PPP Loan Forgiveness Roadmap for BusinessesSpeakers

Jordan ArgizDirector

David EvangelistaPrincipal

Margaret ReachManager

Emilio EscandonPrincipal

Moderator

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Agenda

• New Developments & Current SBA Guidance• Paycheck Protection Program (PPP) Refresher• PPP Loan Forgiveness • Payroll Costs & Non-Payroll Costs• Loan Forgiveness Reductions• Questions Looking for Answers - FAQs

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New Developments & Current SBA Guidance

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New Developments & Current Guidance

Additional Funding – CARES Act v3.5 (Senate approved 4/21; pending 4/23 House approval & President’s signature)• $484 billion in additional funding, including for testing, hospitals, & health care• $310 billion allocated for PPP Loans (including $60B allocated to smaller lenders)• $50 billion allocated for EIDL Loans, and $10 billion allocated for EIDL Grants

SBA guidance as of 04/14/20 clarifies the following:• General active partners of partnerships may not submit a separate PPP Loan

application as an “eligible self-employed individual”• Partnerships with general active partners may include the self-employment

income reported to its partners as payroll costs (up to $100,000 annualized) on their own PPP Loan application

• For self-employed taxpayer, payroll costs are the net-self employment earnings reported on a 2019 Form 1040 Schedule C, Line 31; no additions for health insurance or pension/retirement unless reported on Schedule C for employees

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Paycheck Protection Program (PPP) Refresher

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Paycheck Protection Program Refresher

What is a PPP loan?• Designed to keep small businesses afloat, the CARES Act provides that businesses

with not more than 500 employees — including self-employed individuals and nonprofits (regardless of revenue) — will have access to nearly $659 billion in forgivable (discussed later) loans under Section 7 of the Small Business Act to be made during the “covered period,” which is from February 15, 2020 through June 30, 2020.

• The loans are referred to as “paycheck protection loans” (“PPP Loans”)

• Loans are fully guaranteed by the federal government through December 31, 2020

• Borrowers will have to certify in good faith to certain conditions to obtain the PPP Loan

• Proceeds may only be used for certain expenses (discussed later)

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Paycheck Protection Program Refresher

Who is eligible for a PPP loan?• Businesses (including self-employed individuals and non-profits) that were

in operation on February 15, 2020, had employees and paid payroll;

• Not greater than 500 employees; – Exceptions:

• Businesses in the accommodation and food services sectors (NAICS Code beginning w/72), the 500-employee rule is applied per physical location;

• Any business operating as a SBA designated franchise

• Entities with more than 500 employees that are considered small businesses, pursuant to the SBA size standards

Continuation

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Paycheck Protection Program Refresher

What is the maximum loan amount?The maximum loan amount that an entity can obtain is limited to the lesser of:• The sum of:

– Average monthly “payroll costs” for the calendar year 2019 (if a seasonal employer - February 15, 2019 and June 30, 2019) multiplied by 2.5, and

– Any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan (such as an EIDL),

• or

• $10 million

Continuation

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PPP Loan Uses

Allowable USES of PPP Loan FundsNot considering the PPP Loan forgiveness rules, PPP Loan proceeds must be used only for the following:• Payroll costs• Costs related to the continuation of group health care benefits during

periods of paid sick, medical, or family leave, and insurance premiums• Employee salaries, commissions, or similar compensations• Payments of interest on any mortgage obligation (which shall not include

any prepayment of or payment of principal on a mortgage obligation)• Rent (including rent under a lease agreement)• Utilities• Interest on any other debt obligations that were incurred before the

covered period

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PPP Loan Forgiveness

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PPP Loan Forgiveness

• The CARES Act allows for all or a portion of the PPP Loans to be forgiven; amounts forgiven are not includable in federal taxable income.

• The forgivable amount is equal to the amount the borrower spent on eligible costs during the 8-week period beginning on the date of loan funding (“covered period”).

• Not more than 25% of the forgivable amount may be used for non-payroll costs.

• Eligible Costs:– Payroll costs including benefits,– Payments of interest on mortgage obligations incurred before February 15,

2020,– Rent payments on lease agreements in force before February 15, 2020, and– Certain utility payments for which service began before February 15, 2020

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Payroll Costs & Non-Payroll Costs

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Payroll Costs

At least 75% of the forgivable amount must be spent on the following payroll costs during the covered period are eligible for forgiveness: • Gross salary, wages, tips, and vacation, parental, medical, or

sick leave if not credited under the Families First Coronavirus Response Act (FFCRA),– maximum of $15,385 (~$100,000/52*8) per individual

• Health care expenses,• Retirement contributions, and• State unemployment taxes and other state employer payroll

taxes (e.g., MCTMT)

Loan Forgiveness

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Non-Payroll Costs

Proceeds spent on the following non-payroll costs are eligible for up to 25% loan forgiveness: • Rent payments on pre-February 15, 2020 lease agreements,• Mortgage interest payments on pre-February 15, 2020 loans

secured by real or personal property, and• Utility payments under pre-February 15, 2020 service

contracts (electricity, gas, water, internet, telephone, etc.)

