As a business owner, increasing sales can be a great mood lifter. But what happens if you get a large order and have no way to pay for the supplies? Sales don’t always equal immediate cash in hand, which can put a strain on your business accounts and your ability to deliver on time.
Below, we’ll share what the difference between revenue (sales) and cash flow is, and how it can affect your business.
More revenue, more problems
While the thought of increased revenue causing more problems for a business owner can seem counterintuitive, there are challenges that increased sales can bring forth. But first, let’s talk about what revenue is.
Revenue is the total income generated by business’s sales before expenses are deducted. This is also known as cash inflow. Most often, this is income from your primary operations. Your business may also have non-operating income, which is generated from interest bearing accounts and investments.
When you have sales come in on credit, or terms, it can be weeks or months before you receive the full payment for the order. Additionally, credit card processors can take up to three days to deposit monies from sales, depending on your merchant services provider. Meanwhile, your business still must cover any expenses like building materials, new inventory, or payroll.
That’s where managing your cash flow comes in.
The ins and outs of cash flow
Cash flow is simply how money moves in and out of a business or bank account. Just like you have to budget your paychecks, bills, and expenses in your personal accounts, you have to manage the cash flow for your business.
As stated above, cash inflow is your revenue and your non-operating income. Cash outflow, then, is comprised of anything your business has to pay for (i.e., rent, inventory, supplies, payroll, refunds, and merchant chargebacks).
Creating a forecast for expected expenses and payments, plus when they’re expected to take place, can help you see where any shortages could be expected throughout the month. Keep in mind, the forecast can be affected by delayed sales payments and unexpected expenses.
To create a buffer and give yourself some breathing room in your cash flow, consider:
Raising capital: This means selling a portion of your company to investors for an influx in cash.
Maintaining a business line of credit: This loan allows you to draw funds when needed for expenses and pay them off on a payment plan, or when the revenue you were expecting comes in. Any money you use will incur interest charges as outlined in your loan agreement.
Delaying payments: By negotiating the terms of payments for invoices in supplies, you can limit the amount of cash leaving your account at once. You can make payments in installments throughout the terms of the invoice or pay the balance of the invoice on the due date.
Managing your cash flow is an essential part of business ownership and can keep your company moving forward while minimizing growing pains. Our team can help you review your cash flow system and identify areas of strength or for improvement; or we can assist you in setting up your cash flow system from scratch. Give us a call to get started today.
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
Equipment, the construction of which begins before 2024, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or heat used in industrial or commercial processes (except for swimming pools). If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%.
Equipment, the construction of which begins before 2024, using solar energy to illuminate a structure’s inside using fiber-optic distributed sunlight. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain fuel-cell property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain small wind energy property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain waste energy property, the construction of which begins before January 1, 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain offshore wind facilities with construction beginning before 2026. There’s no phase-out of this property.
The credit equals 10% of the basis of the following:
Certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
Certain cogeneration property with construction beginning before 2024.
Certain microturbine property with construction beginning before 2024.
Certain equipment, with construction beginning before 2024, that uses the ground or ground water to heat or cool a structure.
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
The U.S. Senate and House of Representatives have both unanimously agreed to extend the Paycheck Protection Program (PPP) by five weeks in an effort to continue providing relief for small businesses hit hard by the pandemic. Applications officially closed for the program on June 30 when the Senate voted for a last-minute extension. President Trump is expected to sign the bill.
This extension would give small businesses until Aug. 8 to apply for a share of the approximately $129 billion in remaining PPP funding through the Small Business Administration (SBA). Thanks to the PPP Flexibility Act passed on June 5, recipients have 24 weeks to use loan funds for payroll and other essential expenses like rent/mortgage and utilities. The Flexibility Act also lowered the threshold for payroll expenses to 60% to achieve full forgiveness with a few safe harbor considerations. Over 4.9 million loans have been approved by the SBA so far, worth more than $520 billion.
Contact us for assistance in compiling information for your PPP forgiveness application to present to your lender.
This guidance details two noteworthy changes impacting PPP loan borrowers, including:
when a borrower can apply for loan forgiveness and
expanded limitations on owner compensation.
The updated regulations also make minor updates to existing guidance addressing the extension of the covered period derived from the June 5, 2020 enactment of the Paycheck Protection Program Flexibility Act (H. R. 7010).
