Matt Woolfolk

HHS Provider Relief Fund – General and Targeted Fund Update

HHS issued a limited update Monday July 20th.  The update suggests that providers who received more than $10,000 in PRFs (i.e., any payment under the $50 billion General Distribution, Medicaid/CHIP distribution, or various targeted distributions) will be subject to “future reporting requirements” and that detailed instructions regarding these requirements will be released “by August 17, 2020.”

While the announcement leaves many details vague, it does state that recipients must report within 45 days of the end of calendar year 2020 on their expenditures through the period ending 12/31/20.  The overview released on July 20 does not indicate whether providers who received $10,000 or less will be subject to any reporting obligations and does not provide detail as to the form or content of reports.  However, the following timeline is provided:

  • August 17, 2020: Detailed instructions will be available by this date
  • October 1, 2020: Reporting system comes available
  • February 15, 2021: Report due for calendar year 2020 expenditures
  • July 31, 2021: Second report due (only for those who expended funds in CY 2021)

Please click HERE for the full announcement and don’t hesitate to contact your BiggsKofford advisor with any questions.

The Governor signed the Healthy Families and Workplaces Act on July 14, 2020.

2020:

For the remainder of this year, the Act will require all employers to comply with the emergency paid sick leave requirements of the Families First Coronavirus Response Act (FFCRA).

The paid sick leave provision of the FFCRA mandates that an employer provide to each employee paid sick leave to the extent that the employee is unable to work or telework due to a need for leave because:

(1) The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.

(2) The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.

(3) The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

(4) The employee is caring for an individual who is subject to an order as described in subparagraph (1) or has been advised as described in paragraph (2).

(5) The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions.

(6) The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

Paid sick leave for all the reasons above applies to all employees, regardless of how long the employee has been employed. Full time employees are entitled to 80 hours of paid sick time. Part-time employees are entitled to a proportional number of hours equal to their average hours worked over a two-week period. An employer may not require an employee to use other paid leave before the employee uses the paid sick time. Paid sick time is capped at $511 per day or $5,110 in the aggregate for leave taken due to employee illness, suspected illness, or isolation (reasons (1), (2), and (3) above). The cap for when the employee is needed to care for someone else (reasons (4), (5), and (6), above) is $200 per day or $2,000 in the aggregate. The rate of pay is the greater of either the employee’s regular rate of pay, the Federal minimum wage, or the applicable State minimum wage. However, paid sick time is reduced to two-thirds (2/3) this rate for when absences are due to the employee’s need to care for “family members” (situations that arise due to paragraphs (4), (5), and (6) above).

The FFCRA ends on December 31, 2020 and new required sick time must be implemented.

2021:

Starting January 1, 2021, this new sick leave law applies to all employers in Colorado, except the Federal Government. The accrual of paid sick leave portion of the law goes into effect for employers with 16 or more employees on January 1, 2021. That’s extended to all employers on January 1, 2022 regardless of employee count.

The law states that an employer can satisfy the requirements of this law if the employer already has a policy that meets or exceeds the requirements of this law. Therefore, if your PTO policy meets or exceeds the requirements in this law, you do not need a separate sick time policy. It’s our interpretation of the policy that if an employee uses all their PTO and later becomes sick, the employer does not need to provide additional paid time off. This is a new law, so we may receive more specific guidance or clarification on this in the future.

The law requires that covered employers provide one hour of paid sick leave for every 30 hours worked by an employee, capping at 48 hours or 6 days of paid sick leave per year. The time can be accrued by hours worked or given in a lump amount. For full-time, exempt employees, employers should assume a 40 hour workweek for the purpose of accruing paid sick time. Paid sick time begins to accrue when employment begins. Employers must allow employees to carry over up to 48 hours of sick leave into the following year, but are not required to allow employees to accrue over 48 hours. Employers are not required to pay out unused sick leave on termination. There are additional requirements under this law if we’re in a public health emergency.

If you have any questions, contact us to speak with one of our experts.

Clients and Friends of BiggsKofford,

I’m happy to pass along an invitation for the Scaling Up Workshop, being offered on Wednesday July 1. Many of the BiggsKofford Shareholders and clients have attended this workshop, and everyone believes it was well worth their time (and the small fee). As with most events – this will be held virtually next Wednesday morning. You can see the invitation and sign-up below.

