May 8, 2020
NJGCA May 8th
Coronavirus Shutdown Update
Because of both a confusing and fluid nature of recent Federal Government relief programs, it is understandable that a high volume of calls from NJGCA members looking for clarification has occurred. NJGCA staff has been participating in many online meetings and forums in order to ascertain advice and information that can be passed on to our members. The common issue in every forum is UNCERTAINTY. Government agencies, banks, human resource organizations, accountants, lawyers, and consultants all seem to have different variations of interpreting each program, loan, or grant. As a result of member calls, the NJGCA staff has been tasked this week, and has undertaken the objective to try and simplify some of the complications in the popular PPP loan forgiveness program. Much of the difficulty to clarify comes from the fact that the government agencies themselves do not know the answers and are still formulating the regulations and requirements.
Eric Blomgren has tried to simplify (if that is really possible) what we CURRENTLY know about the PPP loan forgiveness program. It is important to understand that some of this is still a moving target and we are constantly monitoring aspects of the program in order to report changes and updates as quickly as possible to you. It is likely that we will be re-sending this or a variation of it again in future communications.
It is strongly recommended that you consult with your accountant in every aspect of utilizing PPP loans and in the application to apply for Forgiveness.
Paycheck Protection Program (PPP) Loan Forgiveness
By: Eric Blomgren
Small businesses across the nation have been in a mad dash to get some kind of support from the government to keep their business afloat following across the board collapses in revenues for weeks on end. The most generous response seems to be the federal PPP program created by the CARES Act, simply because it’s possible for the entire loan to be forgiven. Unfortunately, there are a series of restrictions to how the money can be spent in order for it to be forgiven, and those restrictions may not work well with many business owners’ current operating expenses. Perhaps the bigger problem is that the specifics of the rules for forgiveness are still being written by the federal government even as we speak, and even after hundreds of billions of dollars have been given out to businesses across the nation. While the PPP loans have been talked about as a way to help small business, when looking closely at the rules that doesn’t really appear to be the case. The truth is right in the first word—payroll; the goal of the program seems to be less to keep small businesses open than to keep people being paid by an employer, rather than further stressing the Unemployment Insurance system, and if some businesses get helped out in the process then that is a nice bonus. When the program is viewed in that light, some of these rules make a little more sense.
The PPP loans allows businesses to take out a loan in the amount of 2.5 times their average monthly payroll, up to $10 million. The principal is due back within 2 years with a 1% interest rate, and no payments need to be made for the first six months (although interest does accrue). In order to get a PPP loan a business must go through a private lender. That lender will also be responsible for signing off on the total or partial forgiveness of the loan.
In order for the loan to be forgiven, it must be spent within an 8-week period beginning on the date the business receives the money. The money must be spent on payroll costs, mortgage interest, rent, and utilities (phone, internet, electricity, water, natural gas). If the money is spent on anything else, it cannot be forgiven. Documentation of these payments should be kept. Loan money can be used to make interest payments on any other debts that had been incurred before February 15th, but that money will not be forgiven.
At least 75% of the money must be spent on payroll costs. Payroll costs include not only salary but also includes health care costs and any retirement benefits (such as 401k contributions) and all state and local taxes. It also includes all types of paid leave, including NJ mandated sick leave and even vacation and personal time provided by the employer. The loan does not cover the payroll expenses from leave mandated by the Families First Coronavirus Response Act (FFCRA), because those costs are reimbursed by a refundable tax credit. It does not count salary equivalent to over $100,000 year (limit applies only to salary; benefits are excluded from calculating the cap) This equates to a cap of $15,384 per employee over this 8-week period, any money paid to them beyond that will not be forgiven. Independent contractors do not count as employees, either in the calculation of the loan amount or as expenses eligible for forgiveness. If non-payroll costs exceeded 25%, then the forgiveness request is reduced until no more than 25% of the amount to be forgiven is qualifying non-payroll costs.
The biggest issue affecting loan forgiveness is the requirement that the business maintain their payroll, and that employees are paid at least 75% of what they were paid previously. The headcount provision is determined by calculating the number of Full Time Equivalent (FTE) employees. An FTE is an individual who works more than 30 hours a week. Part timers can combine to count as one FTE. You can use this link to calculate the number of FTEs https://www.healthcare.gov/shop-calculators-fte/. It should be noted that the CARES Act was not explicit in its definition of FTE for the purposes of this bill, and it is possible future guidance from SBA will use 40 hours a week as the benchmark. To be safe, it has been advised by some accounting firms to use 30.
For the comparison to determine if a business has fewer workers, the business owner can choose from two different options: either the period of 02/15/2019 thru 06/30/2019 or the period 01/01/2020 thru 02/29/2020. Calculate the average number of employees in both those periods and then choose the period with the least number of FTEs. If there is a reduction in the total number of FTEs, then the amount of total loan forgiveness is reduced the same amount. However, the employer can remedy this in many situations, as long as they rehire the employees that were laid off or replace them with an equal number of new employees. The employee count must be corrected by June 30, 2020. However, this only applies to employees laid off between 02/15/20 and 04/26/20, employees laid off between 4/27/20 and 6/30/20 cannot be reinstated to avoid the forgiveness penalty. In May the SBA determined that the employer must offer in writing a specific laid off employee the opportunity to return at the same wages, and the employee’s rejection must be documented in some way by the employer. Then the employer can hire a different person in order to qualify for the loan forgiveness.
The other factor that would reduce the amount of loan forgiveness is if an individual employee sees a pay reduction over the 8 week period of more than 25% compared to the first quarter of 2020. If someone was not employed for that first quarter, then apparently this test does not apply. This means that if an employer rehires an employee on June 20th in order to meet the FTE requirement, the employer has to give at least partial “back-pay” in order not to take a penalty on the loan forgiveness.
For many businesses, demand is so low that it seems wasteful to pay employees when there is no work to do. However wasteful it may seem to put someone on the payroll and potentially have them sit home doing nothing for 8 weeks, your costs will all be covered by the government and they seem to prefer having the employee get their check from your business rather than the UI fund. The employee may not feel the same way since the extra $600 a week they are getting from the federal government may mean they are getting paid more in benefits than they would from a salary. Of course if they have been told by their employer they can return to the payroll, they cannot reject that offer without putting their UI benefits at risk, something employers will have to consider if they want to keep employees happy and interested in returning in the future. These added UI payments end in July and seems unlikely they will be extended. Some members are working with their employees to have them do chores, reorganize the shop and paint or landscape.
It is the lender which decides whether or not some or all of the loan is forgiven, and they must decide within 60 days of getting an application for forgiveness. If every employer who received a PPP (roughly 4 million nationwide, 3.3 million of which are $150,000 or less) submits their forgiveness info in roughly the same window, you can imagine the pressure that will be on banks to move through the applications rather quickly and perhaps not very thoroughly.