When Can a Borrower Apply for Loan Forgiveness? A borrower can apply for forgiveness at any time on or before the loan maturity date. However, if the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages by more than 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.
Expanded Limitations on Owner Compensation The release of Revisions to the Third and Sixth Interim Final Rules on June 17, 2020, increased the maximum compensation for all employees and owners, which was summarized in our blog here. The new interim rules added that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount. Furthermore, healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.
HT2 has established a dedicated PPP loan forgiveness team that is constantly monitoring new guidance from the SBA, as well as the Treasury, Congress, and the IRS, to ensure we have the latest information when advising our clients.
On June 16, 2020, the U.S. Small Business Administration (SBA) released the updated Paycheck Protection Program (PPP) Loan Forgiveness Application (see link below) which supersedes the application previously released on May 15, 2020. The new application incorporates changes to the PPP per the Paycheck Protection Program Flexibility Act (H. R. 7010), which was signed into law on June 5, 2020. The latest PPP loan forgiveness application, in conjunction with the June 17, 2020 release of the Revisions to the Third and Sixth Interim Final Rules, addresses some of the previously unanswered questions, including:
Covered Period: All PPP loan borrowers will now have a 24-week Covered Period, unless borrowers of loans originated prior to June 5, 2020 elect to use the 8-week Covered Period as originally designed. The application instructs the borrower to state their covered period on the application, either the 8- or 24-week period. These new instructions do not suggest that there is an additional form required for the 8-week election.
Maximum Cash Compensation Per Employee: PPP loan borrowers can obtain forgiveness for cash compensation in the maximum amount of $46,154 per employee, calculated as $100,000 as prorated over the 24-week Covered Period, or $15,385 over the 8-week Covered Period.
Owner Compensation: Prior to this latest guidance, owner compensation was limited to eight weeks’ worth (8/52) of 2019 net profit up to $15,385. PPP loan borrowers using the 24-week Covered Period can now include 2.5 months’ worth (2.5/12) of 2019 net profit up to $20,833.
The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (Form EZ)on June 16, 2020. The Form EZ is a simplified version of the loan forgiveness application and is applicable to PPP loan borrowers who are willing to certify they have met one of the following conditions:
Borrower Has No Employees: The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the PPP loan application form.
No Salary or Hourly Wages Reductions or FTE Reductions: The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or compared to the period between January 1, 2020 and March 31, 2020, AND did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
No Salary or Hourly Wages Reductions or Unable to Maintain Level of Business Activities: The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or compared to the period between January 1, 2020 and March 31, 2020, AND was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, or standards of sanitation, social distancing, and any other work or customer safety requirement related to COVID-19.
Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.
On June 10, 2020, the Small Business Administration (SBA) issued an updated interim final rule for the Paycheck Protection Program (PPP) in response to the PPP Flexibility Act passed on June 5, 2020. The updated guidance accounts for revisions made to the covered period, usage of funds changes, extended safe harbors, and more.
Here is a quick rundown of the changes made by the PPP Flexibility Act.
Also of note:
*Borrowers may elect to stick with the 8-week covered period for loans originating prior to June 5, 2020. However, it is not clear if the June 30, 2020, safe harbor deadline still applies.
The amount of any Economic Injury Disaster Loan (EIDL) refinanced will be factored in when determining the percentage of proceeds for payroll costs.
It is unclear whether compensation limits formerly prorated based on 8 weeks now prorated based on 24 weeks.
It is unclear if the covered period may end prior to 24 weeks if funds have been used.
Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.
On May 23, the Small Business Administration (SBA) issued an interim final rule for the Paycheck Protection Program (PPP) that included the loan forgiveness application guidance released May 15, as well as other updated guidance.
The rule, Paycheck Protection Program – Requirements – Loan Forgiveness, is the formal guidance that accompanies the forgiveness application and should be used by borrowers and their advisors, as well as lenders, to ensure accurate completion and review of the forgiveness application. Since the passage of the CARES Act on March 25 and the opening of PPP loan applications on April 3, questions, concerns, and clarifications have abounded regarding loan forgiveness on all sides. The release of the interim final rule clarifies many questions, but guidance is still expected for borrowers and lenders.
Clarifications on borrower responsibility
Alternative payroll period – Until the application was released on May 15, the 8-week rule was strict for payroll. The interim rule now allows borrowers to establish the forgiveness period with the start of the first payroll period following loan disbursement, rather than the date of loan disbursement. This allows for greater flexibility for employers with less frequent pay periods and should make meeting forgiveness requirements for some businesses a little easier.