Best,
Chris Blees
BiggsKofford CEO

WORLD-RENOWNED SCALING UP WORKSHOP

NOW VIRTUAL ~ RESERVE YOUR SPOT TODAY

Learn tools and strategies to help navigate this challenging time at this highly interactive VIRTUAL Scaling Up workshop.

Participate from your computer.

Hosted by Top Colorado Region Scaling Up Coach

Wednesday, July 1, 2020

8:00 am – 12:00 pm MDT

LEARN MORE OR REGISTER NOW >

For the best results & biggest impact, bring your leadership team.
 Our workshop will teach you to beat the odds and get started with the Scaling Up growth framework (Rockefeller Habits 2.0).

 

The world-renowned Scaling Up Business Growth Workshop has empowered more than 40,000 executives and their leadership teams to scale up smarter and accelerate profitable growth using a time-tested and results-driven methodology.

  • Find CASH to weather the storm and seize opportunity
  • Update and pivot STRATEGY to grow right now
  • Achieve flawless EXECUTION to avoid costly mistakes
  • Engage the right PEOPLE and keep your team healthy


Meet Your Workshop Host

Chuck Kocher is a top Scaling Up Certified Coach, founder of The Transformation Company and brings over 40 years of developing and coaching high growth organizations in over 60 countries. Chuck measures his success on his client’s success. His clients have achieved Inc 5000 status, Best Place To Work & Best Cultures, Top Industry Performers, Most Profitable in Industry & Top Franchise in North America.

Many previous clients have sold their businesses at higher multiples than industry standards. More importantly, many of his clients have built businesses that have freed them up to enjoy their families and pursue their personal life passions. Learn more about Chuck here View Chuck’s Bio here

Questions?
Contact Scaling Up Certified Coach Chuck Kocher
chuck@thetransformation.company

We want to thank everyone who was able to attend our Town Hall webinar this morning with Chris Blees, CPA, CM&AA and Austin Bucket, ACA, CM&AA. We had great input from the audience and some really insightful discussion. We hope you all found it valuable.

For those who were not able to attend live, we have the recording of the webinar on demand HERE. We also have our presentation slides available HERE. Lastly, we have a summary of our Q&A session HERE for quick reference of common questions.

If you have questions that did not get answered or something specific to your circumstance, please contact us and we will be happy to discuss how we can support you and your business.

Again, thank you to all of our attendees as well as Chris and Austin for a great presentation.

The U.S. Small Business Administration (SBA), in consultation with Treasury, released Wednesday a revised loan forgiveness application for the Paycheck Protection Program (PPP). The SBA also unveiled a new EZ application for forgiveness of PPP loans.

Join us for a Town Hall Webinar today at 10:00 by registering HERE for more information and input from the experts.

You can find the updated applications HERE on our COVID-19 Resource Page.

Application highlights

The revised PPP Loan Forgiveness Application and instructions include a number of notable items. Among them are:

  • Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
  • Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until Dec. 31 to apply for forgiveness to use the safe harbors.
  • Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.

New EZ application details

The EZ PPP Loan Forgiveness Application requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:

  • Are self-employed and have no employees;
  • Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
  • Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%

New interim final rule published

The SBA issued rules Tuesday night for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.

The Paycheck Protection Flexibility Act tripled the duration during which PPP recipients could spend the funds and still qualify for loan forgiveness — a span of time called the covered period. The interim final rule adjusts and adds to previous guidance for calculating loan forgiveness under the original eight-week covered period.

The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

New interim final rule published

The SBA issued rules Tuesday night for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.

The Paycheck Protection Flexibility Act tripled the duration during which PPP recipients could spend the funds and still qualify for loan forgiveness — a span of time called the covered period. The interim final rule adjusts and adds to previous guidance for calculating loan forgiveness under the original eight-week covered period.

The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

Owner compensation replacement calculations

While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the owner compensation replacement is calculated for the eight-week period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.

The owner compensation replacement calculations are structured to prevent owners from reaping PPP windfalls that Congress did not intend, according to the interim final rule. Specifically, the SBA and Treasury, which oversee the PPP, want to prevent the following scenario, which is made possible by a provision in the Paycheck Protection Flexibility Act that provides a safe harbor from loan forgiveness reductions to any borrower that is unable to return to the same level of business activity it was operating at before Feb. 15, 2020.

