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What You Need to Consider as You Seek Loan Forgiveness – Q&A Highlights

Posted by Carlin Culbertson on May 20, 2020 10:09:45 PM

Loan Origination Fees

On May 13th, Meaden & Moore held a webinar titled “What You Need to Consider as You Seek Loan Forgiveness” to provide information concerning the Paycheck Protection Program through that date with a focus on loan forgiveness items.  Since this is a topic that is on everyone’s mind, there were a significant number of attendees and in turn a lot of questions.  We answered as many as we could during the webinar, and answered the rest via a follow up email to the participants with the questions we didn’t get to during the webinar.

Complicating this though was the fact that Treasury and the SBA released the forgiveness application on May 15th, of which we discussed some of the key provisions in a recent blog, so we attempted to update our answers for this new information prior to sending out the Q&A to the participants. 

Below are some of the recurring questions (some are paraphrased for simplicity sake) and our answers based on the available information as of the date of this blog.

  1. Question: For the 8-week payroll calculations if loan was received mid-week/mid pay period, do we need to do those manual calculations or can we use the closest pay period?

    Answer: With the recent release of the forgiveness application on May 15th, there is some clarification on this item that was one of the biggest questions prior to the release of the forgiveness application.  Borrowers have the option of picking an 8-week payroll period from one of the following two covered periods:  Below are the allowable periods now, which allows you to use a period starting after you received the loan and get credit for a period ending after the 8-week period.

    “Covered Period” – the 8-week (56-day) period which begins the day the PPP loan proceeds were received, or

    “Alternative Payroll Covered Period” – if payroll cycle is bi-weekly or more frequent, may elect to use the 8-week (56-day) period that begins on the first day of their first pay period following the day the PPP loan proceeds were received.

    Payroll costs “paid” vs. “incurred” question – the instructions state that payroll costs incurred but not paid during the last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.  Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).  Either way, it appears the 8-week amount will end up being based on amounts actually paid either during the 8-week period or shortly thereafter.

  2. Question: Is there any guidance on how rent and lease payments between related companies is dealt with? For example, if you have a property company charging rent to a related company that has a PPP loan can you count 100% of the rent for forgiveness (up to the 25% limit of course)? Similarly with a financing related company - would lease payments for equipment e.g. trucks be counted for forgiveness?

    Answer: There has been no wording in any of the guidance issued thus far that would disallow otherwise eligible costs (e.g. rent, mortgage interest, etc.) from the costs used to calculate forgiveness just because they were paid to a related party.  There is a requirement, however, that rent payments are only eligible if the associated lease was in place as of 2/15/2020.  We will need to see if any future guidance addresses related parties to any extent, but to date nothing has been stated that would exclude otherwise eligible items because they are with related parties.

  3. Question: Do H1B employee salaries need to be excluded from the forgiveness calculation?

    Answer: The payroll costs section of the law states "any compensation of an employee whose principal place of residence is outside of the United States" is not allowed to be included in payroll costs.  Typically, US Citizenship and Immigration (USCIS) states that H1B employees do not have lawful permanent residence in the United States, which would mean their principal place of residence is outside of the United States and in turn their compensation would be excluded.  It seems reasonable that the USCIS rules would be used for this determination.  However, IRS definitions of a resident alien can differ from USCIS's definition of a resident alien, so there is some uncertainty.  This could change if clarified in further guidance.

  4. Question: Are you able to raise salaries up to $100,000 per person in order to maximize forgiveness?

    Answer: The PPP program states that at least 75% of the loan proceeds must be used to cover payroll costs.  The current guidance does not explicitly prevent an increase in pay in the form of a short term pay increase, hazard pay or bonus, nor does it provide guidance on how much of an increase (if any) would be allowable.  That being said, consider it may be difficult to justify the need for the loan to retain employees if you're able to pay all your employees the 8-week equivalent of a $100,000 annual salary.  Our suggestion would be to pay employees what is reasonable for the ongoing operations of the business.  Don't “bend over backward” trying to "maximize forgiveness".  What you spend on allowable payroll will get forgiven and whatever you don't spend you can pay back or keep as a loan.  If you pay all employees the $100,000 annual equivalent, and later guidance disallows this (say for example they set a guideline comparing the 8 week payroll costs to an 8 week period in 2019, like they did for owner-employees in the recent forgiveness application release on 5/15), then the funds are already spent and can't be recovered.  This is why we would caution against doing anything that may appear extremely unusual over the 8-week period to get more forgiveness.

  5. Question:  Does the wage reduction refer to total wages versus per hour rate?  In other words, how does overtime play into this?  Example, employee previously worked 50% overtime, now there is no overtime.  Is the 25% reduction rule calculated on total payroll dollars?  Or is the calculation on the hourly rate per hour?

    Answer: It is a calculation based on the average rate per hour discussed further below.  The "Salary/Hourly Wage Reduction" calculation section/instructions on the recent forgiveness application released on 5/15 provides a step by step calculation.  For hourly wage employees you use an average hourly rate, not total wages. Step 3(c) of that calculation asks for the average number of hours worked during January 1, 2020 through March 31, 2020.  Then step 3(d) has you multiply earlier calculated amounts by that average amount of hours.  Since the calculation is having you multiply a rate by hours, then it would appear the calculation is requesting an average hourly rate be used.  However, it does not state what an average hourly rate is.  Is it total wages divided by total hours?  Or is it the average of the hourly pay rates in effect during that period?  What average hourly rate means is not explicitly stated to determine which of those two scenarios is correct so further guidance may be necessary to answer this question.  What seems to be a reasonable way to look at the average hourly rate would be to take total wages divided by total hours to come up with the average rate during that period.  This would factor in the impact of overtime, rate differentials for different functions/shifts, etc. on the per hour rate they were receiving during that period.  Please view the referenced forgiveness application section and walk through the calculation to see the impact for your situation.

With the release of the recent forgiveness application, we would suggest using it as a basis for your proforma calculations on how some of the situations discussed in this Q&A impact forgiveness.  Please feel free to contact us with any questions you may have.  We will continue to provide updates as more information becomes available.

Topics: Tax Planning & Strategies, Small Business, Accounting & Auditing, Accounting and Tax Resource, COVID-19, Featured

Carlin Culbertson

Carlin Culbertson

With over 15 years in public accounting, Carlin has extensive auditing experience serving a wide variety of clients in various industries, including construction, manufacturing, mining, biotechnology and distribution.