen: Hello CLA family, friends, colleagues, and community partners. Welcome back to our Livestream. We sincerely hope that you are continuing to stay safe and healthy at this time.
We appreciate all your questions that have come through the inbox at Livestream@claconnect.com! The questions are wonderful and we are monitoring and responding to them daily. Please keep them coming through the session and we will address as many as we can while we’re live with you today. We also would like to direct you to our COVID-19 landing page at CLAconnect.com for up to date information about all these programs, tools, and ways to contact us for more specific consultation.
Today, we are going to be answering your frequently asked questions and fielding live questions from the inbox on Main Street Lending, the Paycheck Protection Program (PPP), and Economic Income Disaster Loans (EIDL). We have Jack and Todd with us along with Janna Rust from our EIDL team to help answer the questions coming in.
I’d like to start today with an update from Jack on the PPP program and open application process.
Jack Rybicki: Thanks Jen. The Small Business Administration’s (SBA) authority to approve loans under the PPP expired at the end of the day on June 30th. However, before leaving for the holiday break both the House and Senate approved an extension of the program until August 8 and this bill was signed into law on July 4 by the President. This allows the SBA to continue to approve new loan applications through August 8. At last report, there is still over $130 billion of allocated funds available under the PPP. However, that is all that the latest bill did; it did not address matters such as expanding loan amounts for existing borrowers or allowing borrowers to apply for a second PPP loan (you can only have one under current law).
There was an effort by Rick Scott from Florida to introduce language regarding the need to demonstrate economic harm to determine eligibility for future loans, but that language was rejected and Senator Cardin stated that any future changes could be included in a future round of COVID-19 relief legislation, signaling there is more to come from Congress. There are proposals floating around that certain businesses can take out a second PPP loan if they have fewer than 100 employees and can show they’ve lost at least half their revenue. Another proposal is specifically aimed at companies with fewer than 10 employees, while another is considering blanket forgiveness for all loans under $150,000.
We are also hearing that Congress is seeking clarification from the SBA regarding a company’s ability to re-apply for a PPP loan if they were originally granted a loan but then returned the funds by the May safeharbor date. Informal guidance from the SBA seems to indicate that since those loans that were repaid prior to the safe harbor date were deemed to be cancelled, a company may now be eligible to reapply. Companies would obviously need to consider their ability to provide the certifications required in the application, but for those that returned the money because they weren’t going to be able to use it during the original 8 week covered period, this now may be a viable option.
Rohen: I know that some questions have come in with regard to the second round of funding. If someone received a PPP loan in May, can they apply for additional funds now that this round has opened up?
Rybicki: As I previously noted, the bill that extended the time period for the PPP to August 8 did not expand the eligibility. While there are many new proposals being bantered about, nothing currently enacted provides for borrowers to either get an additional amount added to the PPP loan or to apply for a second PPP loan. More to come here though, as it is clear this will be a topic of discussion in both the House and the Senate later this month and into early August.
Rohen: Thanks, Jack – with all that, do we know any more about forgiveness or have any new information about the treatment of utilities and other common questions?
Rybicki: Unfortunately there has been no new guidance provided by SBA of forgiveness related matters since June 22. Given that many borrowers are now in the period when they can be applying for forgiveness, we suspect the SBA and Treasury are focusing on the process and underlying technology needs for the banks to submit forgiveness applications to the SBA. That guidance is delaying the entire loan forgiveness process, as banks can’t release their systems until they have guidance from the SBA. I suspect that once this has been addressed that we will again start to see more guidance from SBA on forgiveness matters. Unfortunately what this means is that most forgiveness applications will have to wait until the end of July at the earliest.
Rohen: Tom asked the following question: Do you have an update on the deductibility of expenses paid by forgiven loan proceeds? In the absence thereof and assuming you have an excess of qualifying forgivable expenses, can you choose to divide compensation to owners and salary/rent/utilities to result in the best after tax benefit.
Rybicki: We continue to hear that Congress intends to include something in the next round of COVID-19 relief legislation to overturn the IRS’s ruling on this matter. This appears to have bipartisan support, but we will have to wait until late July or August until the next round of legislation comes out until we know for sure. If we don’t get a congressional fix, the expenses paid for by the portion of the PPP loan that is forgiven will be deemed nondeductible. As Tom pointed out, there may be an opportunity to do some tax planning, as not all “non-deductible” expenses will have the same tax impact.
Rohen: Mallary has a multiple payroll question: I am having a hard time finding an answer about if I have to use both payrolls (monthly and weekly) for this. Our weekly payroll is job costed and our monthly payroll is overhead. I want to only use the monthly payroll and not have our weekly field employee payroll involved at all. Is this an option?
Rybicki: A borrower only needs to report the costs that you are requesting forgiveness for on the form 3508, so you can pick and choose which costs to include. In this example, you could choose to only use the monthly payroll costs in the forgiveness calculation and use the longer 24 week period to get to your forgiveness amount.