Because the maximum loan amount for a business is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the aforementioned safe harbor, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan forgiven.

“This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee,” the interim final rule says. “For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.”

Other provisions

The interim final rule also modifies earlier guidance to account for changes included in the Payroll Protection Flexibility Act.

  • The minimum term for PPP loans is raised to five years for all loans made on or after June 5. For loans made before June 5, the two-year minimum maturity remains in effect unless both the borrower and the lender agree to extend it to five years.
  • The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness drops to 60% from 75%.

The application deadline for PPP loans remains June 30.

On June 5th, President Trump signed the Paycheck Protection Program Flexibility Act of 2020, which made significant changes to the PPP program. The Bill he signed was the exact law passed as H.R. 7010 by the House of Representatives. Since then, the Treasury Department issued regulations on June 11th, which included some important pronouncements.

All of the information below, as well as any updates will be discussed at our PPP Loan Forgiveness Town Hall Webinar this Thursday the 18th at 10:00 am. Register for that HERE and send any questions you would like addressed ahead of time to mwoolfolk@biggskofford.com.

  1. No 60% Cliff

The Treasury Department does not consider the 60% requirement, which replaced the 75% requirement as to amounts spent on “payroll costs” to be a “cliff.” If a PPP borrower cannot spend 60% or more of the loan proceeds during the 8- or 24-week testing period on payroll, state and local payroll taxes, group health insurance and retirement plan contributions, then there will nevertheless be PPP loan forgiveness based upon whatever is spent on the above “payroll costs,” plus up to 66% of the amount spent on the above items, to the extent of permissible rent, interest and utility expenses.

 

  1. 24-Week Testing Period

Post-June 5 PPP borrowers will only be able to use the 24-week testing period, while borrowers who received their loans before June 5th can elect to use either an 8-week expenditure period or a 24-week expenditure period. Post-June 5th borrowers are required to use the 24-week period.

The 24-week period is advantageous, if the borrower would not be able to spend sufficient amounts and satisfy the 60% test within an 8-week period. The 8-week test is much more advantageous for borrowers who are able to spend the appropriate amounts during the 8-weeks, and then apply for forgiveness and have the loan over and done with, and off of their balance sheets, in order to be able to borrow conventionally going forward.

 

  1. Extended Maturity Date for Some

Loans made before June 5, 2020 have a 2-year maturity, and loans made on or after June 5th have a 5-year maturity.

Post-June 5th borrowers will not have to repay their loans until five years after the loan date, as long as they file their Applications for Forgiveness within ten months after the end of the 24-week testing period that they are required to use.

Pre-June 5th borrowers will still have a due date that is two years after the loan date, but banks and borrowers can agree to extend these loans to five years.

 

  1. Loan Date Clarified

For these purposes, a loan is considered to be made when the SBA assigns a loan number to the PPP loan, notwithstanding that the loan monies may not be received until several days later. This will cause some confusion, since the expenditure rules provide that a loan is to have been received when funded with the first dollars deposited into the bank account of the borrower. As a result of this, many borrowers who received their funds on or after June 5th will still be stuck with a 24-week testing period, and a very long wait for confirmation of forgiveness.

 

  1. Deadline for Forgiveness Application

The new regulations indicate that those borrowers who do not submit an Application for Forgiveness within ten months after the end of the 8- or 24-week period must begin paying principal and interest after that date, with no specificity as to how much principal and how much interest would need to be paid before the 2- or 5-year balloon payment of all remaining interest, at 1% per annum, and principal would be due and payable.

 

  1. Reduced Restrictions for Felons

Consistent with discussion in the Senate Committee on Small Business and Entrepreneurship, the newly updated Borrower Application on June 12th reveals that the rule that individuals that have had felony convictions within five years before applying cannot qualify was changed to one year, based upon considerations that are further discussed below, except that five years still applies if the charges were for fraud, robbery, embezzlement or a false statement in a loan application or an application for federal financial assistance. It is noteworthy that when a borrower entity has an ex-felon who owns more than 20%, then this prohibition will apply, but there is nothing to prevent the ex-felon from transferring enough ownership to get down below 20% in order for the business to qualify. A felony is considered to have occurred if there was a conviction, a guilty plea, a plea of nolo contendere or any form of parole or probation, “including probation before judgment.”

