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Extension Act For PPP loan Functions: Clarifications And Explanations

Potential debtors nonetheless hoping to get a minimize of the PPP pie have been given till August eighth to use for his or her preliminary PPP loan.  President Trump signed the “PPP Extension Act” on July third, which consists of the identical precise language that handed the Senate on June 30th, mere hours earlier than the window to submit purposes for the PPP was set to shut. 

This text was written to assist PPP debtors and their advisors perceive what the principles are at the moment for small enterprise homeowners, and what steerage remains to be wanted to make clear uncertainties. Over the previous few weeks, we now have fielded a whole bunch of questions from small enterprise homeowners and advisors and and have had hundreds attend free webinars on the PPP program.  Our subsequent free webinar shall be on Wednesday, July eighth at 12:30 p.m. for 30 minutes entitled PPP Forgiveness Fundamentals For House owners and Workers of Small Companies: The place Are We Now. You possibly can join this by emailing me at and placing “finish the confusion” within the topic line. In case you are an advisor, please be happy to share this text, and our empathy, for you and your shoppers.  This has been a really onerous highway for these making an attempt to avoid wasting their companies whereas spending cash to get forgiveness beneath guidelines which have adjustments nearly as quick…and furiously…as a curler coaster at a now shut down amusement park. 

Particular due to Brandon Ketron, J.D., CPA, LL.M., who works for me and is the actual brains behind our regulation agency’s skill to assist with these questions, and Kevin Cameron, CPA, who has created a spreadsheet that Brandon and I’ve helped to enhance that’s being utilized by a whole bunch of CPAs and hundreds of debtors to trace and navigate forgiveness.  Free movies on how spreadsheeting forgiveness works will be discovered on the following hyperlinks, (Four minute video) and (47 minute video).  The AICPA additionally has a spreadsheet that’s free for its members, and will be discovered on its web site.  

Greater than 4.Eight million small companies have already utilized for PPP loans designed and applied to maintain companies afloat and maintain paychecks in staff’ fingers. The Program was set to wind down with almost $130 billion nonetheless in its coffers and hundreds of debtors nonetheless confused or unable to search out lenders who would cooperate to allow them to borrow.  Most of those debtors consist of people who’re often called “independent contractors” and “sole proprietors” as a result of they file a Kind Schedule C as a small enterprise or a Schedule F as a farmer, as a part of their Kind 1040 particular person tax returns, and personal their very own commerce or enterprise individually or by means of a completely owned Restricted Legal responsibility Firm (“LLC”) that’s “disregarded” for earnings tax functions. For comfort, I’m referring to those people as “Schedule C Filers” beneath. Lots of them have been referred to as by worse names. 

Many small companies use LLCs or corporations which have elected to be handled as “S corporations” which file Kind 1120S earnings tax returns, and subsequently totally different guidelines apply to them.  Different corporations are handled as “C corporations” and file Kind 1120 tax returns, with different guidelines making use of to them.  Lastly, some joint homeowners of companies and a few LLCs and different entities file a Kind 1065 tax return as “partnerships” for earnings tax functions, with even totally different guidelines making use of to them. 

For the reason that overwhelming majority of questions are coming from Schedule C Filers and S company debtors, we’re not masking the particular concerns that apply for partnerships or C firms in any nice element herein. 

Forgiveness for Unbiased Contractors and Proprietors.  Probably the most generally requested – and best to reply – query from Schedule C Filers is how a lot they need to pay themselves to get full forgiveness.  The SBA has been very variety to Schedule C Filers by offering within the June 11th  Interim Guidelines and the Forgiveness Functions that they’re thought of to have paid themselves an quantity equal to 20.833% of their 2019 Schedule C internet earnings, as indicated on Line 31 of their Schedule C.  Since 20.833% is the same as 2 ½ divided by 12, which is and has been the components for what may very well be borrowed, a Schedule C Filer who had no staff can merely apply for the loan based mostly on 20.833% of his or her 2019 Schedule C internet earnings, and it’s routinely forgiven in that quantity by the submitting of the Kind EZ Utility for Forgiveness, and nothing else must be achieved.  The 20.833% relies on as much as $100,000 of 2019 earnings in order that probably the most that may be borrowed, and the quantity that shall be forgiven, is restricted to $20,833. 

