SESSION TENMay 22, 2020 | 11:00 A.M. EST
Housekeeping Items
• The webinar will be recorded and shared as soon as it is available via email• All materials were emailed to you this morning – also available on
RKL’s Coronavirus Resource Center at rklcpa.com• All lines are muted• NASBA CPE requirements – in order to receive CPE for this webinar:
• Participants must be connected to the session (both audio and presentation) for its entirety
• Participants must answer three questions/elements of engagement• One (1) hour of CPE in the field of business law will be granted if you meet
these requirements
DISCLAIMER: The presenters, Eric Wenger, Bethany Novis and Ryan Hurst, and RKL LLP and its subsidiaries/affiliates are not held responsible for information that has changed or will change and makes no representation or warranty as to the ongoing accuracy of the information presented orally or in writing. Attendees should consult with legal, accounting and other advisors.
Meet Your Team for Today’s PresentationLatest PPP Developments from Washington
Sample Calculation: Forgiveness from Start to Finish
Loan Forgiveness Application Overview
RYAN HURST, ASA | Partner, Business Consulting Services Group
Ryan is a Partner in RKL’s Business Consulting Services Group and an in-demand transaction consultant. Ryan’s areas of expertise include advising clients on buying and selling businesses; succession planning; conducting valuations for a varietyof transactions and structures; litigation support for shareholder disputes; and strategic alternatives analyses.
ERIC WENGER, CPA, MST | Partner, Tax Services Group
Eric serves as Managing Partner of the Lancaster Office and as Chairman of the RKL Board of Directors. Throughout his more than two decades in public accounting, Eric has enjoyed the ongoing challenge of applying evolving tax and financial regulations for the benefit of his clients. As Partner in RKL’s Tax Services Group, he primarily advises closely held and family owned companies regarding tax and general business matters, including succession planning.
BETHANY A. NOVIS, CPA/ABV, CVA, CFE | Partner/Leader, Business Consulting Services Group
Bethany is Partner and Leader of RKL’s Business Consulting Services Group. A Certified Fraud Examiner, Bethany has more than two decades of experience delivering forensic accounting services such as employee theft investigations, reconstruction of financial records and damage calculations for litigation purposes. She is also a highly credentialed business valuator, specializing in valuation of stock for gifting, buyouts and wealth planning.
LATEST PPP DEVELOPMENTS FROM WASHINGTON
Assessing Where We Are
• Initial stimulus packages (FFCRA, CARES)• Congressional intent at the time; reality sets in
• SBA guidance on PPP• Congress passes PPP “Refill” (a.k.a. Stimulus version 3.5)
• Funds of approximately $100 billion remain available
• More SBA guidance – the noose tightens • Inspector General Report released• More SBA guidance – what noose??
• SBA whiplash – initially restrictive, most recent guidance much more friendly
• Congressional involvement again: What might Stimulus version 4.0 look like?• Still not resolved: Are PPP forgiven expenses deductible for tax purposes?
FAQ 46: Good Faith Certification on Necessity of Loan Request
Our take:
Original principal amount <$2M• All clear on this certification
• No special documentation required
• Still have to meet forgiveness tests and necessary forgiveness documentation
Original principal amount >$2M, based on “individual circumstances”
• Subject to SBA review process
• Special documentation of financial need and lack of other sources of liquidity that will not be significantly detrimental to the business
• If borrower fails this certification and repays loan, no further enforcement
Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
Inspector General Report on PPP
HEROES Act – H.R. 6800 – NOT YET LAW
• Health and Economic Recovery Omnibus Emergency Solutions Act –HEROES Act
• Democrat-controlled House passes this 1,815 page Act by vote of 208-199• $3 trillion price tag including various tax provisions
• Continue $600/week unemployment through January 2021• Eliminate state and local tax cap of $10,000 through 2021• Forgive $10,000 of student debt• Second round of stimulus payments, including students • Payments for dependents• Expanded Earned Income Tax Credit• Increase Employee Retention Tax Credit from $5,000 max to $36,000 per worker
• Senate Republicans and Trump: “Dead on arrival”
The PPP Legislative LandscapeConsideration CARES Act HEROES Act –
H.R. 6800 – NOT LAWPPP Flexibility Act of 2020 –H.R. 6886 – PROPOSED
Covered period 8 weeks 24 weeks 24 weeks; (some Senate Republicans are suggesting 12 or 16 weeks instead)
Date for rehiring 6/30/20 12/31/20 12/31/20% of loan for payrollcosts
75% (via SBA guidance)
Removes any requirement
(not included)
Are forgiven expenses deductible?