 

  1. Still Waiting for Additional Guidance for Sole Proprietors

There was no mention of independent contractors and whether they will be automatically forgiven based upon the ability to elect the 24-week period.

Under the separate rules that apply to individuals who are considered to be independent contractors or sole proprietors who file a Schedule C to their personal Form 1040, which is entitled “Profit or Loss From Business,” it would be impossible under an 8-week testing period to have all debt qualify for forgiveness.

Under the independent contractor PPP regulations, the amount of the loan would be equal to 20.8333% (2.5 divided by 12) of the borrower’s 2019 Schedule-C net income. 15.3846% of the PPP loan to an independent contractor who does not have employees is automatically forgiven based on an 8-week testing period, because 8/52nds of 100% is 15.3846%, and 15.38% divided by 20.83% is 73.835%. This happens regardless of how that money is spent, because it is assumed to be compensation received and paid to or for the independent contractor.

The remaining 5.4487% would have to be spent on qualified rent, interest and utilities to get close to having total forgiveness. Total forgiveness was impossible under the 75% rule, but is now hopefully going to be the rule of the land for all living independent contractors who choose the 24-week period, unless future guidance takes this away, because 24/52nds equals much more than 20.8333%.

No guidance has yet been provided, but millions of fingers are crossed and half that many people are hoping that this will be the case. This will mean that independent contractors will have a very short and simple Application for Forgiveness.

HHS Provider Relief Fund Expanded to Medicaid & CHIP Providers

Today, the U.S. Department of Health and Human Services (HHS), through the Health Resources and Services Administration (HRSA), is announcing additional distributions from the Provider Relief Fund to eligible Medicaid and Children’s Health Insurance Program (CHIP) providers that participate in state Medicaid and CHIP programs. HHS expects to distribute approximately $15 billion to eligible providers that participate in state Medicaid and CHIP programs and have not received a payment from the Provider Relief Fund General Distribution. HHS is also announcing the distribution of $10 billion in Provider Relief Funds to safety net hospitals that serve our most vulnerable citizens. The safety net distribution will occur this week.

“Healthcare providers who focus on treating the most vulnerable Americans, including low-income and minority patients, are absolutely essential to our fight against COVID-19,” said HHS Secretary Alex Azar. “HHS is using funds from Congress, secured by President Trump, to provide new targeted help for America’s safety-net providers and clinicians who treat millions of Medicaid beneficiaries.”

HHS is providing support to healthcare providers fighting the COVID-19 pandemic through the bipartisan CARES Act and the Paycheck Protection Program and Health Care Enhancement Act, which allocated $175 billion in relief funds to hospitals and other healthcare providers, including those disproportionately impacted by this pandemic.

ENHANCED PROVIDER RELIEF FUND PORTAL

On Wednesday, HHS is launching an enhanced Provider Relief Fund Payment Portal that will allow eligible Medicaid and CHIP providers to report their annual patient revenue, which will be used as a factor in determining their Provider Relief Fund payment. The payment to each provider will be at least 2 percent of reported gross revenue from patient care; the final amount each provider receives will be determined after the data is submitted, including information about the number of Medicaid patients providers serve.

The initial General Distribution provided payments to approximately 62 percent of all providers participating in state Medicaid and CHIP programs. The Medicaid and CHIP Targeted distribution will make the Provider Relief Fund available to the remaining 38 percent. HHS has already provided relief funding to over one million providers, and today’s announcement is expected to reach several hundred thousand more providers, many of whom are safety net providers operating on thin margins.

Clinicians that participate in state Medicaid and CHIP programs and/or Medicaid and CHIP managed care organizations who have not yet received General Distribution funding may submit their annual patient revenue information to the enhanced Provider Relief Fund Portal to receive a distribution equal to at least 2 percent of reported gross revenues from patient care. This funding will supply relief to Medicaid and CHIP providers experiencing lost revenues or increased expenses due to COVID-19. Examples of providers serving Medicaid/CHIP beneficiaries possibly eligible for this funding, include pediatricians, obstetrician-gynecologists, dentists, opioid treatment and behavioral health providers, assisted living facilities, and other home and community-based services providers.

