The Paycheck Protection Program (PPP) and you - PowerPoint Presentation

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The Paycheck Protection Program (PPP) and you

Presented byCraig Fechter, CPA, MS Tax

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6 – 645 p.m. – the PPP645 - 7p.m. – exclusive time for questions

Schedule

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I won’t get into all the different legislation that has been passed but,

who would have thought there would essentially be a massive small business grant?The way I view this is something resembling a rebate of income taxes paid.This was available to small businesses with less than 500 employees.There are a number of provisions regarding related companies that I will not get into as we are here discussing small dental practices.

The PPP – what can you say?

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The paycheck protection program was first instituted as a response to the COVID crisis and was passed under Section 1102 of the CARES act in March of this year.

The loan is a forgivable loan under certain circumstances (to be discussed later) under relatively liberal terms (the terms of forgiveness have been relaxed under new legislation passed subsequent to the original legislation).

The PPP –inception

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The original loan is based on 2.5 months of average employee salary plus 2.5 months of various employee benefits (retirement, group health coverage, state and local taxes paid, etc.).

There are limitations of up to $100,000 of cash compensation per employee.Note that federal employer taxes are NOT included. For sole proprietors with NO employees, they can apply for the loan based on 2.5 times their 2019 net income as reported on their schedule C (up to a maximum annualized amount of $100,000, or a total of $20,833).

The PPP - loan

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If you are in a partnership, you can apply for the loan based on your SELF EMPLOYMENT income as reported on line 14 of schedule K-1 multiplied by 92.35%

(again, up to a total of $100k annualized, or $20,833). If you are a sole proprietor or partnership and have not yet filed, you may consider electing longer depreciation lives on new assets in 2019 even though you may pay more in income taxes as a result

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The PPP – loan (continued)

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Schedule C loan example:

The PPP – loan (continued)

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S corporation loan example:

The PPP – loan (continued)

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You must certify in “good faith” that there is a need for the loan and that it will be used to retain employees and maintain salaries.

Author’s editorial comments – “need” is relative – there is not one dental practice owned by a local practitioner who has access to capital markets. Given that most dental practices were shut down in March except for emergencies, it’s my opinion the average dental practitioner has nothing to worry about.

The PPP – loan (continued)

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Author’s continued editorial comments – there was nothing in the original legislation that references other sources of funds or savings the business may have accumulated. Only a good faith certification that the loan was necessary.

I would suggest that the SBA/FBI/FEDS would be much better off asking the Los Angeles Lakers, Kanye West, Robert De Niro or Pearl Jam, about why they got PPP loans.

The PPP – loan (continued)

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Loan funds can be USED for:

Payroll costs – includes employee health insurance, retirement costs, etc. (for brevity’s sake I’m not listing everything out).The aforementioned limitations for payroll also apply here. Eligible NON-PAYROLL costs include Interest on mortgage obligations on real or personal property, rental on real or personal property, or utility bills

These agreements must have been in place BEFORE 2/15/2020 to be eligible.

At least 60% of the costs MUST be used for payroll (this was 75% previously).

The PPP – loan usage

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The CARES act and subsequent legislation does not have any specific tracking requirements or requirements for a separate bank account.

Editorializing – the CARES act and subsequent revisions are totally silent about PREVIOUS funds you may have saved and/or CURRENT funds that you are earning. XIf you are at 60% capacity and are making enough to pay your employees otherwise, what happens to the money that you make? Any legislation I’ve seen on the matter is silent.

The PPP – loan usage (cont’d)

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I’ve spent probably 30-40% of my time since March on PPP issues. I had a dream last week that only 7% of the people who applied for forgiveness were going to get it. I actually woke up feeling betrayed. It was a cruel joke my mind played on me.

The PPP – loan forgiveness

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I can’t possibly cover every provision and attempt to make my time so for brevity’s sake I’ll condense what I can.

The rules have changed several times and I wouldn’t doubt if the rules were to change again.

The PPP – loan forgiveness (cont’d)

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Loan forgiveness is based on use of funding in the “Covered Period” or “Alternative Covered period”.

These periods are either 4 weeks or you can elect 8 weeks (if you obtained funds before June 5, 2020) following the receipt of PPP funds.

The PPP – loan forgiveness (cont’d)

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At least 60% of the potential amount forgiven has to be used for payroll costs. The remainder can be for the non-payroll costs previously specified.

The 60% number was previously 75%, but was changed by legislation passed on June 5, 2020.

The PPP – loan forgiveness (cont’d)

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Similar to the previous notes about payroll, forgivable cash compensation is limited to $100,000 per employee. For owners the $100,000 limit applies to total compensation.

Owners are limited for forgiveness based on 2019 compensation (

i.e

, cannot increase owner compensation).

For sole proprietors filing a schedule C, the max compensation over an 8 week period is $15,385 while over a 24 week period the maximum compensation is $20,833. The amounts are the same for self-employment income (times 92.35%) from partnerships.

The PPP – loan forgiveness (cont’d)

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Again several different types of payroll costs are includible in the calculation:

Employer paid health insuranceEmployer paid retirementState employment taxes paid

For S corporation owner employees, health insurance and retirement benefits are included in compensation subject to the $100,000 limit on compensation.

