Paycheck Protection Program Forgiveness Latest Updates

by | May 13, 2020 | Cracking the Tax Code with Christy | 0 comments

Somehow this spring has been both the longest and shortest season ever.  Congress passed the CARES Act in March, but that was not the end of the story.  Several times a week the Small Business Administration issues more guidance regarding the Paycheck Protection Program.  At this point, you may feel like forgiveness is a moving target.  You would think that by at this point in the program, when many of the first recipients are halfway through their covered period, we’d know all the rules, but that is not the case.  Below are five things that we want you to know now that “some” of the dust has settled and more guidance has been issued.  The SBA just released the information in Point One today.  The remaining points are clarifications and expansions of other blogs and webinars we have put out.

1. Safe Harbor Provision.  Remember the public outcry about a month ago when we discovered large public corporations had taken funds from the Paycheck Protection Program?  The government reminded all applicants that they had certified in good faith that they needed the loan and created a safe harbor provision.  Any applicant who returned the funds by May 14th (originally May 7th) would be deemed to have made the certification in good faith even if they didn’t need them due to the current situation and had other access to funds.  Businesses across the country have been wondering and asking questions such as, “What does it mean that ‘current economic uncertainty makes this loan request necessary’?  Just how bad off do I have to be to need the loan?”  The government has threatened audits for businesses of all sizes that take PPP loans.  Many businesses have already returned the funds for various reasons, but many simply because they do not want the hassle of an audit straining their already limited resources.  Today, just one day before the deadline to return funds, the government has stated that all businesses whose loans were less than $2 million will be presumed to have made those certifications in good faith. 

2. Bonuses/Hazard Pay: Many of you have asked me if you can give your employees bonuses with PPP proceeds.  Generally, I have advised against it because the purpose of the act is to maintain business operations, not expand them.  However, I want to clarify that I do think that hazard pay for certain industries and locations is permissible.  You should call the extra pay hazard pay rather than a bonus and denote that it is specifically for the hazards the employee works through in their role.  For example, a medical office may choose to pay their receptionist hazard pay as she interacts with the public. Another example of reasonable hazard pay is someone who works in a care facility for the elderly.  Hazard pay would not be appropriate for someone whose job responsibilities do not put them at risk, such as a full-time remote employee who never leaves their home office.  However, there is also an argument for allowances for employees who need to pay for child care now that schools throughout the country are shut down to the pandemic.  Remember though, any amount that brings the employee over $100,000 annualized salary would not be forgiven. 

3. Hours for Full-Time Equivalent Employees:  The statute and regulations directly regarding the Paycheck Protection Program do not specifically define how many hours an employee must work to be considered full*time.In an effort to be conservative and protect your loan’s forgiveness, we had been recommending 40 hours a week be considered full time. We now feel comfortable that 30 hours can be considered a Full-Time Equivalent employee.  Another portion of the CARES, the employee retention credit, specifically references other federal law that uses a 30 hour a week definition.  It is reasonable than to expect that the SBA would accept 30 hours a week as a full-time equivalent employee. 

4. Full-Time Equivalent Employee Look Back Period:  For forgiveness purposes, you must maintain the same number of full-time equivalent employees during your covered period as the look back period.  The look back period is February 15, 2019 to June 30, 2019 OR January 1, 2020 to February 29, 2020. You as the borrower can chose which one is more beneficial to you.If you are a seasonal business the government has issued specific regulations for calculating the loan amount that open the door for potentially other look back periods.  If you are a seasonal business with questions, please call for a consultation as it depends on your business and the regulation has introduced more questions.

5. Requirement of 75% of Proceeds on Payroll.  It has always been my stance that you must use 75% of your total loan amount on payroll in order for any of your loan to be forgiven and that it is all or nothing requirement.  Then after that atomic bomb requirement, forgiveness can also be reduced pro rata if you do not meet the full-time equivalency requirements and do not maintain employee compensation at least at 75% of what they were making previously. 

I based my interpretation on Interim Final Rule 1 which uses words such as “at least” and “shall” to state how much of the loan proceeds must be spent on payroll.  However, the American Institute of Certified Public Accountants (AICPA) takes a different stance and does not believe the requirement is an atomic bomb.  Rather, they state that if you don’t meet the 75% requirement, the remainder of the loan can be forgiven on a pro rata basis.  Remember, the AICPA’s stance is not law.  Congresses passes law and allows the agencies such as the SBA to issue regulations.  Even though the AICPA interprets this provision differently, the SBA has surprised us before and final guidance is up in the air. 

If you go with my interpretation, you don’t lose anything if we’re wrong.  You still get your loan forgiven, and at most you will only be out the time it takes for you to come up with creative tasks for your employees to do during this period.  If you go with the AICPA’s interpretation and do not use at least 75% for payroll, your loan may not be forgiven, either in its entirety, or by a pro rata basis based on what was not used for payroll.  Monica Reid a CPA with Altman, Rogers & Co., here in Anchorage, and I have discussed and debated this topic and agree that it is best to be conservative unless the client is willing to take on a loan.

We realize that after reading this blog, you may have questions very individualized to your situation and your business.  Please give us a call at the Law Offices of Christy Lee, PC for a consultation.  Our attorneys and staff stay abreast with the newest guidance and regulations so that you can breathe easier and focus on your business.