To be eligible for this funding, health care providers must not have received payments from the $50 billion Provider Relief Fund General Distribution and either have directly billed their state Medicaid/CHIP programs or Medicaid managed care plans for healthcare-related services between January 1, 2018, to May 31, 2020. Close to one million health care providers may be eligible for this funding.

More information about eligibility and the application process is available at https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/general-information/index.html

$10 BILLION ALLOCATION FOR SAFETY NET HOSPITALS

HHS is announcing the distribution of $10 billion in Provider Relief Funds to safety net hospitals that serve our most vulnerable citizens, recognizing the incredibly thin margins these hospitals operate on. This payment is being sent directly to these hospitals via direct deposit.

This payment is going to hospitals that serve a disproportionate number of Medicaid patients or provide large amounts of uncompensated care. Qualifying hospitals will have:

  • A Medicare Disproportionate Payment Percentage (DPP) of 20.2 percent or greater;
  • Average Uncompensated Care per bed of $25,000 or more. For example, a hospital with 100 beds would need to provide $2,500,000 in Uncompensated Care in a year to meet this requirement;
  • Profitability of 3 percent or less, as reported to CMS in its most recently filed Cost Report.

Recipients will receive a minimum distribution of $5 million and a maximum distribution of $50 million.

ADDITIONAL PROVIDER RELIEF FUND UPDATES

  • On Monday, June 8, 2020, HHS sent communications to all hospitals asking them to update information on their COVID-19 positive-inpatient admissions for the period January 1, 2020, through June 10, 2020. This information will be used to determine a second round of funding to hospitals in COVID-19 hotspots to ensure they are equitably supported in the battle against this pandemic. To determine their eligibility for funding under this $10 billion distribution, hospitals must submit their information by June 15, 2020 at 9:00 PM ET.
  • HHS is working on an additional allocation to distribute relief broadly to dentists.

For updated information and data on the Provider Relief Fund, visit hhs.gov/providerrelief

THE PREMIER PPP FORGIVENESS WEBINAR WITH THE EXPERTS

The PPP Flexibility Act was signed into law last Friday. In a joint news release, the Small Business Administration and the Treasury Department said they will “promptly” issue rules and guidance; a modified application form; and a modified loan forgiveness application.

These new rules have allowed greater flexibility to allow for more forgiveness. But, they also create more questions. So, we’ve decided to host a Town Hall meeting to provide answers!

We are excited to invite you to engage with the Directors of our Paycheck Protection Program Response Team as they discuss the key aspects of the PPP Forgiveness process, give you the tools needed to navigate these uncertain times, and answer any questions you may have.

The SBA is expected to release new regulations and an updated forgiveness application. Our Experts will cover these new rules.

THURSDAY, JUNE 18 AT 10AM

Register HERE! We look forward to seeing you then!

 

 

MEET OUR PANELISTS

 

Chris Blees, CPA, CM&AA  

  • Managing Partner of BiggsKofford
  • Director of BiggsKofford’s Mergers & Acquisition Services
  • Licensed Investment Banker (Series 7 and 79) with Aaron Capital
  • Chairman of the Alliance of M&A Advisors (AMAA)

 

 

 

 

Austin Bucket, ACA, CM&AA

  • Director of BiggsKofford’s Virtual Accounting Solutions Team (VAST)
  • Institute of Chartered Accountants in England & Wales
  • Alliance of Merger & Acquisition Advisors
  • Licensed Investment Banker (Series 7 and 79) with Aaron Capital

Breaking News: Significant Changes to PPP Loan Forgiveness Rules

The Senate on Wednesday evening passed by voice vote a House-passed Paycheck Protection Program reform bill, clearing it for President Donald Trump’s signature. The legislation — titled the Paycheck Protection Program Flexibility Act — was introduced by Republican Rep. Chip Roy of Texas and Democratic Rep. Dean Phillips of Minnesota. It is intended to make loans more accessible under the program by making its terms of use more flexible.

The most significant changes:

  • PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • The payroll expenditure requirement drops to 60% from 75%. However, this comes with the stipulation that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met.
  • Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
  • The l Paycheck Protection Program Flexibility Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
  • The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

We are monitoring the situation carefully and will continue to provide updates as it develops. We anticipate more details to come after the President has approved the law and final regulations are provided. For more information, visit our COVID-19 Resource page.

