The PPP Loan Forgiveness Process Just Got Easier

Robin Saks Frankel on Forbes.com at
 

If doing the paperwork to have your Paycheck Protection Program (PPP) loan forgiven seems intimidating, help has arrived. A new online tool can simplify the process—and it won’t cost you a cent.

You can find the new PPP forgiveness platform at PPPForgivenessTool.com. Any business that took out a PPP loan can use the tool for free, regardless of whether they worked with a bank or a non-bank lender. The American Institute of CPAs (AICPA) and CPA.com released the platform this week, which is powered by software from small business lender Biz2Credit.

An Easy Way to Get Started on PPP Loan Forgiveness

Business owners or their accountants can access a suite of loan aids on the platform, including the AICPA’s PPP forgiveness calculator, the PPP loan forgiveness application and all of the required government forms mandated when you submit your loan forgiveness application.

You can even submit your application on the platform using an electronic signature, although the site recommends holding off on filing the application until the federal government offers additional guidance on calculating PPP loan forgiveness.

“From the beginning [of the PPP], we’ve been issuing documents with what our recommendations were and our suggestions on how loan forgiveness works,” says Erik Asgeirsson, president and CEO of CPA.com. “And now we’ve put it all into one application process.”

If you’ve been hesitant to apply for a PPP loan, the new tool could make the forgiveness application part of the process easier.

The PPP forgiveness tool also will incorporate the latest guidelines surrounding forgiveness as they’re released by the U.S. Small Business Administration (SBA) and the Treasury Department, Asgerisson says. From the site: “Once additional guidance is released, PPPForgivenessTool.com will be updated to reflect the new rules and we will contact borrowers who have started applications on the tool.”

Until that occurs, the site recommends you do not submit your completed application.

PPP Loan Money Still Available

Lenders have issued over $517 billion in PPP loans to date to help small businesses struggling to stay solvent during the COVID-19 pandemic. According to data from the SBA, more than 51 million jobs were supported by PPP funds. While the initial $349 billion round of funding ran out in less than two weeks, fewer businesses rushed to claim a second round of $310 billion

The complexity surrounding the requirements for PPP loan forgiveness, plus the extensive paperwork documenting eligibility, may have deterred some small-business owners from applying. Even as the government relaxed forgiveness rules, over $100 billion in PPP funds remains unclaimed. 

PPP loan forgiveness terms state that at least 60% of the funds must be used for eligible payroll costs and must be used over a span of 24 weeks.  Although repayment of PPP loans for those not seeking or who are ineligible for forgiveness was extended to five years at an interest rate of 1%, and additional rules were released allowing for partial loan forgiveness, the possibility of taking on any more debt is unlikely to appeal to anyone struggling to keep their business running.

“This tool hopefully will also encourage people with the next phase of business relief to make sure that complexity in the process is not a reason to not get the assistance they need,” Asgeirsson says. 

The government is still ironing out the details of what will come next in a second stimulus relief package. But GOP lawmakers and Senate Majority Leader Mitch McConnell began discussions this week about what might be included in the Republican proposal, indicating that additional aid to small businesses was likely to be part of any package.


Why New PPP Loan Rules For Owner-Employees Of S And C Corporations Are Bad News

By Alan Gassman in Forbes on June 22, 2020

Much has already been written about the Flexibility Act, SBA Interim Rule changes, and EZ Forgiveness Application and instructions with respect to the Payroll Protection Act, all of which have been enacted and published since June 5th.  

While the updated Interim Rules are still far from clear or thorough, the limitations and procedures explained by the Forgiveness Applications and associated formulas give us the lion’s share of what we need to know for the vast majority of borrowers. 

The most unpleasant surprise from these changes for many borrowers and advisors was the manner in which forgiveness attributable to compensation, health insurance, and retirement plan contribution expenses for S-Corporation and C-Corporation shareholder employees are unexpectedly being limited.