Eligible payroll costs – Payroll costs must make up a hefty 75% of the loan to qualify for forgiveness, but borrowers have questioned what qualifies because employee compensation can be paid in a multitude of ways. The rule clarified that eligible payroll costs include salary, wages, commission, bonuses, hazard pay, cash tips or equivalent, PTO/sick/family/medical leave, separation or dismissals, employee benefits related to group health care coverage and retirement, state and local taxes assessed on payroll, and independent contractor/sole proprietor wages/commissions/income paid by employers to contractors up to the pro-rated amount of a $100,000 annual salary.
Caps on eligible costs for self-employed/owner-employees – For these individuals, guidance on forgiveness was somewhat incomplete and unclear. The rule clarifies that forgiveness is capped at 8/52 of 2019 compensation up to $15,385 across all businesses and that retirement and health insurance contributions are not eligible for forgiveness for self-employed individuals (benefit contributions do qualify for owner-employees) which had been in question prior to guidance issuance.
Costs paid vs costs incurred – The 8-week-from-disbursement rule in the original PPP documentation created some unforeseen restrictions on claiming eligible non-payroll costs for businesses operating on a schedule that did not align with the 8 weeks. The May 15 guidance and the most recent interim rule clarified that non-payroll costs may be paid during the 8-week period or simply incurred as long as they are paid on or before the next billing date. These costs include interest payments on business mortgage on real or personal property, business rent on real or personal property under a lease, and business utility payments, including electricity, gas, water, transportation, telephone, or internet, all incurred, in force, or in service before Feb 15., 2020. The rule also clarified that advance payments on interest are not eligible for forgiveness.
Clarification on calculating FTE employees
The interim rule included much-needed clarification on calculating FTE employees considering the many possible changes and circumstances as a result of the crisis, which was a looming question for borrowers, including when and how safe harbors apply.
First, it is important to note that the FTE calculation for PPP forgiveness differs from previous legislation in that 40 hours is considered FTE status rather than 32 hours, like for the Affordable Care Act. FTEs are calculated by the average number of hours paid per week per employee / 40, rounded to nearest tenth. FTEs can be calculated using the formula available on the forgiveness application or contact us for assistance.
Wage reductions must be analyzed on a per employee annualized basis – Employers may reduce wages and still qualify for forgiveness as long as they follow certain restrictions. Salary or hourly calculations should be done on an average annualized basis compared to period of Jan. 1, 2020, to March 31, 2020. If the average for the 8-week period is 25% less than first quarter of 2020, loan forgiveness will be reduced, unless the reduction is restored at equal to or greater levels by June 30, 2020, then forgiveness will not be reduced.
Rehiring employees – Similar to the above, borrowers who rehire employees and/or reverse reductions to salary and wages by June 30 are still eligible for forgiveness. The guidance also clarified that, for hours and wage reductions on the same employee, loan forgiveness will not be reduced.
Employees who reject return – What happens if employees refuse to return to work for reasons such as personal or familial high-risk health concerns or other reasons? The guidance states that employers will not be beholden to employees who reject returning to work in their total FTE count. Key here is that borrowers will be required to demonstrate they made a good faith effort to rehire the employee with a written offer and must receive a written rejection. Employers must also notify the state unemployment office within 30 days following an employee’s rejection to return to work.
Cause or voluntary employee changes – Concessions have also been granted for employers whose reduction in FTE account was out of their control. The rule clarifies that borrowers who fired employees for cause, employees who voluntarily resigned, or voluntarily requested and received reduction in hours will not be counted against forgiveness. All these procedures should be documented in writing.
Clarification on loan forgiveness procedures
When working with lenders and the SBA, borrowers should be aware of additional guidance and clarification on the procedures for loan forgiveness. Most notably, all forgiveness applications must be submitted to the lender, not the SBA or other entity, and your lender will notify you of your forgiveness amount. Other points to note include:
Understanding non-forgiveness – Borrowers concerned about unforgiveable expenses received clarification that they will have 2 years at 1% interest to repay portions of the loans not forgiven by the maturity date. These terms are more generous that most SBA loans.
Factoring in EIDL – Some borrowers also qualified for, applied, and received Economic Injury Disaster Loan (EIDL) grants from the SBA. How this impacts PPP forgiveness has been a hot topic among borrowers and their advisors, but the guidance has clarified that EIDL grants will be factored into forgiveness calculations. If you want to avoid EIDL grants impacting your PPP forgiveness, they may be paid back prior to forgiveness, if applicable to your circumstances.