Important Highlights from the PPP Forgiveness Application

The SBA released the first draft of the Forgiveness Application and related Instructions on Friday evening (5/15/2020).  The application and instructions can be found HERE.

Most of the Forgiveness Application and Instructions follow the same calculations and interpretations that we have been providing our clients to maximize their forgiveness planning. However, this new application provides some new clarifications and changes to the forgiveness process.

Here are some important changes to note:

Owner Compensation Limit:

For the first time, the Forgiveness Application indicates that Owner Compensation will be limited to an amount equivalent to 8-weeks of 2019 compensation. We knew owner compensation would be limited to $15,385, which is 8-weeks of $100,000. But the application now adds this additional limitation. Example: If an owner’s 2019 W-2 was only $60,000, the 8-week limit would be $9,231 (60,000 / 52 X 8), rather than the $15,385 limitation on all other employees.  If an owner’s 2019 W-2 was $100,000 or more, then the limit will be $15,385.

 

Cash AND Accrual Accounting Allowed:

Prior to release of this application there was much debate about whether the law allowed for cash-method or accrual-method calculations of eligible expenses. The application instructions indicate we can actually use BOTH.  Borrowers may use cash-method (for payments actually made) on the front-end of the 8-week period, and then accrue expenses at the end of the 8-week period (as long as the bill is paid by the normal due date).  Example: Let’s say a company received their PPP loan on April 10th. The company’s 8-week period runs from April 10 through June 4.  Now, let’s say the company typically pays $500 per month in utilities. They pay the March utility bill on April 14. They pay the April utility bill on May 14. But they don’t receive the May or June bills in time to pay them before June 4 (end of the 8-week period). The rules now allow the company to include both payments made PLUS they can accrue the May utility bill and 4-days of June’s bill. This will result in the company receiving $1,567 of eligible utilities expense. ($500 for each March, April and May. Plus 4 days prorated for June).

 

Additional Payrolls Included:

The same Cash AND Accrual method of accounting works for Payroll as well. This means eligible Payroll Costs include any payroll that was paid at the beginning of the 8-week period (even for wages earned before the PPP loan date). Then, you get to accrue payroll at the end to include all wages earned through the last day of your 8-week period (even if the payroll is actually paid sometime later).  This will naturally allow most companies to include more than 8-weeks worth of payroll in their 8-week window.

 

Choose Your 8-Week Payroll Period:

But, there’s more good news! The SBA instructions made it even better for employers with pay cycles of 2-weeks or less. Employers that pay weekly or bi-weekly may choose an “Alternative Payroll Covered Period” that aligns with their normal payroll cycle.  This will allow an employer with a bi-weekly pay cycle to effectively maximize their Payroll Costs and claim a full 10-weeks of payroll, in an 8-week period.  Here’s the example:  Assume an employer received their PPP loan on April 6, has a bi-weekly payroll cycle that ended on Sunday April 12, and they cut paychecks to employees on the following Friday. This company could choose an “Alternative Payroll Covered Period” to begin on Monday, April 13 through Sunday, June 7. They would get to claim the entire payroll that was paid on Friday April 17 (which was for 2-weeks of payroll incurred before the 8-week period). Plus they may claim a full 8-weeks of payroll ending on June 7th, even accruing the last payroll that is paid on Friday, June 12 (after the 8-week period).  Note: While these expanded rules will allow additional eligible payroll costs for most employees making less than $100,000 per year, the total amount that can be claimed for any one employee is still capped at $15,385.

 

Full-Time Equivalent (FTE) is defined as 40 hours:

Prior to these instructions, we didn’t know what the SBA would define as “full-time”. Some had assumed they would follow the Department of Labor definition of 30 hours. But these instructions indicate that 40-hours is considered “full-time”.  Anyone that worked more than 40 hours per week is still considered 1.0.  Less than 40 hours should be calculated as an FTE down to 1 decimal point. The instructions also allow use of a “simplified method”, where all employees with less than 40 hours can be counted as 0.5 FTE. If the FTE calculation becomes a problem, a company may want to calculate FTE’s using both methods and use the better answer.

