This brief 30-minute webcast covers highlights of the recently released application for forgiveness.
Join attorney Rebecca Dobbs Bush on Wednesday, May 27 at 1 PM CT for a complimentary webcast as she reviews the instructions for PPP loan forgiveness with attendees and points out items of special interest for all employers.
On May 13, 2020, the SBA and Treasury issued additional guidance with respect to the necessity certification that borrowers must make when applying for a PPP loan. FAQ #46 provides a safe harbor for borrowers receiving loans which are less than $2 million and also indicates that, in the event the SBA determines that a borrower receiving a loan in excess of $2 million lacks an adequate basis for making the necessity certification, such borrower will be afforded the opportunity to repay the loan. Specifically, FAQ #46 states:
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.
Moreover, in light of the timing of FAQ #46’s release, the SBA extended the deadline for borrowers to repay its PPP loan from May 14, 2020 to May 18, 2020.
On Sunday May 3rd, the Treasury issued additional guidance regarding the impact of layoffs on the headcount calculation for purposes of loan forgiveness. Specifically, FAQ #40 asked whether a borrower’s PPP loan forgiveness amount would be reduced if the borrower laid off an employee, subsequently offered to rehire the same employee, but the employee declined the offer. The Treasury’s answer reads in part as follows:
…SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Based on the Treasury’s answer, there should be no adverse impact on a business “headcount” for purposes of loan forgiveness even where the business initially laid off a worker, but then extended the worker a WRITTEN offer to return and the worker rejected the offer. However, the business should keep a record of the worker’s rejection of the offer just like other PPP loan related documentation, i.e. payroll tax filings, cancelled checks, payment receipts, etc.
It should also be noted that, while not required, the written offer should include a statement that if the worker chooses not to return to work after the offer is made, doing so may, under some circumstances, be deemed a voluntary resignation potentially disqualifying the worker from continued unemployment benefits.
NOTE: This is general information and should not be construed as legal advice. New guidance is continually being published. This information is only current through May 3, 2020.
The Small Business Administration stopped accepting applications for loans under the Payroll Protection Program (PPP) late last week after quickly reaching the program’s $349 billion limit. Congress is debating appropriating additional funds for the program and businesses shut out last week may get another chance. But in the meantime, employers should consider the other options under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as discussed below.
Employee Retention Tax Credit
An Employee Retention Tax Credit of up to $5,000 per employee is available to an eligible employer whose business has been financially impacted by COVID-19. The refundable payroll tax credit is equal to 50% of up to $10,000 in “qualified wages” paid per employee. The credit is available for wages paid from March 13 to December 31, 2020.
An employer may be eligible for the tax credit for a calendar quarter if the employer has not taken an SBA loan under the CARES Act (i.e., a PPP loan, Economic Injury Disaster loan or other SBA loan) and:
the employer’s business is fully or partially suspended by government limiting commerce, travel or group meetings order due to COVID-19 during the quarter, or
the employer’s gross receipts are below 50 percent of the comparable quarter in 2019.
The “qualified wages” used to calculate the tax credit differ based on whether the employer has 100 or more full-time employees. If the eligible employer averaged more than 100 full-time employees in 2019, only wages paid to an employee for time that the employee is not providing services due to a full or partial suspension of operations by order of a governmental authority, or a significant decline in gross receipts qualify for the credit. But for employers with less than 100 full-time employees, wages paid to anyemployees during the period of economic hardship qualify for the credit. “Qualified wages” include cash payments plus the employer portion of health insurance premiums.
Any paid sick leave or paid FMLA under the Families First Coronavirus Response Act (FFCRA) is specifically excluded from “qualified wages” for the Employee Retention Tax Credit, as employers receive a separate tax credit for such paid leave wages.
Employers can be immediately reimbursed for the Employee Retention Tax Credit by reducing their required deposits of payroll taxes by the amount of the credit for the quarter. Eligible employers may also request an advance of the Employee Retention Credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Payroll Tax Deferral
All employers are eligible to defer the payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020 and Dec. 31, 2020, with no penalties or interest. Fifty percent (50%) of the deferred amount must be paid by December 31, 2021 and the remainder paid by December 31, 2022. There is no dollar cap on the wages that are counted in calculating the taxes that may be deferred.
This payroll tax deferral is available to all employers, regardless of size, and there is no requirement to show any specific COVID-19-related impact. However, employers that receive a PPP loan may not defer taxes due after a PPP loan is forgiven.
Tax Credits for Paid Sick Leave and Expanded FMLA
Don’t forget that a tax credit is available to employers with less than 500 employees that provide paid leave to employees as required by the Families First Coronavirus Response Act (FFCRA). These refundable payroll tax credits are available to fully reimburse employers for the costs related to providing qualifying paid leave for reasons related to COVID-19 under the FFCRA.
An employer may claim a tax credit against the employer portion of Social Security taxes equal to 100% of the amount of paid leave provided under the FFCRA. If the amount of the tax credit exceeds the employer portion of the Social Security taxes, then the excess is treated as an overpayment and refunded to the employer. Employers claiming the tax credit will be able to retain an amount of federal employment taxes equal to the amount of the qualified leave wages paid, rather than depositing them with the IRS. An employer may claim the tax credits when filing its quarterly federal employment tax return or request an advance of the tax credits using Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers must retain records supporting each employee’s leave to substantiate the tax credit.
NOTE: This is general information and should not be construed as legal advice. New guidance is continually being published. This information is only current through April 16, 2020.
So far, the CARES Act and related guidance published by the Treasury indicates that two general factors will be examined in determining forgiveness:
1: Were at least 75% of the funds spent on “payroll costs”?
2: Have you maintained the same headcount and salary levels for full-time equivalent (FTE) employees?