SBA may review any loan – While earlier guidance indicated that loans under $2 million will not be audited for economic need, the rule clarified that the SBA still has the right to review any loan, regardless of size, to ensure it meets eligibility requirements and is calculated correctly and funds are used properly. A separate ruling is expected on these procedures. Proper documentation will be essential here. Contact us for assistance.
Borrowers may appeal – Even if you feel you have all your ducks in a row, the SBA may still think differently. Fortunately, the interim rule allows borrowers 30 days to appeal SBA determinations. More guidance is expected on this.
Lenders have a deadline – The interim rule also issued clear guidance and deadlines for lenders and the SBA to handle the forgiveness applications. Lenders have 60 days to decide on loan forgiveness from receipt of application (and to notify the borrower of forgiveness amount), followed by 90 days for the SBA to review the application. Borrowers may be asked questions by the lenders and the SBA during these reviews, so they should be prepared with accurate documentation.
The first PPP loans were disbursed on April 3, so early borrowers are closing in the final weeks of the 8-week period. More guidance is expected in the coming days and weeks, but borrowers should begin preparing their documentation now. Contact us for assistance with your loan forgiveness application.
The Small Business Administration (SBA) has released its long-awaited Paycheck Protection Program (PPP) forgiveness form for borrowers. The release on May 15 brought with it significant changes to the interpretation of some components of forgiveness that were not previously known.
Clarity is still needed on many of the components of forgiveness. Changes were made to the following components of the program based on the release of the form.
Covered payroll periods – Until this release, the guidance indicated the covered payroll period began immediately after loan disbursement and lasted eight weeks. For those with payroll schedules that did not align with the disbursement and covered period, this generated many questions and concerns. However, this latest guidance indicates that the eight-week period may begin starting with the borrower’s first payroll following disbursement, not necessarily on the day of disbursement. This alternative period only covers payroll costs, not other allowable expenses, although adjustments do exist for other allowable expenses.
Incurred and/or paid expenses – The CARES Act originally indicated that, for costs to be covered under PPP, they would need to be incurred and paid during the eight-week period. The latest guidance, however, forgives costs that are incurred, but not paid, as long as they are paid on or before the regular billing date. This expansion applies to costs such as mortgage interest, rent, utilities, and payroll incurred during the loan period. Payroll costs incurred during the last payroll period but not paid during the covered or alternative periods (mentioned above) may be forgiven if those payroll costs are paid on or before the next regular payroll date.
Full-time equivalent (FTE) employee counts and wages – The guidance also included several clarifications to the FTE employee count and wage calculations necessary for forgiveness including:
FTE calculation can be rounded to the nearest tenth – The formula to calculate an FTE is average number of hours paid per week per employee / 40, rounded to nearest tenth (differs from Affordable Care Act calculation).
Wage reductions must be analyzed on a per employee annualized basis – Salary or hourly calculations should be done on an average annualized basis compared to period of Jan. 1, 2020, to March 31, 2020. If the average for the eight-week period is 25% less than first quarter of 2020, loan forgiveness will be reduced, unless the reduction is restored at equal to or greater levels by June 30, 2020, then forgiveness will not be reduced.
Safe harbor exists for borrowers who rehire lost employees by June 30, 2020, at the same level as of Feb. 15, 2020. Forgiveness will not be reduced.
Safe harbor exists for borrowers who made good faith written offer to rehire employees who then refused. Forgiveness will not be reduced.
Safe harbor exists for borrowers who fired employees for cause, voluntarily resigned, or voluntarily requested and received reduction in hours. Forgiveness will not be reduced.
Amounts paid to owners (owner-employees, a self-employed individual, or general partners), capped at the lower of: 1) $15,385 (the eight-week equivalent of $100,000 per year) for each individual; or 2) the eight-week equivalent of their applicable compensation in 2019
We expect further guidance to be issued from the SBA on PPP forgiveness beyond the changes outlined above. Borrowers will be required to submit the information in the forgiveness form through their lender, but your CPA can help with calculating and completing your form. Contact us for assistance.