 

New FTE Safe-Harbors:

There appears to be 2 different exclusions from the FTE calculations: 1) If you have not reduced the number of employees or hours paid between 1/1/2020 and the end of the Covered Period, then you automatically get 100% FTE ratio. 2) If you reduced your employees between 2/15/20 and 4/26/20, but then you restore your FTE’s by 6/30/20 to the same levels as on 2/15/20 – you can also use 100% FTE ratio.  Finally, if neither safe harbor applies, then you can use the FTE calculation methods described in the law.  When calculating FTE’s during the Covered Period, you can also add employees that you bring back by 6/30/2020, add any employee that quits or reduces hours voluntarily, and add any employee that was laid-off and then turned down the offer to return to work.

 

Wage Reduction Safe Harbor:

There is a similar “safe harbor” for the Salary / Hourly Wage Reduction.  If an employee’s wages or hours were cut during the Covered Period (even more than 25%), but by 6/30 you restore them to the same or greater wage that they were earning on 2/15, then you can skip the wage reduction calculation for that employee.

 

These are a few of the added clarifications and rules that may impact your forgiveness planning during the 8-week period.  We expect there will be more clarifications and added instructions that will continue to refine the rules. As always, we’ll keep you informed as quickly as possible when the rules are released.

We are also gearing up to assist with the preparation of these Forgiveness Applications when the rules are finalized, and your 8-week window is complete. You can count on BiggsKofford to help you complete and submit your Forgiveness Application when the time comes.

In the meantime, if you have any questions about these ever-changing rules, please give us a call.

Requirements for CARES Provider Relief General Fund Recipients

Below is an article from the GreenbergTraurig Law Firm blog. GreenbergTraurig did a great job at researching and summarizing the extremely complex process regarding the Relief General Fund and required documentation. We appreciate the hard work that went into this article. The original format of the article can be found here.

Many providers have received large payments from the U.S. Department of Health & Human Services (HHS) in April 2020 under the federal government’s effort to provide relief during the Coronavirus Disease 2019 (COVID-19) public health emergency. Many terms and conditions accompany the acceptance of such payments and all recipients must submit documents sufficient to demonstrate that funds are used for healthcare-related expenses or lost revenue attributable to COVID-19.  While HHS has not issued full guidance on the specific documentation requirements (though such guidance may be issued shortly), HHS has promised significant antifraud and comprehensive audits over the use of the general distribution funds.  Providers retaining the funds should plan to document their use of funds and comply with the reporting requirements.

 

The CARES Act Provider Relief General Distribution Fund

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (PL 116-136), HHS is distributing $50 billion to qualifying providers on the frontline of the COVID-19 outbreak (the General Distribution Fund).  The General Distribution Fund constitutes grants that do not need to be repaid if certain terms and conditions are met.  Although providers who billed Medicare may have automatically received money from the General Distribution Fund,2some recipients may choose not to keep the distribution.  Providers who keep the General Distribution Fund must sign an attestation confirming receipt of funds, agreeing to the terms and conditions of payment, and confirming the CMS calculation of payment.3  Providers who retain the distribution for at least 45 days without signing the required attestation or otherwise contacting HHS regarding remittance of those funds are deemed to have accepted the terms and conditions.

The $50 billion General Distribution Fund was released in two tranches.  The first tranche was $30 billion, based on each eligible provider’s 2019 Medicare fee-for-service payments.  The second tranche was $20 billion, allocated proportional to recipients’ share of 2018 net patient revenue across all payer sources.

Under the CARES Act, HHS’ Office of Inspector General (OIG) is obligated to perform both interim and final audits of the disbursed funds over the next three years.  Providers retaining these funds should be prepared to respond to OIG audits, likely focusing on whether the funds were utilized for an approved purpose and whether the provider sought improper balance billing from patients.  Further, providers that retain the General Distribution Fund, but fail to comply with the outlined terms and conditions and/or attestation requirements, may be subject to recoupment.  Anyone who knowingly avoids or conceals an obligation to return money to the government could be subject to sanctions and financial penalties.

 

Permitted Uses

Providers must certify that the General Distribution Fund monies will only be used to prevent, prepare for, and respond to the COVID-19 public health emergency, and only to reimburse for healthcare related expenses or lost revenues that are attributable to COVID-19.  Further, General Distribution Fund monies cannot be used to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse.

