CAPATA PRESENTS PPP Loan Forgiveness
PPP Loans $513 billion approved loans $118,000 national average loan amount 4.4 million approved loans CAPATA CPA | 2020
Loan Forgiveness HOW DOES IT WORK? Loan received is equal Spend Period At least 75% of funds Supporting to 2.5 times average used must be documentation monthly payroll attributable to “Payroll submitted to the Cost” lender to apply for Up To 25% attributed loan forgiveness to Rent, Utilities, and CAPATA CPA | 2020 Mortgage interest
Agenda BORROWER CERTIFICATION PAYROLL COST DEFINING ELIGIBLE EXPENSES & QUALIFICATION CALCULATING LOAN FORGIVENESS STEP-BY-STEP CASE STUDY APPLYING FOR LOAN FORGIVENESS & DOCUMENTATION IRS UPDATE Q&A CAPATA CPA | 2020
Borrower Certifications April 26th – SBA released guidance regarding borrowers who applied before April 26th and repay 100% of the loan prior to May 18th will be deemed to have acted in good faith What Does This Mean? – Documentation is KEY from applying to receive the money to applying for forgiveness CAPATA CPA | 2020
Good-faith Certification Any borrower, with its affiliates, who received PPP loans less than $2 million will be deemed to have made the required good-faith certification. This safe harbor will promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. CAPATA CPA | 2020
Payroll Costs During 8- week Covered Period Covered Period - Alternative Covered Period Cash compensation Non-cash compensation Owner compensation CAPATA CPA | 2020
Eligible Expenses: Payroll Cost Wages paid which are subject to Social Security and reported on a W2 (IRC 415) Sick leave pay for which a credit is allowed under Families First Coronavirus Response Act is not eligible Portion of group health benefits paid by the employer Profit Sharing or 410(k) match prorated for the 8-week period State or Local taxes assessed – State Unemployment Tax Employer Share of Social Security and Medicare ARE NOT ELIGIBLE EXPENSES Max wage per employee over 8-week period is $15,384 $100,000 x 8/52 CAPATA CPA | 2020
Eligible Expenses: Interest, Rent & Utilities Mortgage Interest is eligible, but specifically: Mortgage is a liability of the PPP loan recipient Mortgage in place before February 15th No prepayment of interest Interest only, no principal Rent is eligible but must be “obligated under a leasing agreement in force before February 15, 2020” Specifically “Rent obligated” (Does not allow prepayments) Copy of mortgage or lease may be necessary Eligible Utilities specified, but only if service began before February 15, 2020 Electricity, gas, water, transportation, telephone and internet Non-payroll forgiveness limited to 25%
Eligible Expenses: Qualification Payroll/bills PAID with PPP funds for periods before the Covered Period do not qualify Nonpayroll costs that are eligible for forgiveness must be incurred during the Covered Period and paid by the next regular billing date, even if that date is after the Covered Period NO Prepayments Segregation of Funds is PREFERRED but NOT REQUIRED CAPATA CPA | 2020
THE 3 OBSTACLES TO LOAN FORGIVENESS Any amount not used will not be Reducing pay for any employee Number of Full-Time Equivalent forgiven by any means–the by more than 25% reduces (FTE) employees has the most money must be spent to be forgiveness significant impact on forgiveness forgiven of spent money CAPATA CPA | 2020
Breaking Down this Calculation Step 1 : Determine the eligible cost Eligible cost: payroll cost, payments of rent or mortgage interest, covered utility payments Step 2a : Determine salary/wage reduction in excess of 25% per FTE between covered period from base line period for FTE position Step 2b : Calculate average number of FTE’s during covered period Calculate average number of FTE’s during base line period Divide covered period by baseline period CAPATA CPA | 2020
STEP 1 EXAMPLE: AN ISSUE FOR EVERYONE
Step 2a: Reduction Related to Salary & Wages (this is for employee A) CAPATA CPA | 2020
Step 2a Example: Salary/Wage Reduction Greater Than 25% Per Employee CAPATA CPA | 2020
Step 2b: Reduction in FTE Employees Compare average number of FTEs per month during the covered period to either: February 15, 2019 – June 30, 2019 January 1, 2020 – February 29, 2020 Tip: Go with the smaller number But how are average number of FTEs per month calculated? CAPATA CPA | 2020
Average Full-Time Equivalency Reductions Employer’s forgiveness reduces when there is a reduction to the average full-time equivalent (FTE) employees within the Covered Period opposed to a past reference period, unless the new FTE Reduction Safe Harbor applies to the employer. To calculate the FTE: Enter the number of hours paid each week per employee throughout the Covered Period or APCP Divide this amount by 40 Round to the nearest tenth Note: The calculation is capped at 1.0 per week. Employees who work 40 hours or more a week, automatically receive 1.0 weekly, and employees who work less than 40 hours a week receive 0.5 weekly. CAPATA CPA | 2020
Exceptions to FTE Reductions An employer is not penalized for FTE reductions due to: Reductions during the Covered Period of APCP related to an employee who was fired with cause, voluntarily resigned, or voluntarily requested a reduction of hours Reductions to any position when the employer has made good-faith, written offers of rehire that were rejected by the employee(s) during the Covered Period or APCP CAPATA CPA | 2020
FTE Reduction Safe Harbor The PPP safe harbor exempts employers from losing forgiveness based on reduced FTE employee levels. The safe harbor applies when both of these conditions are met: The employer reduced FTE employee levels within the period beginning on February 15, 2020 and ending on April 26, 2020 The employer restores FTE employee levels that existed in the pay period including February 15, 2020 no later than June 30, 2020 CAPATA CPA | 2020
Step 2b: Calculating Avg. # of FTEs Per Month CAPATA CPA | 2020
Step 2b Example: Reduction in FTEs CAPATA CPA | 2020
Step 3: Borrower must apply for forgiveness (See SBA Application) Forgiveness without documentation is Prohibited Documentation verifying the number of FTE employees on payroll and pay rates for the covered period and base line period Payroll tax filings reported to the Internal Revenue Service and State (FORM 941, DE 9 / DE 9C) Minimal impact due to cancelled checks, payment receipts, bills, payroll registers, etc., delay PPP loan proceeds being disbursed CAPATA CPA | 2020
IRS NOTICE 2020-32 On April 30, 2020, the IRS' stated their position on the PPP loan forgiveness. Income from forgiveness of PPP loans is to be excluded from gross and taxable income. IRC Sec 162 provides for a deduction for “ordinary & necessary” business expenses paid with forgiven funds is not tax deduction. Covered rent, utility, interest, and payroll costs are all considered ordinary and necessary under IRC Sec. 162. The IRS is only taking this position for the amounts forgiven, and not amount of unforgiven PPP loan proceeds. Expenses paid with unforgiven PPP loans are deductible.
Presentation Disclaimer This presentation is intended for educational purposes only and do not replace independent professional judgment. Statements of facts and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of CAPATA, its cosponsors, or its committees. CAPATA does not endorse or approve, and assumes no responsibility for the content, accuracy or completeness of the information presented. Attendees should note that sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.
Q&A
The Folks Behind the Scene SAL KUREH LEO ZHANG Partner Staff Accountant
Get in touch! 28202 Cabot Rd #525, Laguna Niguel, CA 92677 PHONE NUMBER 949-364-0334 EMAIL ADDRESS adminteam@capatacpa.com
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