PPP Loan: Questions Answered (Part I)

Hello again, everybody, Tom O’Saben  from the University of Illinois Tax School, coming to you from my safe house, we’ll call it, in Maryville, Illinois. We’re not on the campus yet back at Urbana-Champaign. And we’re going to bring you this week’s blog. The goal of this blog and several more coming after it will be to try to address questions that came up during the PPP loan forgiveness webinar that we did on Tuesday, May the 19th. By the way that is available for video replay for those of you who maybe didn’t get a chance to participate. We had a lot of people, over 800 so there were tons and tons of questions that there just wasn’t time to get to in the space allotted during that that broadcast. So I’m going to try to address some of the questions that I think were some of the most popular coming through. We’ve got a limited amount of time when we do these blogs. I hate to keep you folks on these videos for longer than 20 to 25 minutes and we’re going to run real close to 25 minutes today on this one.We’re going to address about three questions, so we’ll go ahead and get started. If we can pop up the first slide. So the questions that I’m going to address today deal with what happens if we, or our client, got an economic injury disaster loan, referred to as an EIDL loan? And what is that impact on PPP, the Paycheck Protection Program, loan forgiveness. The second question is, what happens if a company goes out of business after it gets a PPP loan. And thirdly, what we’re going to spend the most time on, is calculating full time equivalent employees (FTEEs) and give you examples. So the first thing we need to do is to talk about just a brief background about the PPP program. You know the design of this program is to be a short-term cash infusion to keep businesses going, but most importantly, to keep people paid. That’s the real key. I will tell you that in the late late hours on Friday, May the 15th, the SBA released the forgiveness paperwork, including instructions. I think a lot of your questions will be addressed by flowing through the application, and also some of the definitions and the steps that it uses there. I think it’s very, very, very useful information. And we’re glad to have it. Now, I will give you a caveat that any of the things I talk about today can change. There are a number of proposals out there in Congress to change it. And as soon as we know something about that, we’ll get it as quickly as we can. I would strongly suggest you join our Facebook group. That’s the quickest way to get the most current information. So I want to to stress that to you, sincerely as we go forward.

But before we go into our first question, I want to give you a correction from the webinar that we did. There’s a more full blown correction that’ll be coming in our blog post next week, so stay tuned. But here’s what I want to talk about in where we had an error and I didn’t discover it until today. We talk about the 75/25 rule in the SBA program, and we talked about it in the webinar. Seventy-five percent of the PPP loan money is supposed to be used for payroll, the other 25% for other qualified expenses. Now, that being said, what I said in the webinar was that if you use less than 75% of the loan amount for payroll, that’s fine. But you can’t use other qualified expenses to make up the difference to get you to 100% loan forgiveness. Well, that’s not exactly correct. It is true that qualified expenses cannot be more than 25% of the loan amount, but get this. If the payroll portion doesn’t end up being 75% of the borrowed amount, whatever that percentage of shortfall is, is going to reduce the amount of qualified expenses that are eligible for forgiveness and it’s going to increase the amount that the borrower is going to have to pay back. So we want to keep that straight. I’ve got an example for you in the blog that’ll be coming out next week. But I want you to be aware that, yes, we can have the full amount of payroll forgiven. But if that doesn’t end up being 75% of the loan amount, then the qualified expenses are going to be a lower quotient. And then there’s going to be, again, more that has to be repaid. So let’s keep that in mind as we go along.

So we go ahead and have slide three, we’re going to go ahead and get into our questions. The first one again, deals with these EIDL loans, these economic injury disaster loans or grants, and what is their impact on PPP loan forgiveness. You can still apply for a PPP loan if the EIDL loan was obtained January 31 through April 3 of 2020. If that EIDL loan was not used for payroll, it doesn’t impact eligibility for a PPP. If it was used for payroll, then that  EIDL has gotta be refinanced into the PPP loan. Think about it, payroll from EIDL comes to Paycheck Protection Program, gotta roll it into it. If the business also receives a PPP loan or refinances an EIDL into a PPP loan, we’re going to have to subtract away that grant money that ends up being tax free, away from the amount that would be eligible for forgiveness under the PPP program. So in other words, we can’t have double dipping. And that makes sense. We also mention here on the slide, that businesses can’t use the EIDL money for exactly the same cost as PPP. We have an example here where if the EIDL money was used for a given number of employees and not just a number, but given employees in the month of May, we can’t use the PPP proceeds for those same employees in the month of May. Now, we could use it in the month of May for different employees or we could use In the month of April or June for those same employees, but not just the same employees in the same month. So if you want to know where to get more information about that, I’ve given you a PDF, which you can go ahead and plug into Google, and it will take you to the information that I just provided you.