Loan Forgiveness

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FACTS AND ASSUMPTIONS

On April 10, 2020, ABC, Inc. received a PPP loan in the amount of $1,000,000. Payroll costs for the 8-week covered period consisted of:• Salaries, wages, and paid time off of $465,000 (limited to annualized salaries of $100,000 or $15,385 per individual)• Health care expenses of $150,000• Retirement contributions of $75,000• State unemployment insurance of $10,000

Total qualifying payroll costs= $700,000

Calculated minimum payroll costs to be forgiven: $1,000,000 * 75% = $750,000

The entity will have a forgiveness amount of $700,000 related to payroll costs.

ABC, Inc. also paid non-payroll costs as follows:• Rental expenses of $150,000• Utilities of $50,000

Total qualifying non-payroll costs= $200,000

Calculated maximum non-payroll costs to be forgiven: $700,000 / 75% * 25% = $233,333

The entity will have a forgiveness amount of $200,000 related to non-payroll costs.

MBAF Comment: If total qualifying payroll costs were $900,000 and total qualifying non-payroll costs were $200,000, then the total costs eligible for forgiveness is the entire loan amount of $1,000,000. The total costs forgiven cannot exceed the loan amount.

Example #1 – Loan Forgiveness Costs

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Loan Forgiveness Reductions

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Salary & Wage Reduction

• Salary & Wage Reduction:– Applies to employees that earned less than $100,000 of annualized wages

during any single pay period in 2019, and– whose wages were reduced in excess of 25% during the covered period.

• The reduction amount is the difference between 75% of the employee’s annualized most recent full quarter salary and the annualized gross wages paid to that employee during the covered period.

If employee’s wages are fully reinstated by June 30, 2020, then the salary & wage reduction is waived.

Forgivable Amount Payroll Costs,

Mortgage Interest, Rents, and Utilities

Salary decrease by more than 25% for any employee making less

than $100k

Forgivable Amount after the Salary & Wage Reduction

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FACTS AND ASSUMPTIONS

John Seymour is an employee of ABC, Inc. For purposes of this example:

• John’s annualized salary in most recent full quarter (i.e., Q1 2020) = $25,000• John’s annualized salary during covered period = $17,500

Forgiveness wage reduction: ($25,000 * 75%) - $17,500 = $1,250.

The entity will have a forgiveness reduction of $1,250 related to John’s reduction in salary.

MBAF Comment: For purposes of this calculation, entities need only to consider employees who make less than $100,000 annualized in a single pay period during 2019.

Example #2 – Salary & Wage Reduction

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The Full-Time Equivalent (“FTE”) Workforce Reduction

• The forgivable amount must be reduced by multiplying the sum of payroll costs by the quotient obtained by dividing the average number of FTEs (defined later) per month employed during the covered period by the lesser of either (at the borrower’s election):– Option 1 (Required for Seasonal Employers): Average number of FTEs per

month employed during the period beginning on February 15, 2019 and ending on June 30, 2019; or

– Option 2: Average number of FTEs per month employed during the period beginning on January 1, 2020 and ending on February 29, 2020

If the FTE workforce is reinstated by June 30, 2020, then the workforce reduction is waived

Forgivable Amount after the Salary & Wage

Reduction

Average # of FTEs per month for the covered

period

Average # of FTEs per month from Option 1 or

Option 2

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Full-Time Equivalent (“FTE”) Employees

• Under the historical SBA guidance, FTEs are employees working at least 30 hours per week.

• Part-time employees, working less than 30 hours per week, can be combined based on hours they worked each week.

Full-Time Employees: 50

Part-Time Total Hours during pay period 450Divide by FTE Hours per pay period 60

Part-Time FTEs per pay period: 7.5FTE Employees per pay period: 57.5

Average FTE Employees for pay period from April 15, 2020- June 15, 2020 (4 pay periods): 57.5 Pay periods in 2019: 26 Annualized FTEs: 1,495

Monthly Average FTEs (divde annualized amount by 24): 62.3

Sheet1

FTEs Calculated for Bi-Weekly Pay Period:

Full-Time Employees:50

Part-Time Total Hours during pay period450

Divide by FTE Hours per pay period60

Part-Time FTEs per pay period:7.5

FTE Employees per pay period:57.5

Average FTE Employees for pay period from April 15, 2020- June 15, 2020 (4 pay periods):57.5

Pay periods in 2019:26

Annualized FTEs:1,495

Monthly Average FTEs (divde annualized amount by 24):62.3

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FACTS AND ASSUMPTIONS

The borrower determined that using the average number of FTEs per month for the period from February 15, 2019 - June 30, 2019 was most advantageous to the entity. For this illustration:

• The loan amount granted was $1,000,000• The entity spent $700,000 in payroll costs and $200,000 non-payroll costs during the covered period; therefore $900,000

was spent from the total of the loan proceeds, thus $100,000 is not eligible for forgiveness• The entity had $15,000 of salary and wage reductions • 1 FTE= 30hrs/week• Average number of FTEs from February 15, 2019-June 30, 2019 = 105• Average number of FTEs during covered period = 85

Forgiveness Ratio = 85/105= 81%

Calculated minimum payroll costs to be forgiven: $700,000

Calculated maximum non-payroll costs to be forgiven: $700,000 / 75% * 25% = $233,333The entity will have a forgiveness amount limited to $200,000 actual non-payroll costs

Workforce Reduction = ($700,000 + 200,000 - $15,000) *(1 - 81%) = $168,150

Therefore, the maximum amount eligible for forgiveness is $700,000 + $200,000 - $15,000 - $168,150 = $716,850 and the entity will be required to repay $100,000 + $15,000 + $168,150 = $283,150 of the loan amount plus interest.

MBAF Comment: The workforce reduction is applied to payroll costs after the salary and wage reduction to prevent a “double-dipping” reduction effect on total payroll costs.

Example #3 – FTE Workforce Reduction

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Economic Injury Disaster Loan (“EIDL”) Grant

If the borrower received up to $10,000 in EIDL grants, then the amount available for loan forgiveness, after considering both the salary or wage reduction and the workforce reduction, is reduced by the amount of grant received.

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The Loan Forgiveness Process

• It is expected that there will be a formal loan forgiveness application to be submitted to the lender

• Loan forgiveness is NOT guaranteed even if requirements have been met– It is up to the lender’s discretion based on documentation and certifications

from borrower– Lender will not be penalized by the SBA if they reject a borrower’s loan

forgiveness application• Lender has 60 days after receiving loan forgiveness application to make a decision

on forgiveness• To document the eligible costs, the borrower must submit Form 941 and state

quarterly wage unemployment insurance tax reporting forms or payroll processing records, copies of leases, business mortgage interest statements, and business utility bills

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Little to No Forgiveness

• In the event you are unable to achieve 100% forgiveness, the unforgiven portion of the loan plus interest must be repaid within 2 years.

• PPP Loans carry a 1% interest rate with loan payments deferred for the first 6 months.

• There is also no pre-payment penalty, which allows you to repay the loan at any time before the maturity date.

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Questions Looking for Answers FAQs

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Questions Looking for Answers

Payroll Costs 1. Is there a difference between incurred and accrued? What about prepayments?2. If the forgivable portion is excludable from Federal taxable income, can the expense paid used to

qualify for forgiveness be deducted?3. Can bonuses paid during the covered period be forgiven? What about back pay, or advanced pay?4. Can a bonus paid in the covered period cause the employee’s annualized salary to exceed the 12-

month salary that was used to determine the loan amount (is that excess salary)?5. Can I pay a bonus in the 8-week period to an employee who made less than $100,000 to avoid the

salary and wage reduction?6. My pay period ends after the 8-week covered period so I will partly pay my employees for the time

they worked after the covered period? How do I account for this? 7. Is “8-weeks” of payroll different from 2 months as used in loan proceeds calculation?

Non-Payroll Costs1. Are payments covered if they related to a period before the loan is made (back rent) or a period

after the covered period (prepaid rent)?2. Does the lease need to be in writing? Are related-party leases included?

FAQs

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Questions Looking for Answers

Other issues1. Do I need to set up another bank account to track costs?2. Will payments post-June 30th be eligible for forgiveness if

funding is received June 1st? 3. Sounds like self-employed and independent contractors may

not be able to ever get 100% loan forgiveness?4. Can anyone get 100% loan forgiveness?5. Will they fix the math error in the FTE calculation wording?

FAQs

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PPP Loan Forgiveness Roadmap for BusinessesAgendaNew Developments & Current �SBA GuidanceNew Developments & Current GuidancePaycheck Protection Program (PPP) Refresher Paycheck Protection Program RefresherPaycheck Protection Program RefresherPaycheck Protection Program RefresherPPP Loan UsesPPP Loan ForgivenessPPP Loan ForgivenessPayroll Costs & Non-Payroll CostsPayroll CostsNon-Payroll CostsExample #1 – Loan Forgiveness Costs Loan Forgiveness ReductionsSalary & Wage ReductionExample #2 – Salary & Wage ReductionThe Full-Time Equivalent (“FTE”) �Workforce ReductionFull-Time Equivalent (“FTE”) EmployeesExample #3 – FTE Workforce ReductionEconomic Injury Disaster Loan �(“EIDL”) GrantThe Loan Forgiveness ProcessLittle to No ForgivenessQuestions Looking for Answers �FAQsQuestions Looking for AnswersQuestions Looking for AnswersSlide Number 28