This is applicable no matter whether or not the commerce or enterprise remains to be open and there’s no must maintain observe of lease, curiosity, or utilities.  Schedule C taxpayers may need to report this compensation to unemployment, nevertheless, this isn’t solely clear.  The one official steerage we now have gotten comes from the April 14th Interim Closing Guidelines, which offer that Schedule C taxpayers “should be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.” Though a Schedule C taxpayer’s receipt of a PPP loan may disqualify them from unemployment advantages throughout the interval the loan is excellent, there doesn’t appear to be any prohibition that will forestall a Schedule C taxpayer from receiving unemployment advantages earlier than receipt of the PPP loan after which re-applying after the PPP loan is forgiven.  

The principles are extra sophisticated for Schedule C taxpayers who acquired loan monies based mostly upon the sum of their 2019 internet earnings and 20.833% of wages they paid to staff of the enterprise.  On this scenario, they should have wages paid to staff (apart from themselves), and presumably lease, curiosity and utilities, to have their loans fully forgiven beneath guidelines which can be similar to what applies for S firms, C firms and partnerships. 

Discount in Workforce Penalties and Protected Harbors.   One frequent query posed to and by advisors is whether or not the deadline change from June 30th to August eighth additionally applies to the now-modified rule that was going to allow debtors that decreased their work power to keep away from a discount in forgiveness in the event that they returned to regular workforce ranges by June 30, 2020.  An ideal many debtors re-hired a big a part of their workforce after April 26th based mostly upon this prior secure harbor, which mainly stated that if a borrower had a discount in workforce earlier than April 26th and restored it by June 30th there wouldn’t be a discount in forgiveness.  The June 30th re-hire deadline was prolonged to December 31st and debtors who had been performing in reliance upon it maybe spent some cash inefficiently, however many roles had been saved (or at the very least prolonged), and forgiveness shall be accessible to the overwhelming majority of those debtors based mostly upon the brand new secure harbors beneath. 

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Can Restore Workforce by Date of Utility for Forgiveness Submitting or by December 31st.  The PPP Flexibility Act handed on June fifth prolonged this June 30th secure harbor testing date to December 31st, and the brand new extension for debtors to use for loans by August eighth as a substitute of by June 30th has nothing to do with this, however has brought about some confusion. 

Whereas many debtors had been exasperated that that they had been placing the workforce again collectively to have it at full capability on June 30th although many companies weren’t prepared for this, the discount workforce hours requirement is way simpler to navigate as a result of the June fifth Flexibility Act supplies that such reductions shall be disregarded to the extent that the workforce is restored by the date that the Forgiveness Utility is filed, or by December 31st. Plainly the borrower must file the Forgiveness Utility by December 31st, and never earlier than then, if the workforce just isn’t restored, though it’s not solely clear beneath present steerage whether or not debtors can apply previous to December 31st and get credit score for the variety of staff they’ve restored, even when not restored to the complete pre-virus stage. 

The 2 different secure harbors that can be utilized in lieu of the above for debtors with decreased workforces are as follows:  

  1. Governmental Tips Brought about Discount. Compliance with CDC, HHS, and OSHA guidelines and pointers that compel an employer to cut back their workforce, which embrace state and native legal guidelines by reference in such pointers; or 
  2. Good Assist Is Laborious to Discover Discount.  An lack of ability to re-hire people beforehand employed in the identical place when the people are not accessible for causes past the management of the borrower, as correctly documented, and can’t be changed resulting from an absence of certified people accessible for rent. The dearth of certified candidates is comprehensible and customary, provided that many staff are in a position to obtain each state and Federal unemployment advantages, and are reluctant to depart their younger youngsters, or danger their lives within the workforce proper now given the excessive an infection and demise charge being skilled in most people.  One requirement for this exemption is that the borrower should report the employees not prepared to return again to unemployment officers, recognized to animal lovers as “ratting them out.”  

In reality, company and property planning paralegals can electronic mail me at and put “desperately looking for paralegals” within the topic line.  Early Thursday morning, our distant third shift paralegal of over 15 years, Carolyn, died in her sleep, presumably of Covid-19, and falls beneath exception (2) above.   She despatched me an electronic mail simply earlier than 6 a.m. on Thursday morning that she didn’t see any extra work to do and was going to sleep after just a few days of hassle along with her arthritis and by no means woke as much as benefit from the Fourth of July weekend along with her grandchildren, or to sort this text. She shall be sorely missed, and we now have rather a lot to be grateful for.  