Let’s go on to the second question. What happens if a company goes out of business after obtaining a PPP loan? Well, this question was asked during the webinar, and I thought it was a slam dunk answer, because when you think about it, who’s providing the guarantee? SBA. It says it doesn’t require any collateral, nor does the borrower have to provide a personal guarantee. But be careful. I did some research on the internet. It took me to a number of legal sites. And here’s what sometimes happens when an individual goes to their bank. So if you remember when the program first started, most lenders were saying, “we’re going to work with our customers first before we just work with the general public, who maybe doesn’t do business with Bank of North America.” Okay. That being said, I thought that was good customer service. But there may be something more at work. There’s something attorneys have referred to called a dragnet clause. And here’s what I want to mention: when that PPP loan is taken – and let’s say that your client, the borrower, has other loans with that same institution – the dragnet clause could come in to say, all of these loans (the regular borrowing they’ve had plus this PPP loan with this Bank of North America) could be all considered one package, which means the collateral provided, the personal guarantees provided, could apply to all of the borrowing including the PPP loan. We have no idea when we sign this ream of paperwork when we go in the bank. But be careful in the event that you’ve got a client who goes out of business and say, “Well, at least I don’t have to be worried about them coming after my house for that PPP money.” They may want to double check with the bank at that time. It may not be the case. So the moral of the story I mentioned down here at the bottom, it’s kind of talking about the horse after it’s out of the barn. But did it make sense to get that PPP loan with the same friendly neighborhood bank that we do our other business or borrowing with? Well, little late now, and we may not have had much choice. But the moral of the story might have been no. It may have made sense to go through a different borrower, but I don’t know how we’re going to deal with that since it’s already happened. But I want you to be aware of this circumstance, should it happen. I’m not saying that the banks did something sinister, although I hope they would have explained it. That it could be, I think the term the banks like to use is cross collateralized.

Now we’re going to spend the rest of our time talking about the issue with full time equivalent employees (FTEEs) and how the change in employment could cause less loan forgiveness, meaning more that has to be paid back. Remember, the goal of the PPP program is to keep people employed, give a quick shot in the arm of money. And that way to keep the business going, but the government wants that money spent quickly. You’re going to hear me use eight weeks and 56 days a number of times. Now as we begin this section, let me say this to you. If you’re dealing with a client who went ahead and got a PPP loan, and they’re just business as usual, no change in employees, no change in payroll, you don’t have to go through all these calculations. You know, if they use enough of it for payroll, enough of it for qualified expenses. Yes, we’re trying to get to where we could get to 100% loan forgiveness, yes. But what we’re getting into here is where either the number of employees was reduced and not restored in a certain period of time, or the payroll has been reduced, and that’s where we could have the loan forgiveness reduced. A lot of this information is going to come, like I mentioned, right out of that SBA paperwork, that PPP loan forgiveness form, and the instructions that came with it. So the first thing we talked about after you put their name down, is they want you to list the cash compensation and I think it’s important, you might want to circle this, the gross salary. There were some discussions about whether or not we use gross or net pay, we use gross. And this is going to be for W-2 employees. Okay. And we talked about listing that for a couple of terms that I’m going to define coming up – covered period and alternative payroll covered period. So we’ll get into that just a minute, I promise. But I also want to mention that for any one employee, you don’t include more than $100,000 on an annualized basis per employee, not total of employees, but per employee. For this covered period, which I’ll define in a minute, how do we come up with a number? Take $100,000 divide it by 52, multiply by eight. This kind of factor is going to be used often. I don’t want you to divide by 12 and multiply by two. I want you to divide by 52 and multiply by eight. If you take $100,000 divided by 52 and multiply it by eight (I bet there’s some of you doing that right now) you’re going to get $15,385. That’s the most we can show for any one employee. I will tell you that it that $15,385 can be increased  for payments during the covered period, for health insurance and retirement plans, and things like state unemployment, but we’ll get into that as we go along.

Okay. On the next slide, we’re going to define these to you. That covered period is the eight weeks – and all the loan paperwork from from SBA says 56 days. So that may answer your question about if these are business days or physical seven days in a week. They are seven days in a week. So 56 days from the day they got their money equals the covered period. And we have an example here that there’s a loan proceed distributed on April 20. That’s day one.  A question came up during the webinar – is the first day day zero or day one, it’s day one. That gives them until June 14, that’s day 56, to spend these funds if they’re looking for loan forgiveness, and in fact have part of it forgiven. So we had the question about is day one, zero or day one, one, it’s one. The other question that came up during the webinar was -what if a taxpayer, a borrower, leaves the bank with a check, walks around with in their pocket for three weeks. Is it when they deposit it to the bank? I’ll tell you, don’t let your clients play that game. They were in constructive receipt of the money. The fact that they chose not to deposit it means nothing to the bank. The bank is going to go with the date on the check. So that’s going to be day one. Okay. So that’s our covered period. We have an alternative payroll cover period. And all that does is address that if we got the loan this day, and payroll isn’t for a week, could we use a later date? The answer is yes. In the example here, which builds on the example we just did, the loan proceeds were distributed on April 20. The following Sunday, April 26, was the next payroll period, the taxpayer can choose that alternative payroll covered period, starting then April 26, which would give them until Saturday, June the 20th. And we use the acronym APCP and now throughout the SBA PPP loan paperwork, that the borrower will be asked to check a box, which says we’re using the alternative payroll covered period. So I think it’s important to be aware of that as well.