First factor to keep in mind: AT LEAST 75% of the PPP Loan Proceeds were used on “payroll costs.”
“Payroll cost” is referring to the same definition employers looked at when performing calculations for the amount of available loan proceeds.
This includes gross cash compensation up to $100k on a prorated basis
Employer monies spent on retirement plan funding (such as pension contribution payments or 401(k)/403(b) matching funds)
Employer monies spent on health plan premiums (do not include amounts charged to your employees and paid for by them)
Employer taxes paid to state and local government
This does NOT include employer portions of federal payroll taxes such as Social Security and Medicare
This DOES include employer payroll taxes paid to state unemployment agencies.
Absent fraud DO NOT be concerned if you don’t spend 75% of the funds on payroll costs. There are multiple potential scenarios where that could innocently occur. Some examples:
You have a significant portion of your employee population eligible for paid leave through the FFCRA. Since you will receive payroll tax credits to fund that paid leave, you cannot claim it as a payroll cost incurred by the Company.
You don’t have work to resume employment for individuals. And, depending upon an employee’s annual salary level, current unemployment levels may have provided them with an increase in compensation. You don’t have to interfere with that and disqualify them from unemployment by resuming their compensation.
How was the remaining percentage (of not more than 25%) spent?
Permissible expenses include interest on mortgages, rents, utilities.
Generally, the obligation or service agreement needs to have been in existence prior to 2/15/2020.
Next factor to keep in mind: Determining whether there’s a reduction in employee headcount OR in an employee’s salary.
Forgiveness is NOT all or nothing – it can be prorated. Proration is based on headcount or salary levels – or both.
Calculation used to determine if reduction in headcount:
First divide A by B
Average number of full-time equivalent employees per month employed during the 8 weeks following receipt of loan proceeds
the average number of full-time equivalent employees per month during 2/15/2019 through 6/30/19
OR, the average number of full-time equivalent employees per month during 1/1/2020 through 2/29/2020
Then, multiply that percentage by:
The total amount spent on permissible “payroll costs” and other permissible expenses such as business debt/mortgage interest and utilities during the first 8-weeks after you received loan proceeds
The resulting final number is the principal amount eligible for forgiveness.
Forgiveness can also be reduced if you reduce employee compensation:
Look at salaries paid during the 8 weeks following receipt of loan proceeds.
Loan forgiveness will be reduced by the amount of reduction in an employee’s wages.
Reduction is determined by looking at the total amount paid during the 8-week period after loan proceeds are received and comparing it to the total salary or wages of that employee during the most recent full quarter.
Factored in only where reduction greater than 25%
As long as a salary reduction does not cause an individual to fall below $100k prorated over the 8-week period, it should not factor into forgiveness.
This is a conclusion based on 2 different parts of the Act. One part allows complete disregard for any reductions made for someone making $100k or more a year, and another part of the Act which requires 75% of loan proceeds to be paid out as payroll costs (and with that same individually presumably counting for at least $100k in determining loan availability).
What about the option to fix things?
CARES provides an opportunity for employers to “fix” things and have headcount or salary reductions entirely disregarded in determining forgiveness.
Circumstances where “fix” is an option:
Employer reduced headcount or salary between 2/15/2020 and 4/26/2020 (30 days after CARES went into effect), but the employer fixes it by:
Increasing the headcount of full-time equivalent employees by 6/30/2020.
At least 1 employee had their salary reduced by more than 25%, and the employer eliminates that reduction by 6/30/2020.
There is zero clarification on what the “fixes” mean. We presume averages of some sort will be published to eliminate the potential abuse of allowing for last minute corrections.
What documentation should I be maintaining?
CARES mentions the following as eligible documentation that can be provided to a lender to verify calculations for forgiveness:
Payroll tax filings (both state and federal)
Transcripts of accounts verifying payments made
Certification from a person authorized to do so on behalf of the business that the documentation is true and correct and the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
Summary: Things to Do and Keep in Mind
Maintain a ledger of total loan principal received
Immediately calculate 75%:
This is the total minimum amount you must spend on employee payroll, unemployment taxes and employer share of costs of health and retirement benefits (including insurance premiums paid).
Note the remaining 25% number:
This is the total maximum amount you can put towards all utilities, all business interest expenses and any rental or lease obligations.
Keep in mind the documentation noted above. These items may be required to verify the expenses you claim towards the required percentages.
The forgiveness calculations are complex with some potential implications not yet occurring and/or being outside of your control. All you can do initially is carefully track how you spend the loan proceeds during the first 8 weeks after receipt.
Amounts you cannot receive forgiveness for will be subject to repayment and will be a loan on the following terms:
2 – year term
1% interest rate
No payments due for first 6 months
No personal guarantees
No collateral at-risk
TOTAL Loan received of $645,421.00
A = ? (Possibly 14)**
(Average FTE employees per month during 8 weeks following receipt of loan proceeds)
B = 21
(Average FTE employees per month for the period of 2/15/19 to 6/30/19 OR 1/1/20 to 2/29/20)
66.7% = $430,281
(Potential percentage ratio/ $ eligible for forgiveness)
75% of total loan amount = $484,065.75
(Minimum amount of loan that must be spent on “payroll costs”)
25% of total loan amount = $161,355.25
(Maximum amount of loan that may be spent on rent, lease, utilities, and/or mortgage interest)
Amount of loan to be repaid at 1% interest —>
Total loan proceeds less ratio described above
** Note that this example anticipates a scenario where wages are not paid to individuals in the event there is no work for them to perform with unemployment a better alternative for the individuals. If the estimated number for A increases, the amount of the loan available for forgiveness will also increase.
**Also note that this example does not account for any salary reductions for any individuals that earn less than $100k annually.