Joe DeLucchi conducted a Zoom interview with Larisa Rapoport, partner, & Kevin O’Connell, principal, of Squar Milner’s audit practice to gain a better understanding of the PPP loans & alternative options under the CARES Act. During this conversation important insight is shared from an accounting perspective and this transcript is being shared with you and directly for your benefit. We encourage you to share this data with others and to know you can contact us to discuss any part. We are truly all in this together.
Breaking down PPP loans and alternative options under the CARES Act
Even as weeks have passed since Congress approved the Coronavirus Aid, Relief, and Economic Security (CARES) Act, one thing remains consistent – there are still a lot of questions. Many of these questions stem from the Paycheck Protection Program (PPP), a program designed to provide payroll relief for businesses with 500 or less employees. But as the $349 billion allocated for the PPP officially ran out last week and Congress works to provide additional funding for the program, many business owners question how to proceed – and what options other than a PPP loan are available to them.
Partner Larisa Rapoport and Principal Kevin O’Connell from Squar Milner offer their insights to help guide you through some of your most pressing questions.
How should I go about the PPP loan application process?
As mentioned above, the PPP fund recently ran dry, having disbursed the $349 billion allocated for the program under the CARES Act. However, Congress recently passed a bill providing another $320 billion for the PPP fund. So we continue to encourage you to apply.
But then the question arises regarding the best avenue for completing your application. Based on client experiences, if you are a customer with a larger bank, like Bank of America or U.S. Bank, continue to work with them, and the same goes for smaller, community-based banks. Don’t disregard smaller banks. The ones that adequately prepared for the influx of applications have been processing applications and answering applicant questions successfully. In addition, if you are running into some roadblocks applying or working with banks, additional financial institutions are now permitted to process applications. These fintech companies include PayPal, Intuit, Square and more. The fintech route presents unique opportunities for sole proprietors and independent small business owners.
If I am approved for a PPP loan, what considerations should I make to ensure it is fully forgiven?
If you were one of the approved applicants for a PPP loan, there are certain stipulations to be aware of to ensure you are in position to receive full forgiveness on the loan.
The amount of PPP loan forgiveness may be up to the full principal amount of the loan plus any accrued interest, so long as the borrower maintains salary and employee counts, and all loan proceeds are used for authorized purposes during the eight-week loan period (beginning when the lender makes the first disbursement).
Authorized uses include: 1) payroll costs; 2) continuation costs of group health care benefits and insurance premiums; 3) mortgage interest payments on mortgage obligations incurred before February 15, 2020; 4) rent payments on leases dated before February 15, 2020; and 5) utility payments on service agreements dated before February 15, 2020.
The U.S. Small Business Administration (SBA) issued Interim Rules which contained further information on certain limitations on loan forgiveness. Some of the highlights include:
- At least 75% of your PPP loan must go towards payroll costs in order to be eligible for full forgiveness. This means no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs, and any excess amounts will not be eligible for forgiveness.
- There are complex rules exists regarding measurement of employee headcount and compensation reductions, applicable to both seasonal and non-seasonal business.
- PPP loan proceeds used to refinance Economic Injury Disaster Loan (EIDL) borrowed prior to January 31, 2020 are not eligible for forgiveness.
What if I had to lay off or furlough employees prior to receiving the loan?
Borrowers have until June 30, 2020 to restore full-time employment headcount and salary levels for reductions made between February 15, 2020 and April 26, 2020.
How do I apply for PPP loan forgiveness?
In order to apply for PPP loan forgiveness you must have certain documentation in order. This includes confirmation of payroll costs, documentation verifying the number of equivalent employees and pay rates, and invoices and payments on eligible mortgage, lease, and utility obligations.
Once you have your documentation in order, you can submit a request to the lender servicing your loan. The lender has 60 days to make a decision.
One important tip in regards to your PPP funds – put them in a separate bank account. By placing the funds in a separate account dedicated exclusively to your PPP loan, you are better able to track where the money is spent to verify it is going solely towards authorized uses. In addition, having a separate account will make applying for loan forgiveness a smoother process and provides extra defense should an audit take place.