In an update to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) FAQs, the SBA and Treasury have announced that borrowers with an original principal amount less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
Released just ahead of the May 14 repayment deadline, the SBA indicated in FAQ #46 that this safe harbor was introduced because borrowers who requested less than $2 million were less likely to have access to alternative funding options. The access to other capital was the sticking point in FAQ #31, which requested businesses that could not certify in good faith their need for funds to repay them by May 14.
Borrowers with a principal amount greater than $2 million can still meet the good faith certification. Still, the SBA continues to emphasize that they will be reviewing those larger loan applications for compliance with program requirements. See question 47 for update source .
Contact us for assistance with your PPP loan obligations.
For those of our clients who have received their PPP loan and endured the painful application process, we have just one word to share – Congratulations!!!! Now what?
Now, you are on the clock! You have 8-weeks to determine how much of that loan will have to be returned and how much of that loan may be forgiven.
In our opinion, we think most of our clients will be left with some amount of loan. We hope that this article will provide some guidance that can be used to help you through this 8-week time period and to maximize what your loan forgiveness will be. With that said, we must qualify our comments in that there remains many unanswered questions and the SBA still must provide guidance to those answers. Accordingly, some of our comments and observations could be incorrect based on our present interpretations.
Based on our experience with the application process, the banking industry had developed their own due diligence rules and the documents required varied from bank to bank and how they interpreted what was includible costs. Be prepared for potential conflicts once the 8-week time period ends and you enter the “loan forgiveness” stage.
WHAT SHOULD I DO WITH THE LOAN PROCEEDS?
The SBA guidance provides that the PPP loan must be used only for qualified expenditures and if not used properly, the fine print of the loan document has a very heavy statement. “If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud”. We know that our clients would never knowingly misuse the funds, but we would be negligent if we did not share that statement with you.
WHAT ARE QUALIFYING EXPENDITURES FOR PURPOSES OF THE LOAN FORGIVENESS?
The good news is that the categories of what you can use the loan proceeds for are limited. They are made up of “Payroll Costs” and “Non-Payroll Costs” which are defined as follows:
PAYROLL COSTS- At least 75% of PPP Loan
Generally, your gross payroll(wages); For a partnership, guaranteed payments.
Any compensatory payments that exceed $100,000 on an annualized basis are not included as qualified payroll costs. (Maximum of $15,384.64 for an 8-week period)
It does not include the employer portion of Federal payroll taxes, such as FICA or Medicare.
It does include some state and local taxes, such as SUTA and ETT for California.
Payments for group medical, dental, and vision insurance.
Employer paid retirement plan contributions.
NON-PAYROLL COSTS – Remaining 25% of PPP Loan
Rent payments based on a lease agreement.
Utility expenses such as gas, electricity, phone, and internet services. Services must have begun before February 15, 2020 to be included.
Mortgage interest on real and personal property incurred before February 15, 2020.
Interest payments on any other debt obligations that were incurred before February 15, 2020.
What time period do I have to make these expenditures over?
Are the qualifying costs based on paid or accrued?
What documentation do I need to keep?
As mentioned above, you have 8-weeks starting from the time your loan hits your bank account. Unlike a tax return, no extensions are allowed.
With respect to documentation, go overboard with organization and expect that you will have to provide your banker with copies of everything. Here are some of the steps we are recommending to our clients:
First, set up a separate file for qualifying expenditures and as the expenditure is made, take a copy of an appropriate supporting document and file it away.
Make sure you have a copy of your lease.
Take copies of all utility payments including showing the account was in existence as of February 15, 2020. This includes traditional gas, electric but also phone and internet bills.
Provide copies of any debt agreements as of February 15, 2020 to show the date of the mortgage as well as any other qualifying loan document. The amount of interest can be included as a qualifying expense.
LOAN FORGIVENESS TRAPS
The computations for purposes of the loan forgiveness creates some traps and could result in a significant portion of the PPP loan not being forgiven. In the mad rush to apply for the PPP Loan, many businesses did not spend a lot of time on the loan forgiveness computations. The following are some of the traps that will limit the forgiveness amount and we will spend time doing a deeper dive into each of the traps.
Your non-payroll costs may be limited based on the above.
Your “Full-time Equivalents (FTE)” counts come up short during the measurement periods.
You have reduced individual employee compensation by more than 25% during a covered period.
If you maximized your PPP loan by using your “average monthly payroll” costs from 2019 and then multiplied that by 2.5 to determine your loan it will be difficult to achieve 100% of forgiveness unless everything aligns in your favor. With that said, let us address each of the above items that may limit your forgiveness.
