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PPP: Your Loan Forgiveness Questions Answered

April 07, 2020

The major questions yet to be answered when calculating loan forgiveness as of April 7, 2020. (Additional guidance soon would make the loan forgiveness calculation simpler than the roll out of the loan calculation amount).

Check out our Paycheck Protection Program FAQs. Here, we cover the major issues we see impacting the loan forgiveness formula that we hope to see additional guidance issued on.

KLR has been at the forefront of assisting clients impacted by the economic effects of the Covid-19 virus spread by committing countless hours of reading and re-reading every official rule and paragraphs of guidance that the US government has issued. We have consistently taken a practical approach with our interpretation of the rules when consulting with our clients. We have stressed intent as opposed to the text of the bill.

How to Determine What Amount of Paycheck Protection Program Loan can be Forgiven:

From the Interim Final Rules:

The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. <..…> SBA will issue additional guidance on loan forgiveness.

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); ……………

Is there anything that is expressly excluded from the definition of payroll costs?

The Act expressly excludes the following: Any compensation of an employee whose principal place of residence is outside of the United States; The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Our thoughts: Everyone knows the roll out of the Payroll Protection Program included lots of implementation issues as the law was written hastily and many discrepancies arose when a borrower began calculating their eligible loan amount. We see a major storm brewing when borrowers go to calculate their loan forgiveness formula. Read on if you are interested.

If you are familiar with “Gross” payroll vs. “Net” payroll then this first issue should be obvious. If you notice in the definition of payroll costs form the interim final rules guidance, excluded from payroll costs is Federal employment taxes (employee’s component of Social Security and Medicare and Federal Income Tax Withholdings) for a period in 2020 which is expected to cover the 8 week period a borrower uses to assess loan forgiveness. This is the same definition of payroll costs for determining a borrower’s eligible loan amount. We covered in another blog that the eligible loan amount should be based on 2019 payroll so this exclusion for Federal employment taxes was not a factor when determining loan eligibility amounts. Essentially a borrower was able to obtain loan proceeds based upon the idea of covering the total costs they would incur for payroll purposes (the Gross Amount).

Now for assessing forgiveness purposes, it appears that the amount of loan proceeds that a borrower uses to pay payroll in the 8 week period is to be reduced by the amount the borrower must remit of Federal employment taxes withheld from employees. Keep in mind this amount is not a tax incurred by the Employer rather Social Security and Medicare taxes and Federal Income Tax Withholdings that an employee has withheld and removed from their payroll. The Employee receives a “net” pay which is their pay amount reduced for these taxes. Also the Federal Income Tax Withholding is an estimate based off of information that the employee voluntarily provides an employer about their anticipated Federal Income Tax for the year.

So a recipient of loan proceeds under the Payroll Protection program is going to receive proceeds to cover their entire employee payroll cost (“gross” pay) but only have the “net” pay the employee receives eligible for forgiveness purposes? I have read articles by people far smarter than me justifying why this makes sense. The Government does not want to give a business forgiveness from taxability on the funds they are remitting to the Government.

Our thoughts…

I cannot get on board with this reduction making sense (and neither can most CPAs I have spoken with) and here is why. There are too many inputs that allow an employee’s Federal Income Tax Withholdings (which will be the largest number in this forgiveness reduction input) to be adjusted easily. Also the Employer incurs the “gross” payroll costs regardless of what the employee receives.

The Medicare is a straightforward amount. Every employee has 1.45% of their gross pay withheld. Every employee has 6.2% of the first $137,700 wage base in 2020 withheld for Social Security purposes. This Social Security wage base can be modified in some ways to move the dial but we will not cover that in detail here and it is probably not material in the grand scheme of the whole program.

Getting back to the federal income tax withholding, it is too easy of an input to influence. Employees could reduce their federal income tax withholdings once they get back to work as a way to get more cash in their pockets from being out of work due to Covid-19 shutdowns or they could reduce withholdings in their entirety for this period of time and then increase their federal income tax withholdings later in the year outside the 8 week forgiveness assessment period to catch up. This will increase the forgiveness formula as an employee’s “net” pay will increase by the federal income tax withholding decreasing. Anyone who is a business advisor knows this and knows that you can make your loan forgiveness amount more or less by employees modifying their federal income tax withholdings. Additional guidance is paramount on this issue to put recipients of a loan under the Payroll Protection Program on an even playing field. Although even if the forgiveness feature stays as written, one has to be glad the loan was available and a portion was forgivable and the portion forgiven is not subject to income taxes while the expenses paid are still eligible as of April 5, 2020 as a 2020 tax deduction.

Other issues of note:

Rent is not defined in any of the guidance. Is it rent for just leased premises or does it include rent for trucks and machinery and equipment? What about cloud computing services?

Also, is it rent or utility costs incurred in the 8 week period or the amount paid in this period? Only guidance is that utilities and leases have to be on agreements in place prior to February 15, 2020. Many companies have not paid their March 2020 rent and utilities and will use the Payroll Protection Program to get caught up. How is this accounted for in the formula?

As you can see above the interim final rules say the SBA will issue additional guidance on loan forgiveness. Hopefully these issues noted are addressed by the SBA such that the loan forgiveness calculations will be clearer to figure out than the loan eligibility ones were.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis. With a completely remote workforce our advisors are always available.

Visit our Coronavirus Resource Center for more information.

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