We had vague indications that this might occur in previous iterations of SBA pronouncements, but the terminology used was unclear and more indicative that these limitations would only apply to individually owned businesses that file a Schedule C to a Form 1040 of the owner or entities treated as partnerships for income tax purposes. For those who are not tax experts, the discussion below covers how these rules apply specifically to LLCs and other entities that are taxed as S corporations or C corporations. 

Different rules apply to entities taxed as partnerships vs. individuals (commonly referred to as independent contractors and sole proprietors) who file their taxes under the Schedule SE or F of their Form 1040 personal tax returns.  These individuals were very well served by the newest Interim Rule changes and applications, which allow them to consider the lesser of: (a) 20.833% (2.5 divided by 12) of their 2019 net income; or (b) $20,833 as having been spent on forgivable costs, regardless of what they do with these funds. Most such individuals got their loans based upon 20.833% (2.5 divided by 12) of their 2019 net income, and can count the same exact amount toward forgiveness, plus permitted rent, interest, and utility costs, to put them clearly above the amount of expenses needed to gain full forgiveness.                 

What we now know for certain about compensation and benefits for shareholders/owners of S corporations and C corporations, which the SBA seems to be referring to as “owner-employees”, is as follows:

1. The group health insurance costs of an individual who is an owner of an S corporation cannot be included in the forgiveness amount.

This makes sense because health insurance premiums paid for S corporation shareholders who own more than 2% of the company are deductible but are reported as compensation on Form W-2, thus the amount of the shareholder’s health insurance costs are already included in his or her W-2 income.

The forgiveness credit applies to the W-2 income (including the health insurance costs reported on the W-2) unless the shareholder is over the W-2 forgiveness ceiling, which will be $15,385 if an 8-week forgiveness period is chosen or $20,833 if a 24-week forgiveness period is chosen. The $15,385 and $20,833 numbers are explained under section 3 below.

Here is an example of how the health insurance rules will apparently work. John owns 2% or more of ABC LLC and earns $98,000 a year in salary. His health insurance costs are $6,000 per year. From an annualized basis standpoint, these rules will allow all of John’s $98,000 salary and $2,000 of his health insurance costs to count towards forgiveness. 

If an 8-week forgiveness testing period is selected, this means that the company can count $15,077 of John’s salary and $308 of his health insurance based upon 8/52 of $98,000 and 8/52 of $2,000. 8/52nds of $4,000 in health insurance ($615) cannot be counted since that would exceed the $15,385 limit on owner compensation.

If a 24-month testing period applies, then the total combined wages and health insurance allowable for an employee shareholder will be $20,833, and excess insurance costs will not be counted towards forgiveness.

It is interesting that this rule is directly contrary to previous SBA guidance issued in FAQ #7, which allowed shareholders of S-Corporations to include health insurance costs above and beyond the cash compensation limit of $15,385. Many Loan Applications were filed to include health insurance costs above the limit on cash compensation, and now such borrowers may have a mismatch between what loan amount they received and the amount that can be forgiven. Presumably this can be made up by spending money on non-payroll costs, or maybe future guidance will allow health insurance costs to be included above and beyond the owner compensation limit. 

Larry Starr has noted that his interpretation of the rule related to the inability to include health insurance costs for S-Corporation shareholders with more than 2% ownership on line 6 of the Loan Forgiveness Application is that such shareholders cannot include any of their health insurance costs. I do not believe this to be the case since the reasoning for not including such health insurance costs is that they are already included in W-2 compensation, which is reported on Line 9 of the Loan Forgiveness Application, but future guidance would be helpful to clarify this issue. 

A greater limitation and disadvantage might apply for S-Corporation shareholders with less than 2% ownership and less than $100,000 in annualized wages because the W-2 income does not include health insurance costs, so the company presumably receives no forgiveness for the health insurance costs since the recently released guidance makes no distinction or exception for shareholders owning less than 2%. An aggressive position might be to include health insurance costs of shareholders owning less than 2%, based upon the reasoning that since such costs are not included in W-2 compensation reported on Line 9 of the Forgiveness Application, they should therefore be reported on Line 6. 