Rohen: David asked a question that we hear in a lot of different variations, so it warrants covering again today: One of our employees opted not to return to work during the pandemic due to concerns regarding his chronically ill mother. How will that effect our forgiveness data?
Rybicki: While this may impact the company’s ability to use the EZ forgiveness application form, it should not impact your forgiveness amount on the long forgiveness application form (form 3508). A voluntarily termination is one of the “add backs” that are permitted, along with involuntary terminations for “cause” and voluntary reduction in hours. These “exceptions” are not permitted for the EZ form, but can be reflected on the long form FTE reduction quotient calculation.
Rohen: I’d like to pivot the discussion to Janna for a few minutes to talk about EIDL. Janna, welcome to the Livestream. Is there anything by way of introduction that you’d like to discuss before we get started with questions?
Janna Rust: I always like to start out by discussing the big picture, so I’ll start by saying that with these SBA-facilitated loans, even though specifics may differ, a common underlying premise exists – the loans were intended to indemnify the borrower for losses, rather than enrich the borrowers in the form of low interest loans or forgiven dollars. Borrowers need to keep that “filter” in mind when planning how to use the money.
Rohen: We have a question from David in light of the 7/15 tax deadline: I have a pass thru entity and a $150K EIDL in place. I also have a July 15 estimated tax payment pending. Since we had a very good Q1 2020, the tax is a substantial amount. Any solution for getting a written approval from the SBA for a distribution allowance for tax payment?
Rust: Not at this time. I would try to talk to an SBA representative about your particular loan, which may be a little difficult to do since the office is so overwhelmed and the application and funding process was all completed through a portal.
Rohen: Bonnie asked: can you get loan forgiveness for both if you received the full amount for both? (PPP received first and EIDL second, so full eligible amounts received). If so, what is EIDL restricted for? Timeframe for spending?
Rust: Since you received the PPP loan, the amount of your EIDL advance would reduce the amount of your PPP loan forgiveness. EIDL advances will not have to be paid back or “forgiven,” even if you did not get the PPP loan.
EIDL Restrictions – EIDL loan proceeds are to be used “solely as working capital to alleviate economic injury.” The SBA website defines working capital as “the amount of capital that is available for the day-to-day operations of a business.”
Restrictions include (we believe this to be for the life of the loan, but may need additional clarification) the inability to use EIDL proceeds for:
- Payment of any dividends or bonuses
- Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant
- Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose
- Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations
- Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency
- Contractor malfeasance
Rohen: Lois asked: We have received the $10k EIDL advance. Then we got the loan paperwork. Do we complete that for the $10k if we don’t want to receive any additional funds? Our board doesn’t want to take on more debt and doesn’t want to take the loan. So, I only want the $10k we have received, not to end up with $20k.
Rust: If you already received the EIDL advance, you do not have apply for additional funds.
Rohen: Thanks, Janna! Todd, I’d like to turn the discussion to you to learn more about what we now know about the Main Street Lending Program. Could you give us some quick headlines of what’s been happening?
Todd Sprang: The program is still moving forward, but slowly. Why? As we’ve discussed in previous Livestreams
1. Concerns about the 95% of the each loan sold to the special purpose vehicle (SPV) remaining on the bank balance sheet – this will eventually get addressed but it’s been too slow
- Most banks (especially smaller, local community banks) don’t have in-house legal resources to help evaluate this so this adds significant costs and risks to participating
- Lack of uniformity in loan documentation/structure between banks makes it difficult for a single legal analysis to be shared on an industry-wide basis
2. Concerns about risk/reward and profitability
- Combination of rate and fees (origination and servicing) don’t align with a 5 year loan with payment deferral features
- Less risky and more profitable to structure a more conventional loan to qualified borrowers
3. Regulatory scrutiny
- Similar to other programs, regulators are supportive of participation at inception and then critical 12-18 months later during examinations
- Usually require outside assistance to analyze affiliation rules
- Pari Passu priority and security features make refinancing complicated
- Need more flexibility to borrow/pay down other debt over the 5 year term of the MSLP loan
Rohen: I think Sandra did a good job of asking a question we all want to know: Can a company apply for a Main Street Lending Program loan yet? If so, is there a specific application required by the Fed?
Sprang: The Federal Reserve today unveiled an interactive state-by-state map listing lenders participating in the Main Street Lending Program that have chosen to be listed and are currently accepting applications from new customers. The Boston Fed will update the listing regularly as new lenders complete the registration process and elect to be included on the map. Only a handful of lenders are in each state per the map and their abilities to lend vary greatly. The list is not complete. There are more lenders I’m aware of that aren’t included on that map.
Rohen: Unfortunately, that’s all we have time for today. Thank you to Jack, Todd, and Janna for the great discussion, to you for your questions, and to our moderators for all the support and great information and answers.
Next week, we’ll be back on Thursday with any additional updates, as well as a deep dive discussion on the impact of COVID legislation on the dealership industry and considerations you may face when trading in or purchasing a new automobile in the current economic situation. Please send in your questions in advance of the session and we’ll cover what we can while we’re together.