For an S corporation owner/employee, you include a max of 2.5 months of the prior year retirement contribution.

The PPP – loan forgiveness (cont’d)

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Whether or not you qualify for full forgiveness will depend on a variety of factors.

Those factors include greater than 25% reductions in employee pay or any reductions in full-time equivalent employees over the “covered period” compared with specified periods of time before COVID.There are several safe harbors, however, that allow you to still obtain forgiveness

even if you reduced your employee workload to compensate for less work.

The PPP – loan forgiveness (cont’d)

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You will be able to file for forgiveness on either form 3508EZ or form 3508. You will want to use form 3508 EZ if possible due to the fact that it will be “easier”

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The PPP – loan forgiveness (cont’d)

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Form 3508 EZ – you can google it and easily find this form

There are extensive inst.

The PPP – loan forgiveness (cont’d)

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You may use the 3508 EZ if you can certify at least one of three options:

Option 1 - The borrower is self-employed individual (files a schedule C) who had no employees and did not include any employee salaries in the loan calculation.

The PPP – loan forgiveness (cont’d)

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Option 2 – the borrower did not reduce annual salary or hourly wages of any employee (who earns less than 100k on an annualized basis) by more than 25% during covered period compared to period between 1/1/2020 and 3/31/2020.

AND – borrower did not reduce the number of FTE employees or average paid hours of employees between 1/1/2020 and the end of the Covered Period.You are allowed to ignore reductions in FTEs if employee quit, if the employee voluntarily requested a reduction of hours, or they refused an offer of re-employment.

Most dentists will NOT qualify under this option

The PPP – loan forgiveness (cont’d)

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Option 3 – The borrower did not reduce annualized salary or hourly wages by more than 25% during covered period AND (this is huge for dental offices) – the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established by Secretary of HHS, Director of CDC etc.

This option is huge and will be applicable to any dental office experiencing a reduction of work.

The PPP – loan forgiveness (cont’d)

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Whether or not the 8 week or 24 week periods are used will depend on the maximum amounts that may be forgiven

. Option 3 on form 3508 EZ is likely the one that most dental offices will qualify under if you did reduce employees.

The SBA has provided no examples of what type of proof

that you have a business reduction will be necessary

– editorializing – showing them an appointment ledger or month by month income statement would likely suffice

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The PPP – loan forgiveness (cont’d)

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Form 3508 is used where you cannot make any of the above certifications. That is to say, if you cut employee salaries by more than 25% (and did not restore them) and/or you cut staffing yet recovered to your business levels pre-2/15/2020, you will use this form

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The PPP – loan forgiveness (cont’d)

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I will not get too much into these calculations due to the relative complexity, but you have to compare reductions in FTE employees and/or salaries for the covered period to before the covered period.

In the end, there are still safe harbors you can attest to that render the calculations a moot point.

The PPP – loan forgiveness (cont’d)

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Safe harbor 1 -

the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established by Secretary of HHS, Director of CDC etc.

The PPP – loan forgiveness (cont’d)

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Safe harbor 2 -

You can ignore the FTE equivalent reductions if you restore FTEs as of the earlier of 12/31/2020,or the date the forgiveness application was submitted. It is unclear what would happen if you upped FTEs for one or two payroll periods to submit the application and qualify for forgiveness. I would suggest that underlying tax concepts such as “substance over form” would rule here.

The PPP – loan forgiveness (cont’d)

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Safe harbor 3 -

You can ignore the employee pay reductions if you restore employee pay as of the earlier of 12/31/2020 or the date the forgiveness application was submitted. It is unclear what would happen if you upped pay for one or two payroll periods to submit the application and qualify for forgiveness. I would suggest that underyling tax concepts such as “substance over form” would rule here.

The PPP – loan forgiveness (cont’d)

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Example 1- sole proprietor with no employees

Sole proprietor – payroll is not a consideration. Sole proprietor will have to simply fill out form 3508EZ and submit to their lender – and they’ll be able to claim the full $20,833 as forgivable.

The PPP – loan forgiveness (cont’d)

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Example 2- sole proprietor with 3 employees

The PPP – loan forgiveness (cont’d)

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Note that EVEN THOUGH payroll was down through furloughing employees, due to the certification on form 3508 EZ, doctor is able to obtain FULL FORGIVENESS.

The PPP – loan forgiveness (cont’d)

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Example 3- S

corp owner with 3 employees

The PPP – loan forgiveness (cont’d)

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Key forgiveness take-aways

Be sure you can document reduction of business activity due to shut-down.Be sure to maintain payroll records.Be sure to not reduce employee compensation by more than 25% (hourly or salary compensation) when they do work.

Make sure that salaries and other forgivable costs paid over the 24 week period is greater than the PPP loan amount (and again, remember that payroll must be greater than 60% of the total PPP funds expended)

The PPP – loan forgiveness (cont’d)

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Please call me at 916-333-5360 or email at

cfechter@fechtercpa.com if you have any questions.

THANK YOU