So then what we have to do is calculate the average FTEEs. So in doing that, we have to look at what’s an FTE? Well, the FTEs are 40 hours. One FTE is 40 hours. Well, a lot of people work less than 40 hours. So in the first calculation, you take 40 hours divided by the hours they really worked. And that gives you what percentage of an FTE you have. That sounds kind of crazy. There’s actually a simplified method which says, if somebody works 40 hours or more a week, they’re one. If they work less than 40 hours, they are a half. There’s no additional credit given regardless, by the way, if somebody works more than 40 hours a week (like 60 hours like you and I do) that doesn’t give them 1.5. That’s still a one. Everybody below 40 is a half. I would use the simplified method. I think that would be important to consider. I also want to mention that when we’re talking about this 40 hours, the paperwork from SBA says 40 hours. I mentioned that during the webinar, had some comments come back that said I beg to differ because some companies, some businesses will use 30 or 35 hours as defining full-time employment. Hey, you’re welcome to it…look at the paperwork from SBA, they use 40 so we have to use 40. So that’s important as well. When we talk about what’s going to happen, why are we doing this? Remember, again, that the purpose of the program is to keep people employed. So if the numbers of employees, by the way, this doesn’t matter, what then who they are, what their names or any of that, if the number of full time equivalents drops, then by that amount that it dropped, we’re going to have that much less eligible for forgiveness. And I’ll describe that when I get to that in just a minute. And there are in fact, some safe harbors that we’ll talk about as well. We have to talk about a test period. What do we have to do to compare what our full time equivalent employees are now to what they were before? You have one of three choices. You can use February 15, 2019 to June 30, 2019. You could use January 1, 2020 to February 29, 2020. Or the third choice, if we have seasonal employers, you could use either of what we just described, or a consecutive 12 weeks between May 1, 2019 and September 15, 2019. Here’s my advice for you with your clients – use the method that ends up with the least amount of FTEEs. We want the lowest number, the smallest number of FTEEs to compare against what we’re doing now.

Okay? Now, what’s the moral of that? If we end up with the same number of employees or more? You’re gold, you’re good to go. If you have less employees than you did in the test period, the percentage by which we’ve decreased is the percentage of PPP loan proceeds that can’t be forgiven. And I have an example here for you. In the test period, you had 10 FTEEs and now you have nine, that’s a reduction of 10%. Therefore 10% of the PPP loan proceeds are now not eligible for forgiveness. See this, the idea being to keep people employed. Now there is a safe harbor I’ll talk about here on the next slide. We can be exempt from the reduction in loan forgiveness if we meet both of these conditions. The borrower had to reduce its level of employees between February 15 and April 26 (the worst time for the Coronavirus situation so far, when it really started hitting and people started shutting down and and hunkering down in place and all of that). So they had to lay people off during that period of time. And two, they get that employment number restored by June 30. And then you could ignore that layoff period between February 15 and April 26. And it doesn’t have to be the same employees. We’re just talking about employee numbers…it doesn’t have to be the same people. So that’s the Safe Harbor there.

Okay, so let’s go ahead and take a look at this example we’ve got. In addition to yourself, (you’re the sole proprietor we’re talking about,) there are three employees. They made $3,000 a month. So the PPP loan amount was $22,500, which the average over the last 12 months, $3,000 a month times 2.5 gave us the $22,500. Remember, there’s three employees. So we have 9000 times 2.5. You had to lay them off in February. Only two of three employees were able to be hired back or two out of three were hired. That’s only two thirds during this test period, and by the way, the owner is not considered in this test as an FTEE . I think that’s an important consideration as well. So over that eight weeks, the covered period of 56 days, $12,000 was spent on payroll for the employees. And you know what, that didn’t get us to 75% of the loan amount, so we advise the owner to take payroll of $4,875 with the remaining funds being spent on other qualified expenses. So our payroll costs for that time ended up being $16,875, which is 75% of the PPP loan amount. Remember, we have an issue here, if we don’t hit that 75%, benchmark. Qualified expenses outside of payroll are things like mortgage interest and rents and utilities. They are limited to 25% of the loan amount. Twenty-five percent of $22,500 is $5,625, just as you’re seeing in the slide. Hey, looks like we’re good to go – $22,500 is eligible for forgiveness, tentatively. That’s $16,875 for payroll plus $5,625 for other qualified expenses. Uh oh, we only brought back two of the three employees we had numbers in the test period. So only 67%, we only got back two thirds. So 67% of the loan is eligible, which means $15,075 is all that is eligible;  $7,425 will need to be paid back. And remember, if I didn’t mention it before, or you didn’t have a chance to participate in the webinar, the interest rate is at 1%. It accrues from day one, the day the money is dispersed.