Act isn’t clear; IRS says no
Expenses ARE deductible
(not included)
Special carve-outs
Underserved and Rural Markets requirement
Small businesses with 10or fewer EEs; nonprofits
(not included)
Loan maturity Act: No more than 10 years; Guidance: 2 years
5 years 5 years
FTE haircut Ignore resignations or “inability to hire similarly qualified employees by 12/31/20”
POLLING QUESTION
To be eligible for CPE, 3 polling questions must be answered.
LOAN FORGIVENESS APPLICATION OVERVIEW
• 75% of forgiveness (not loan amount) must be spent on payroll• Incurred OR paid – widening the window • Introduces Alternative Payroll Covered Period• Softens the salary penalty (annualizes the 2020 1Q and compares to the Covered
Period Salary annualized)• Expands mortgage interest and rents to include personal property in addition to real
property – vehicles, copiers, equipment• “Owners” capped at lesser of 2019 cash compensation or $100,000 (annualized)• No FTE reduction haircut for employees who were (a) fired for cause, (b) voluntarily
resigned or (c) voluntarily requested and received a reduction of their hours
Forgiveness Application – New Items
On Friday, May 15, the SBA released the application borrowers of a PPP loan must use to determine the amount of the loan that may be “forgiven” by their lender. https://www.sba.gov/document/sba-form--paycheck-protection-program-loan-forgiveness-application
The application and instructions (SBA Form 3508) is 11 pages long. It consists of the following components:1. PPP Loan Forgiveness Calculation Form2. PPP Schedule A3. PPP Schedule A Worksheet4. PPP Borrower Demographic Information Form (optional)
All borrowers must submit (1) and (2) to their lender.
Loan Forgiveness Application
Similar to a tax return, you complete the underlying schedules first:
PPP Loan Forgiveness Application
Schedule A Worksheet:• Can use provided form or
equivalent report from your payroll system or payroll processor
• Reports the following key metrics for the selected eight-week Covered Period: cash compensation, average FTE (each EE is assigned an equivalent), Salary/Wage reduction “Haircut” per EE
• Separate table for EEs making over $100k/year
Not required to be submitted to your lender
Schedule A:• Amounts from boxes 1-5
on your Schedule A Worksheet carryforward to lines 1-5 on this form
• Reports additional allowed payroll items (health insurance, retirement plan, state & local taxes on comp)
• Reports owner-employee and self employed compensation
• Calculates FTE Haircut
Required to be submitted to your lender
Loan Forgiveness Calculation Form:• Brings Total Payroll Costs from
Schedule A• Adds in Mortgage Interest,
Rent/Lease Payments and Utilities
• Reduces potential forgiveness by the Salary/Hourly Wage Reduction Haircut
• Applies a “FTE Reduction Quotient” (FTE Haircut)
• Compares total forgiveness to the “75% Payroll Test”
Required to be submitted to your lender
The PPP Loan Forgiveness Application allows you to elect a slightly different eight-week covered period for payroll expense computation.
• Original Covered Period = Eight-week period (56 days) starting the day you receive your PPP funds in your account
• Alternative Payroll Covered Period = Eight-week period (56 days) starting the first day of your first pay period after receiving your PPP funds
Depending on your payroll periods and timing of employees returning to work, the Alternative Payroll Covered Period could be a better choice.
Choice of Covered Period for Payroll Expense
XYZ Company pays payroll every other Friday. They received their PPP funds on April 14. Their Covered Period starts April 14 and ends eight weeks (56 days) later, on June 8. Pay periods start on Sunday and payroll is paid the following Friday. There are four payrolls within the Covered Period:
Payroll Covered Period Example
Payrolls in Covered Period:April 17, May 1, May 15, May 29
XYZ Company pays payroll every other Friday. They received their PPP funds on April 14. Using the Alternative Payroll Covered Period starts the eight weeks (56 days) on April 26, which is the date of its first pay period after receiving the PPP funds. There are five payrolls within the Alternative Payroll Covered Period:
Payroll Covered Period Example: Alternative Covered Period
Payrolls in Alternative Payroll Covered Period:May 1, May 15, May 29, June 5, June 19
Two options to assign FTE equivalent to each employee:
OPTION #1: 40 hours or more = 1 FTEUnder 40 hours = Assigned equivalent of 40 hours(24 hours/week = .6 equivalent)
OPTION #2: 40 hours or more = 1 FTEUnder 40 hours = Assigned equivalent of .5 FTE(24 hours/week = .5 equivalent)
This may or may not change your FTE reduction computation. Above all, be consistent in application to measurement and covered period.