Eight Versus 24 Week, or Someplace In Between, Testing Interval. The June fifth Flexibility Act supplies that debtors can elect to make use of an Eight week or 24 week testing interval to find out the quantity of bills that may depend in the direction of forgiveness.  The June 11th Interim Guidelines and Forgiveness Functions present {that a} shorter than 24 week interval will be elected in order that debtors can merely apply as quickly as they’ve spent sufficient. 

Most lenders will not be but accepting Forgiveness Functions, and are ready for additional steerage from the SBA, however some are. 

As mentioned beneath, S company and C company homeowners’ compensation for forgiveness functions can solely be counted based mostly upon not more than the lessor of 20.833% of their 2019 W-2 compensation, or $20,833 if the 2019 earnings was over $100,000, and presumably should wait till at the very least 10.83 weeks has handed from after they acquired the loan, as a result of 10.83 divided by 52 is 20.833%. 

Compensation paid to non-owner staff just isn’t topic to the 20.833% limitation and may as a substitute quantity to as a lot as $46,154 per non-owner throughout the 24 week interval. It’s unclear beneath present steerage if non-owner worker compensation counted in the direction of forgiveness shall be restricted to $887.58 ($46,154 / 52 = $887.58) occasions the variety of weeks compensated for throughout the testing interval, or if as much as $46,154 will be paid to a non-owner worker throughout the testing interval if the borrower applies for forgiveness previous to the top of the complete 24 week interval.  Our greatest guess is that SBA steerage will present that an employer will probably want to make use of your entire 24 week testing interval to have the ability to depend the complete $46,154 in the direction of forgiveness, whereas, for instance, an employer needing solely half of that quantity would have the ability to apply for forgiveness after 12 weeks have elapsed. 

To clarify what stays to be informed I’ve rewritten elements of my article of June 22nd entitled Why New PPP loan Guidelines For Proprietor-Workers Of S And C Companies Are Unhealthy Information to incorporate what we now have concluded since then, to learn as follows:

1. The group medical health insurance prices of a person who’s an proprietor of an S company can’t be included within the forgiveness quantity.

This is smart as a result of medical health insurance premiums paid for S company shareholders who personal greater than 2% of the corporate are deductible however are reported as compensation on Kind W-2, thus the quantity of the shareholder’s medical health insurance prices are already included in his or her W-2 earnings.

The forgiveness credit score applies to the W-2 earnings (together with the medical health insurance prices reported on the W-2) until the shareholder is over the W-2 forgiveness ceiling, which shall be $15,385 if an Eight week forgiveness interval is chosen or $20,833 if a 24 week forgiveness interval is chosen. The $15,385 and $20,833 numbers are defined beneath part Three beneath.

Right here is an instance of how the medical health insurance guidelines will apparently work:

  • John owns 2% or extra of ABC LLC and earns $98,000 a 12 months in wage. His medical health insurance prices are $6,000 per 12 months. From an annualized foundation standpoint, these guidelines will permit all of John’s $98,000 wage and $2,000 of his medical health insurance prices to depend in the direction of forgiveness. 
  • If an Eight week forgiveness testing interval is chosen, which means that the corporate can depend $15,077 of John’s wage and $308 of his medical health insurance based mostly upon 8/52 of $98,000 and eight/52 of $2,000. 8/52nds of $4,000 in medical health insurance ($615) can’t be counted since that will exceed the $15,385 restrict on proprietor compensation.
  • If a 24 week testing interval applies, then the overall mixed wages and medical health insurance allowable for an worker shareholder shall be $20,833, and extra insurance coverage prices is not going to be counted in the direction of forgiveness.
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It’s fascinating that this rule is in direct opposition to earlier SBA steerage issued in FAQ #7, which allowed shareholders of S Companies to incorporate medical health insurance prices above and past the cash compensation restrict of $15,385. Many PPP purposes had been filed to incorporate medical health insurance prices above the restrict on cash compensation, and now such debtors may have a mis-match between what loan quantity they acquired and the quantity that may be forgiven. Presumably this may be made up by spending cash on non-payroll prices, or possibly future steerage will permit medical health insurance prices to be included above and past the proprietor compensation restrict. 

A larger limitation and drawback applies for S Company shareholders with lower than 2% possession and fewer than $100,000 in annualized wages, as a result of the W-2 earnings doesn’t embrace medical health insurance prices, so the corporate receives no forgiveness for the medical health insurance prices for the reason that up to date guidelines make no distinction or exception for shareholders proudly owning lower than 2%. An aggressive place could be to incorporate medical health insurance prices of shareholders proudly owning lower than 2%, based mostly upon the reasoning that since such prices will not be included in W-2 compensation that’s reported on Line 9 of the Forgiveness Utility, these prices needs to be reported on Line 6. Undoubtedly speak to your CPA or lawyer earlier than taking this place.  