“Full-time Equivalents (FTE)” CALCULATION IS IMPORTANT:
If your employee count in 2019 was the same as 2020 and, there has been no reduction in wages, you probably will not have a problem and the FTE count exercise will probably not impact you other than to calculate the FTE’s in the measurement period.
If your current FTE’s are less than the period starting February 15, 2019 to June 30, 2019 you need to go through this calculation to determine if there needs to be a % reduction in your qualified wages.
If your current FTE’s are less than the period starting January 1, 2020 through February 29, 2020 you need to go through this calculation to determine if there needs to be a % reduction in your qualified wages.
If you reduced your FTE’s between February 15, 2020 and April 26, 2020 you need to go through this calculation to determine if the % reduction can be mitigated if you hire back by June 30, 2020
The calculation of your FTE’s will be part of the required documentation to submit to your bank when it is time to ask for loan forgiveness.
It appears that the SBA defines a “Full Time Equivalent (FTE)” as an employee that works 30 hours or more. Anyone that works less than 30-hours is considered a part-time employee. However, you can add up the total hours of your part-time employees and make a conversion to an FTE for purposes of these calculations.
The rules regarding the computations refer to “the average FTE’s” calculated during the measurement periods. We take this to mean that you must look at each pay period and do the FTE calculation for each payroll. You then take the total of the FTE’s in each payroll and divide by the number of payrolls in the measuring period.
Payments to independent contractors (1099 recipients) do not count as a payroll expense.
FINALLY, AND MAYBE THE MOST IMPORTANT STEP, IS TO TRACK WHERE YOU ARE AT WITH THE LOAN FORGIVENESS. HERE ARE THE STEPS WE WOULD RECOMMEND:
Set up an excel file to create a schedule that shows the qualifying payroll expenses, the nonpayroll expenses, and your FTE counts.
On a weekly basis update the schedule to show the cumulative qualifying payroll and qualifying non-payroll costs that have been paid.
Add to those totals the projected amounts to be paid in the remaining 8-weeks.
Using your PPP Loan proceeds as the denominator and the expected qualifying payroll costs as your numerator calculate the percentage.
If your percentage is on track to exceed 75% of the total loan proceeds that is a positive sign towards maximizing your forgiveness. This is the most important calculation because it impacts how much of the qualifying non-payroll costs will be considered for purposes of the loan forgiveness. If the percentage is less than 75%, start to plan accordingly.
Finally, review your expected qualified non-payroll costs for the 8-week period. Will the projected totals exceed 25% of the loan forgiveness? If not, look for ways to fill that gap. As a reminder, if the total qualified payroll costs exceed 75% of the PPP loan you just need to fill the gap which is the difference between the PPP loan and your qualified payroll costs.
QUESTIONS THAT NEED SBA GUIDANCE
We will need guidance as to what was the intent of the “payments made” or “costs incurred” language in the present guidance.
We think the definition of an FTE is 30-hours of work per week. However, this needs to be confirmed.
The SBA still needs to provide addition guidance on the calculations related to the “Restoration Test” as discussed above. This is confusing as written and is a very meaningful part of the CARES Act.
The CARES Act specifically says that any PPP loan proceeds that are forgiven are not taxable income. That is the good news. However, there is a provision in the Internal RevenueCode that says that any expenses paid with non-taxable income are not deductible.Stay tuned for guidance!
Will the states follow federal and not tax the forgiven PPP loan proceeds?
Will there be rules that limit companies from increasing payroll costs for selected employees during the 8-week measurement period?
What happens if you receive your PPP loans on May 15th? Do you only have 6-weeks in your “covered period”?
Guidance for the self-employed Schedule C borrower will need to be provided as to what nonpayroll costs can be included in their computations for loan forgiveness.
The SBA guidance for purposes of defining a salary reduction of more than 25% for an employee during the 8-week period needs clarification. They indicate you use the previous quarter which consists of 12 weeks and compare that to the 8-week period for purposes of the computation. This does not make sense.
How do you handle retirement plan contributions if historically a decision is not made until year-end? It may be that only 401k matching contributions may count.
We understand the PPP Loan Forgiveness step is confusing and we are here to help you and answer any questions you may have. We anticipate additional guidance from the SBA to be released in mid- May and will keep updating the information as it becomes available. As always, visit our dedicated COVID-19 Resource Page for continued updates and alerts.