Can nonprofits utilize PPP funds?
Nonprofit organizations are eligible for PPP funds if they are a § 501(c)(3) or § 501(c)(19) organization. However, one consideration is whether or not the organization receives federal or state grants to cover payroll. One requirement of the PPP loan application is the need to certify why you need the funds. Seeing as the PPP loans are intended to cover payroll costs, it is hard for nonprofits with governmental grants to prove their need for a PPP loan to cover costs.
Beyond the PPP loans, what can I do to properly plan and prepare for tax filings in the future? What options are available to me?
The CARES Act introduced multiple tax measures intended to help employers during this unprecedented time of crisis: NOL carrybacks, adjustments to qualified improvement projects, payroll tax deferrals, and the Employee Retention Credit.
Prior to tax reform at the end of 2017, taxpayers were allowed to carry back net operating losses (NOLs) five years. However, the Tax Cuts and Jobs Act (TCJA) ended this process. However, under the CARES Act, taxpayers are once again allowed to carry NOLs from 2018 and 2019 back 5 years. Therefore, you can take a 2019 NOL and carry it back to 2015 and receive a refund right away.
Another accounting consideration is the change to qualified improvement projects (QIP). Prior to the CARES Act, QIP depreciated over 39 years due to a technical glitch in the TCJA. Now, the CARES Act rectifies this issue, known as the “retail glitch,” by allowing QIP to depreciate over 15 years, therefore accelerating depreciation. Importantly, you can apply the new depreciation period retroactively, which in part may generate an NOL which you can now carryback.
In addition, employers and self-employed individuals are able to defer their payment of the employer share of social security taxes. Generally, this comes out to a 6.2% social security tax on employee wages. Under the CARES Act, employers must pay the first half of the deferred tax by December 31, 2021 and the second half by December 31, 2022.
The CARES Act also introduces the Employee Retention Credit (ERC). In general, the ERC is a refundable payroll tax credit equal to 50% of qualified wages paid by eligible employers to certain employees after March 12, 2020 and through December 31, 2020. The credit caps out at $10,000 in qualified wages per employee, thus coming out to a maximum refundable credit of $5,000 per employee. Furthermore, the credit is only available to eligible employers, including tax-exempt entities, who have experienced: 1) full or partial suspension of operations as a result of a COVID-19 government order, or 2) greater than 50% reduction in quarterly receipts, measured on a year-over-year basis, due to COVID-19. Notably, self-employed individuals are not eligible employers for purposes of ERC.
Are there other loan programs I should be aware of?
Approved on April 9, there is a new program available to companies that were either too large or too healthy to qualify for a PPP loan. The Main Street Lending Program is comprised of $600 billion in funds to provide mid-sized companies with critical loans. Unlike the PPP loans, these Main Street loans are not forgivable; however, the terms are quite favorable. For example, payment on the loan is deferred for a year and the interest rate is very favorable.
What other accounting advice do you have?
As you go about the next several weeks and months, we recommend you track your expenses related to COVID-19 separately. Several companies have already implemented separate ledger codes, like “Payroll COVID-19” to track their expenses. This is a useful step in case you file an insurance claim in the future or if you do obtain a PPP loan and apply for forgiveness.
Secondly, it is likely that the current situation has upended your business forecasting. Therefore, there will be much to consider when you present your forecasting on financial statements. In all likelihood, the projected growth you expected at the beginning of the year may instead look like a series of peaks and valleys now.
Finally, cash flow, cash flow, cash flow. Cash is king and will continue to be throughout this experience. Weekly cash flow projections are vital to help you strategize for the short-term and long-term and keep your business afloat.
As you navigate the next several weeks and months, Squar Milner is here to answer your questions and help you develop practical strategies tailored to the unique circumstances of your business. Please contact Larisa or Kevin for more information, or visit the Squar Milner website.