2. Compensation Counted for Proprietor-Workers Can’t Exceed The Professional -Rata Portion of What They Had been Paid in 2019.

That is already defined above however extra element by no means hurts. 

Suppose that John’s 2020 annual compensation was at the very least $100,000.

What if John’s 2019 compensation was $49,000 and his medical health insurance was $3,000 as a result of he solely labored 6 months in 2019 for no matter purpose?

Assuming that the corporate had important different payroll in order that it’s PPP loan was way more than $100,000, one would have assumed that both 8/52nds or 20.833% (2.5 divided by 12) of John’s whole $100,000 quantity would depend as forgiveness, however the brand new modified interim guidelines point out that such forgiveness shall be restricted to not exceed a pro-rata portion of his 2019 earnings.

Which means that many small companies that primarily relied upon non-owner staff in 2019 won’t be able to obtain full forgiveness if the first staff within the firm are homeowners throughout the testing interval. 

The SBA’s reasoning for this rule is that the loan was based mostly on a most of 20.833% of 2019 compensation for homeowners, and with the extension to 24 weeks, many enterprise homeowners may obtain a windfall by solely paying themselves and relying upon one of many quite a few exceptions to sustaining full employment for his or her staff.  For instance:

  • If John’s 2019 compensation was $49,000 in 2019 as a result of he solely labored for six months, then John would obtain a loan of $10,208 based mostly on his compensation. Let’s additionally assume that John had two different staff that every made $25,000 in 2019, and that the corporate paid  no advantages or state employment taxes, in order that John’s complete loan was $20,624 (10,208 + $10,416).
  • If not for the above talked about rule, John may lay off each of his staff and nonetheless obtain full forgiveness based mostly upon paying himself the utmost wages of $20,833 by relying upon the exception that his worker headcount was decreased as a result of his enterprise couldn’t return to the identical stage of enterprise exercise. The SBA is making an attempt to keep away from this so-called “windfall” to homeowners by limiting forgiveness to 20.833% of 2019 compensation for the 24 week interval in order that forgiveness for homeowners will match the portion of the loan acquired for their very own compensation.

One unanswered query is whether or not or not this limitation applies to spouses or different kin of the proprietor. Underneath present guidelines, no such attribution exists, so wages exceeding quantities paid in 2019 will be paid to spouses or different relations that work within the enterprise, assuming that the wages paid are respectable compensation for providers rendered to the corporate. 

3. $20,833 for Eight Week Testing Versus $46,154 for 24 Week Testing and Why?

As talked about above, forgiveness for wages and medical health insurance for an proprietor and worker throughout a 24 week testing interval can not exceed $20,833. If an Eight week testing interval is elected, the limitation is $15,385.

That is based mostly upon the premise that the forgiveness for an organization mustn’t exceed the quantity that was loaned for the wages of its homeowners (2.5 months/12 months X $100,000). 

Then again, a non-owner worker’s compensation will be counted based mostly upon as a lot as $46,154 (24/52’s of $100,000) if the individual has wages of $100,000 or extra. Along with this, the corporate’s whole value of offering the non-owner worker with medical health insurance and retirement plan advantages (paid or incurred) throughout the 24 week interval will be counted.

Whereas this limitation was not anticipated, most debtors is not going to be damage as a result of they are going to have loads of different bills to use in the direction of forgiveness. 

4. What About Retirement Plan Bills?

The PPP loan program was very beneficiant on the lending aspect by together with an quantity equal to 2.5 occasions the typical annual expense for retirement plan contributions, contemplating that in lots of small corporations, the overwhelming majority of contributions are for extremely paid staff and homeowners.

The SBA may have required employers to measure how a lot of every retirement plan contribution for 2019 was attributable to salaries above the $100,000 annualized restrict, however this may have been extraordinarily sophisticated and would have considerably lowered the PPP loans going to many corporations who’re already struggling to take care of their pension advantages, not to mention preserving the identical variety of staff on the payroll.

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The planning alternative left open by all indications beneath FAQ’s, Interim Closing Guidelines, and Forgiveness Functions and Directions, was that each one pension plan bills “paid or incurred” throughout the Eight week or 24 week testing interval would depend as forgiveness.