FTE Calculation
Schedule A Worksheet is used to report the following:• Cash compensation by employee over the covered period (or alternative
covered period).• Average number of FTEs – used to determine whether your forgiveness
amount will be reduced for the FTE Headcount Haircut.• Salary/Hourly Wage Reduction – used to determine whether your forgiveness
amount will be reduced for the Wage Reduction Haircut.• All items are reported for the covered period or alternative covered period.• You do not include owner-employees/self-employed individual/general
partners in Schedule A worksheet. Compensation for these individuals will go directly to the PPP Schedule A.
PPP Schedule A Worksheet
Loan Forgiveness Schedule A Worksheet
Table 1 compiles info for employees with salary/wages < $100k/year
Table 2compiles info for employees with salary/wages > $100k/year
Note: Boxes 1 through 5 feed to the Loan Forgiveness Calculation Form.
PPP Schedule A
PPP Schedule A
PPP Schedule A
This is the number used for the 75% of forgiveness test!
PPP Schedule A
Loan Forgiveness Calculation Form: Top Half
Loan Forgiveness Calculation Form: Top Half
Loan Forgiveness Calculation Form: Top Half
Loan Forgiveness Calculation Form: Bottom Half
This is where it comes together:Payroll + other allowable costsLess: Haircut for Pay ReductionLess: Haircut for FTE Reduction= Total Forgiveness
POLLING QUESTION
To be eligible for CPE, 3 polling questions must be answered.
SAMPLE CALCULATION: FORGIVENESS FROM START TO FINISH
Example: Fred’s Service Center• Shut down as “not life sustaining” March 19
• 1 owner (S Corp) + 10 employees
• Received $100,000 PPP loan
• Funds disbursed April 13, 2020
• Last day of covered period June 7, 2020
Highlights• No one earned more than $100,000
• 8 FT salaried employees and 2 PT hourly employees (plus owner)
• FTEs calculated on a base of 40 hours/week• 9.4 base FTEs
• Owner not included in FTE count• Need further guidance to verify
• Compensation and hours did not change from 2019 through March 19
Example: Employee Roster
2019/20 Eligible Payroll (hours/salary/wages remained the same through March 19)2019 Average Monthly Payroll Costs 40,000 2019 Annual Payroll Costs 480,000 2019 Non-Cash Payroll 40,000 2019 Cash Compensation 440,000
Employee Roster Weekly
Hours FTEs Annual Salary
Wage Rate
Annual Cash Compensation
Owner 40 80,720 80,720 Employee 1 40 1.0 60,000 60,000 Employee 2 40 1.0 40,000 40,000 Employee 3 40 1.0 40,000 40,000 Employee 4 40 1.0 40,000 40,000 Employee 5 40 1.0 30,000 30,000 Employee 6 40 1.0 30,000 30,000 Employee 7 40 1.0 30,000 30,000 Employee 8 40 1.0 30,000 30,000 Employee 9 30 0.8 22.00 34,320 Employee 10 24 0.6 20.00 24,960 Total 440,000 Average FTEs 9.4
• Employees 2, 9 and 10: Stayed on payroll (no salary/wage reductions, no hours reductions, no problem)• Employees 3: Furloughed then resigned• Employee 8: Terminated for cause• Employee 7: Voluntarily reduced hours due to home constraints• Employees 4, 5 and 6: Furloughed then brought back (one week into eight-week period)• Employee 1: Salary reduced from $60,000 to $37,000 – need to run Salary Reduction Test
Example: Workforce Changes
Impact of Shutdown/Business Conditions
Employee Roster Status
Revised Weekly Hours
Revised FTEs
Revised Annual Salary
Revised Wage Rate
Revised Annual Cash
Compensation
Revised 8-Week Cash
CompensationOwner Stay 40 80,720 80,720 12,418 Employee 1 Reduced salary 40 1.0 37,000 37,000 5,692 Employee 2 Stay 40 1.0 40,000 40,000 6,154 Employee 3 Furloughed then resigned - 1.0 - - - Employee 4 Furloughed, brought back 4/20 40 0.9 40,000 40,000 5,385 Employee 5 Furloughed, brought back 4/20 40 0.9 30,000 30,000 4,038 Employee 6 Furloughed, brought back 4/20 40 0.9 30,000 30,000 4,038 Employee 7 Voluntarily reduced hours 24 1.0 18,000 18,000 2,769 Employee 8 Terminated for cause - 1.0 - - - Employee 9 Stay 30 0.8 22.00 34,320 5,280 Employee 10 Stay 24 0.6 20.00 24,960 3,840 Total 335,000 49,614 Average FTEs 9.1
No impact to FTE testNo/reduced payroll costUnclear whether Employee 7 had a “salary reduction”
Example: FTE Reduction Quotient
Period AFebruary 15, 2019 to June 30, 2019
9.4 FTEs
Period BJanuary 1, 2020 to February 29, 2020
9.4 FTEs
Seasonal PeriodAny consecutive 12-week period
between May 1, 2019 and September 15, 2019
N/A
Average FTEs During 8-Week Covered Period
9.1 FTEs
Lesser of the Comparison Periods9.4 FTEs
FTE Reduction Quotient96.81%÷ =
Comparison Period
Unless FTEs are restored by June 30, 2020
Employee 1’s annual salary was reduced from $60,000 to $37,000 on March 19, 2020.