2. Compensation Counted for Owner-Employees Cannot Exceed The Pro rata Portion of What They Were Paid in 2019.

The above rule and example assumes that John’s 2019 annual compensation was at least $100,000.

What if John’s 2019 compensation was $49,000 and his health insurance was $3,000 because he only worked 6 months in 2019 for whatever reason?

Assuming that the company had significant other payroll so that it’s PPP loan was much more than $100,000, one would have assumed that either 8/52nds or 20.833% (2.5 divided by 12) of John’s entire $100,000 amount would count as forgiveness, but the new modified interim rules indicate that such forgiveness will be limited to not exceed a pro-rata portion of his 2019 earnings.

This means that many small businesses that primarily relied upon non-owner workers in 2019 will not be able to receive full forgiveness if the primary workers in the company are owners during the testing period. 

The SBA’s reasoning for this rule is that the loan was based on a maximum of 20.833% of 2019 compensation for owners, and with the extension to 24 weeks, many business owners might receive a windfall by only paying themselves and relying upon one of the numerous exceptions to maintaining full employment for their employees. 

For example, if John’s 2019 compensation was $49,000 in 2019 because he only worked for 6 months, then John would receive a loan of $10,208 based on his compensation. Let’s also assume that John had two other employees that each made $25,000 in 2019, and that there were no benefits or state employment taxes, so that John’s total loan was $20,624 (10,208 + $10,416). If not for the above mentioned rule, John could lay off both of his employees and still achieve full forgiveness based upon paying himself the maximum wages of $20,833 by relying on the exception that his employee headcount was reduced because his business could not return to the same level of business activity. The SBA is trying to avoid this so-called “windfall” to owners by limiting forgiveness to 20.833% of 2019 compensation for the 24-week period so that forgiveness for owners will match the portion of the loan received for their own compensation.

One unanswered question is whether or not this limitation applies to spouses or other relatives of the owner. Under current rules, no such attribution exists, so wages exceeding amounts paid in 2019 can be paid to spouses or other family members that work in the business assuming that the wages paid are legitimate compensation for services rendered to the company. 

3. $20,833 for 8-Week Testing Versus $46,154 for 24-Week Testing and Why?

As mentioned above, forgiveness for wages and health insurance for an owner and employee during a 24-week testing period cannot exceed $20,833. If an 8-week testing period is elected, the limitation is $15,385.

This is based upon the premise that the forgiveness for a company should not exceed the amount that was loaned for the wages of its owners (2.5 months/12 months X $100,000). 

On the other hand, a non-owner employee’s compensation can be counted based upon as much as $46,154 (24/52′s of $100,000) if the person has wages of $100,000 or more. In addition to this, the company’s entire cost of providing the non-owner employee with health insurance and retirement plan benefits (paid or incurred) during the 24-week period can be counted.

While this limitation was not expected, most borrowers will not be hurt because they will have plenty of other expenses to apply towards forgiveness. 

4. What About Retirement Plan Expenses?

The PPP loan program was very generous on the lending side by including an amount equal to 2.5 times the average annual expense for retirement plan contributions, considering that in many small companies, the vast majority of contributions are for highly paid employees and owners.

The SBA could have required employers to measure how much of each retirement plan contribution for 2019 was attributable to salaries above the $100,000 annualized limit, but this would have been extremely complicated and would have significantly lowered the PPP loans going to many companies who are already struggling to maintain their pension benefits, let alone keeping the same number of workers on the payroll.

The planning opportunity left open by all indications under FAQ’s, Interim Final Rules, and Forgiveness Applications and Instructions, was that all pension plan expenses “paid or incurred” during the 8-week or 24-week testing period would count as forgiveness.