This may be interpreted to imply that at the very least 8/52, or 24/52 (as relevant), of the 2020 annual pension prices will be thought of as paid towards forgiveness, whether or not paid or not throughout the Eight week or 24 week interval, for the reason that expense was incurred throughout that interval however would probably need to be paid within the regular course previous to submitting the loan Forgiveness Utility to get credit score for such prices.

By the identical token, the principles will be learn to supply that paying your entire 2019 pension obligation throughout the Eight week or 24 week interval (which is regular in pension planning), would additionally facilitate having your entire 2019 pension contribution counted in the direction of forgiveness and that paying the 2020 contribution quantity throughout the testing interval could cause 100% of the 2020 expense to be counted in the direction of forgiveness.

The Utility for Forgiveness makes no reference to those planning alternatives, and there may be nothing within the revised Interim Closing Guidelines that will restrict this both.

Please see the phrases we now have underlined beneath from the next language that’s taken verbatim from the brand new EZ Utility, and may present for a limitation on retirement plan contributions for homeowners. This language additionally supplies a superb overview of the principles which can be mentioned above:

Worker Advantages: The overall quantity paid by the Borrower for:

Employer contributions for worker medical health insurance, together with employer contributions to a self-insured, employer-sponsored group well being plan, however excluding any pre-tax or after-tax contributions by staff. Don’t add employer medical health insurance contributions made on behalf of a self-employed particular person, common companions, or owner-employees of an S-corporation, as a result of such funds are already included of their compensation.

Employer contributions to worker retirement plans, excluding any pre-tax or after-tax contributions by staff. Don’t add employer retirement contributions made on behalf of a self-employed particular person or common companions, as a result of such funds are already included of their compensation, and contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution quantity.

Employer state and native taxes paid by the borrower and assessed on worker compensation (e.g., state unemployment insurance coverage tax), excluding any taxes withheld from worker earnings.

This above underlined language just isn’t included in the principle loan Forgiveness Utility, and we all know of no purpose why, until it’s a drafting error to incorporate it within the EZ Utility, or it was an error to not embrace it within the non-EZ Utility. Alternatively the SBA may not need this “loophole” to be accessible for many who file an EZ Utility, or will do that now to avoid wasting face and declare that this was not an error. Underneath this limitation, the utmost pension expense permitted for quantities put away for an worker shareholder shall be based mostly upon 2.5/12 (20.8%) of the annual retirement plan expense, versus the bigger quantities that will in any other case be counted within the Forgiveness Utility.

It’s unknown whether or not it was supposed that this limitation would apply just for debtors who use the EZ Utility and never for debtors who use the complete loan Forgiveness Utility, or if it was supposed to use to each.

5. What Is An Proprietor-Worker and What Can Be Carried out to Keep away from this Limitation?

The principles present no trace as to what an “owner-employee” is, however we are able to assume that that is any one that has an possession curiosity within the borrower firm of any dimension, and that this is not going to embrace the partner or one other member of the family of the proprietor who may work for the corporate.   Additionally, there appears to be nothing to stop the one that has owned the corporate prior to now from promoting or gifting their possession to another person, like a partner, and whereas persevering with to work for the corporate in order to not be topic to those limitations throughout the interval of the testing weeks that the individual is not an proprietor.      

For instance, a person or part-owner of an organization who labored for the primary ten weeks of the 24 week testing interval, incomes no matter wage was paid, may have the ability to switch her possession to her partner and obtain $46,154 of compensation between the date of the switch and the top of the 24 week interval, even when a part of the compensation in these final weeks is pre-paid for work the worker turns into legally accountable to carry out after the 24th week.

This is able to permit a complete $46,154 to depend in the direction of forgiveness, assuming the compensation quantity is cheap for the work that’s being carried out.

Some have questioned whether or not the time period “owner-employee” for this goal features a S or C Company shareholder.  The present steerage doesn’t reply this particularly however does present the next: 

“Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.”

According to the above, the Interim Closing Guidelines on loan Forgiveness present as follows:

“Owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment.”

I don’t see how “owner-employee” doesn’t imply S and C company homeowners when the wording above particularly mentions “a self-employed individual” and “common companions”. What else may an “owner-employee” be?

Thanks very a lot for studying this text and for offering any questions, feedback or questions you may need for your self or others as we proceed to do our greatest to maintain up with this and to assist these in want. 

Different articles on the next associated matters may be of curiosity:

It has been introduced that PPP loan purposes shall be audited, which raises the query of what the which means of the phrases “necessary to support the on-going operations of the applicant” really imply.

Judie Simms


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