Example: Salary/Wage Reduction
78 days at $60,000 + 13 days at $37,000 = $56,71433 days at $60,000 + 39 days at $37,000 = $47,542
Step 1Determine if pay was
reduced more than 25%
Step 2Determine if the
Salary/Hourly Wage Reduction Safe Harbor is met
Step 3Determine the Salary/Hourly
Wage Reduction
$37,000 average during covered period ÷ $56,714 average for 1Q 2020 = 65.24%<75% so move to Step 2
$60,000 at February 15, 2020 > $47,542 average February 15 to April 26, 2020At June 30, 2020, salary remained at $37,000Salary was reduced and not restored at June 30, 2020 so move to Step 3
75% of $56,714 average for 1Q 2020 = $42,536$42,536 - $37,000 average during covered period = $5,536$5,536 x 8 ÷ 52 = $852 salary reduction
Example: Calculate Pre-Reduction Eligible Expenses
Non-Payroll Items during Covered PeriodMonthly
CostEligible Monthly
CostMortgageMortgage on RE - $5,000 P&I, $3,000 of this is interest 3,000 3,000
RentRent on trucks - all leases in place prior to 1/1/2019 5,000 5,000 Rent on copier - lease in place 6/30/19 200 200 Rent on storage - no lease 2,000 - Total 7,200 5,200
UtilitiesElectric 500 500 Gas 400 400 Water 225 225 Transportation 200 200 Telephone 100 100 Internet 100 100 Total 1,525 1,525
Calculation of Pre-Reduction Eligible ExpensesPayroll CostsRevised 8-Week Cash Compensation - Employees 37,196 Employer contributions for employee health insurance 5,000 Employer contributions for employee retirement plans 2,000 Employer SALT assessed on employee compensation 100 Revised 8-Week Cash Compensation - Owner 12,418 Total Payroll Costs 56,714
Non-Payroll CostsMortgage interest 6,000 Rent expense 10,400 Utilities 3,050 Total Non-Payroll Costs 19,450
Total Eligible Expenses 76,164
Example: Calculate Forgiveness
Calculation of ForgivenessTotal Eligible Expenses 76,164 Less: Salary Reduction (852) Subtotal 75,312
Multiply by FTE Quotient 96.81%
Take the lesser of:Eligible expenses less reductions 72,910 PPP loan amount 100,000 Payroll Cost 75% Requirement (Payroll Cost ÷ 75%) 75,619
Forgiveness Amount 72,910
Example: Summary
$27,090
POLLING QUESTION
To be eligible for CPE, 3 polling questions must be answered.
• Maximize loan forgiveness?
• Minimize net out-of-pocket costs?
What is Our Goal?
Restore employees • During covered period: Increased forgiveness by $4,325 vs. increased cost of $1,923 (+$2,402)• By June 30, 2020: Increased forgiveness by $2,402
• Assumes can hire back for a day or that business is back up and running
Restore reduced salaries/wages• During covered period: Increased forgiveness by $4,250 vs. increased cost of $3,539 (+711)• By June 30, 2020: Increased forgiveness by $824
• Assumes can hire back for a day or that business is back up and running
Ensure that not spending on payroll is not eroding forgiveness of non-payroll costs
What if the owner had not brought three employees back?• Saved $13,461 in payroll costs but…gave up $30,795 in forgiveness
Align the Alternative Covered Period to reduce impact of late rehires
Hope there’s a change in the rules (e.g. extended covered period or elimination of 75% requirement)
Potential Strategies
FOCUSED.ON YOU.
Questions? • Contact your RKL advisor.• Visit RKL’s Coronavirus Resource Center
for more updates and guidance.
THANK YOU FOR PARTICIPATING
DISCLAIMER: The presenters and RKL LLP and its subsidiaries/affiliates are not held responsible for information that has changed or will change and makes no representation or warranty as to the ongoing accuracy of the information presented orally or in writing. Attendees should consult with legal, accounting and other advisors.
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