This can be interpreted to mean that at least 8/52, or 24/52 (as applicable), of the 2020 annual pension costs can be considered as paid toward forgiveness, whether paid or not during the 8-week or 24-week period, since the expense was incurred during that period but would likely have to be paid in the normal course prior to filing the Loan Forgiveness Application to get credit for such costs.

By the same token, the rules can be read to provide that paying the entire 2019 pension obligation during the 8-week or 24-week period (which is normal in pension planning), would also facilitate having the entire 2019 pension contribution counted towards forgiveness and that paying the 2020 contribution amount during the testing period can cause 100% of the 2020 expense to be counted towards forgiveness.

The Application for Forgiveness makes no reference to these planning opportunities, and there is nothing in the revised Interim Final Rules that would limit this either.

Please see the words we have underlined below from the following language that is taken verbatim from the new EZ Application, and may provide for a limitation on retirement plan contributions for owners. This language also provides a good review of the rules that are discussed above:

Employee Benefits: The total amount paid by the Borrower for:

  1. Employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. 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.
  2. Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation, and contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount.
  3. Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.

This above underlined language is not included in the main Loan Forgiveness Application, and we know of no reason why, unless it is a drafting error to include it in the EZ Application, or it was an error not to include it in the non-EZ Application. Alternatively the SBA may not want this “loophole” to be available for those who file an EZ Application, or will do this now to save face and claim that this was not an error. Under this limitation, the maximum pension expense permitted for amounts put away for an employee shareholder will be based upon 2.5/12 (20.8%) of the annual retirement plan expense, as opposed to the larger amounts that would otherwise be counted in the Forgiveness Application.

It is unknown whether it was intended that this limitation would apply only for borrowers who use the EZ Application and not for borrowers who use the full Loan Forgiveness Application, or if it was intended to apply to both.

5What Is An Owner-Employee and What Can Be Done to Avoid this Limitation?

The rules provide no hint as to what an “owner-employee” is, but we can assume that this is any person who has an ownership interest in the borrower company of any size, and that this will not include the spouse or another family member of the owner who might work for the company.   Also, there seems to be nothing to prevent the person who has owned the company in the past from selling or gifting their ownership to someone else, like a spouse, and while continuing to work for the company so as to not be subject to these limitations during the period of the testing weeks that the person is no longer an owner.      

For example, an individual or part-owner of a company who worked for the first ten weeks of the 24-week testing period, earning whatever salary was paid, can transfer her ownership to her spouse and receive $46,154 of compensation between the date of the transfer and the end of the 24-week period, even if part of the compensation in those last weeks is pre-paid for work the employee becomes legally responsible to perform after the 24th week.

This would allow an entire $46,154 to count towards forgiveness, assuming the compensation amount is reasonable for the work that is being performed.

Larry Starr has expressed his disagreement with me that an S/C Corporation shareholder is considered an “owner-employee” and thus subject to the above mentioned rules limiting compensation to a pro-rated portion of 2019 earnings. His reasoning comes from Internal Revenue Code Section 401(c)(3), which defines an owner-employee for purposes of qualified pension, profit-sharing, and stock bonus plans rules as “an employee who (1) owns the entire interest in an unincorporated trade or business [a sole proprietor], or (2) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.”

I hope that Larry is right but I think that the SBA will clarify this based upon my view, particularly in light of the below quoted Application Instructions that seem to put the nails in the coffin:

  • “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.”

Consistent therewith, the Interim Final Rules on Loan Forgiveness provide 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 do not see how “owner-employee” does not mean S and C corporation owners when the wording above specifically mentions “a self-employed individual” and “general partners”. What else could an “owner-employee” be?

There will undoubtedly be more questions and changes in these rules, but PPP borrowers who can attain full forgiveness while navigating these somewhat wavy waters should be on their way to the successful completion of an Application for Forgiveness, and a fresh start in saving their business or professional practice, as intended by Congress.