Loan Repayment begins after six months, and has to be paid off over two years, so keep that in mind as well. So see the reduction in FTEEs? Hey, we spent the money, but we had a reduction in the number of employees, that’s an important consideration. So there’s a second test: the salary or hourly wage reduction. This calculation is used to determine whether the borrower’s loan forgiveness also must be reduced because individual payroll circumstances dropped by more than 25%. That’s the key. Let’s go ahead and move on. Now there’s a worksheet that the borrower needs to go through from the PPP loan forgiveness website. And we have to complete that for any of the employees where it dropped greater than 25%. If it didn’t drop by more than 25%, there’s a safe harbor there. We have a circumstance with the FTEEs that if the borrower can document that they offered for the employee to come back and the employee said, No, I’m doing better on unemployment. I’m not coming back to work for you. We could leave that employee out. Or if an individual was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in their hours (sounds like we need to have that documented). In all those cases, we can use those exceptions so we’re not looking at the individual employee. But we can only use it if the employees were replaced. If we didn’t do it, then the Safe Harbor doesn’t apply.

So let’s go on with an example. We have those same three employees from our example who made $3,000 a month. So the PPP loan amount was $22,500. They were laid off in February. They were all hired back, we really needed them, but the borrower could only afford to pay them $2,000 a month. Remember that the first thing we have to do is to see if payroll was reduced by more than 25%. In this example, payroll for each employee was reduced by a third. So then we start to go through the calculation. This next slide is actually from the worksheet from the PPP loan forgiveness application, which basically refers to the slide I just did. When we divide what the annualized payroll is for these employees now (for each employee $24,000). What was it before? $36,000. There, we see that it is two thirds, or 67%. So it is less than 75%, we have to go on to the next step. So in the next step we have to see if a safe harbor is met. Well, we don’t meet the Safe Harbor because the payroll is less than 75% than it was in the test period. So we have to do a wage reduction test. So we look at what our wages were before – $36,000. Take 75% of that, you know where that came from. See, that’s kind of the reciprocal of what we just talked about. We look to see if they dropped more than 25% by asking if the wages total 75%. So 75% is $27,000. Then we subtract that from what we’re paying them now, which is $24,000 on an annual basis. That’s $3,000. Okay. You can skip the rest of these unless you’re doing hourly employees. And then say we take that difference, $3000, multiply it by eight, that gives us $24,000, then divide that by 52. So you don’t divide by 12 months. That gives us $462. That’s a $462 reduction per employee that we’ll have to do for each one of them. So over the eight weeks, the 56 days of the PPP period, $12,000 was spent on employee payroll, plus, we advise the owner, to take $4,875 for yourself so we get up to 75%. The non payroll expenses were still limited to 25%. So the full $22,500 again appears to be eligible for forgiveness. Well, guess what? It’s impacted by that reduction in those employees’ compensation, not the owners compensation, but those full time employees (that 75% test). If you just did simple math, it looks like it would have come out to about $500 in reduction for each employee, if you just divided by 12 and multiplied by two. But by dividing by 52, we had that $462 reduction. We have to do that for three employees. So we have a reduction of $1,386. So instead of $22,500 being eligible for forgiveness, it’s $21,114. Again, the goal is to keep employees employed.

On this last slide, I mention the impact of safe harbors and reduction exceptions. Did we get payroll back up to speed by June 30? Can we use that safe harbor? Do we have employees who refuse to come back? We didn’t get them replaced. And finally, don’t forget to tell your client, the owner, to pay themselves, I’m assuming that we’re talking about a non incorporated situation. Because if we have employee W-2 shareholder employees, they’re employees just like everybody else. They would be an FTEE. But in the self-employed world on a Schedule C or a Schedule F, that owner would not be an employee, should we tell them to take money to get us up to that 75%. Or we could have our qualified expenses reduced as well by the ratio by which we did not hit the 75%.

Please join the Facebook group and post your questions out there. Lots and lots more legislation is proposed.  So we’ll try to get you that information as quickly as possible and as timely as we can. We’ll have another blog next week with some more questions. So for now, this is Tom O’Saben for all of us at the University of Illinois Tax School. I’ll say goodbye for just a while.
Hide Video Transcript