Determining whether expenses fall under the permitted uses of General Distribution Fund monies is a fact-specific exercise that requires coordination between a provider’s legal and finance teams.  Examples of permitted uses may include loss of revenue from cancelled elective procedures or reduced volumes of patient encounters; acquisition cost of personal protective equipment; reconfiguration of space and/or equipment in response to COVID-19.

While details on what constitutes permitted uses are forthcoming, HHS offered guidance on how to estimate loss of revenue in the context of providing necessary information on the Provider Relief Fund Application Portal for allocating remaining General Distribution Fund.  When asked “how do I estimate lost revenue in March or April?” HHS responded, “[y]ou may use a reasonable method of estimating the revenue during March and April compared to the same period had COVID-19 not appeared. For example, if you have a budget prepared without taking into account the impact of COVID-19, the estimated lost revenue could be the difference between your budgeted revenue and actual revenue. It would also be reasonable to compare the revenues to the same period last year.”

 

Documentation Requirements

Providers accepting General Distribution Fund monies must create and maintain records to demonstrate the following:

  • Compliance with federal law and the terms and conditions of the General Distribution Fund;
  • Total amount of General Distribution Fund monies received;
  • Amounts of General Distribution Fund monies expended or obligated to projects and activities, including the name of those projects and activities and an estimate of the number of jobs kept or created by those projects and activities (if applicable); and
  • Information about subcontracts or sub-grants awarded by the provider (if applicable). In addition, the provider must maintain “appropriate records and cost documentation” of expenditures made with General Distribution Fund monies sufficient to establish that the monies were used for allowable costs.  These records should include source documentation, must be maintained for at least three years, and must be promptly submitted to HHS upon HHS request.

 

 

Reporting Requirements

Depending on amounts received from the federal government, providers accepting General Distribution Fund monies may be subject to two reporting requirements.  First, all providers accepting General Distribution Fund monies must submit reports to HHS so that HHS can ensure compliance with the General Distribution Fund terms and conditions.  These reports must be submitted at a time specified by HHS and in the format, and with the content, as specified by HHS.  HHS has not yet issued the report form, content, or deadlines, and may do so in future program instructions directed to General Distribution Fund recipients.

Second, providers accepting more than $150,000 total in funds under the CARES Act (this includes loans such as the Paycheck Protection Program (PPP)), the Families First Coronavirus Response Act (PL 116-127) (FFCRA), or any other federal Act primarily making appropriations for the COVID-19 response and related activities, must submit quarterly reports.  This second report must be submitted to HHS and the Pandemic Response Accountability Committee no later than 10 days after the end of each calendar quarter, beginning with the calendar quarter ending June 30, and it must contain:

  • The total amount of funds received from HHS pursuant to the CARES Act, FFCRA, and other federal Act primarily making appropriations for the COVID-19 response and related activities;
  • The amount of such funds received that were expended or obligated for each project or activity;
  • A detailed list of all projects or activities for which such covered funds were expended or obligated, including the name and description of the project or activity, and the estimated number of jobs created or retained by the project or activity (where applicable); and
  • Detailed information on any level of subcontracts or subgrants awarded by the provider or its subcontractors or subgrantees, including the data elements required to comply with the Federal Funding Accountability and Transparency Act of 2006 allowing aggregate reporting on awards below $50,000 or to individuals, as prescribed by the Director of the Office of Management and Budget.

 

Practical Considerations

  • According to the guidance, providers should calendar 45 days from the date of receipt of any General Distribution Fund as the deadline for signing the attestation and decide whether to retain these funds.4
  • Providers should document General Distribution Fund received and segregate such funds if possible.  According to the guidance, General Distribution Fund are identified through an “HHSPAYMENT” description.
  • If payments were swept as a part of practice management sweep structure, the management company may track receipt of the funds by tax identification number; however, the recipient must have access to the records.
  • What about a Change of Ownership (CHOW)?  If the buyer of a healthcare facility recently assumed the seller’s Medicare Provider Agreement but has not received the Medicare tie-in notice, the seller likely received the General Distribution Fund through its tax identification number.  However, the seller may not be entitled to sign the attestation because the buyer is the party that will “prevent, prepare for, and respond to coronavirus.”
  • Providers may want to implement written policies to ensure that General Distribution Fund monies will only be used for medical expenses or lost revenues attributable to COVID-19.  Providers should also consider establishing cost centers for tracking COVID-19 related expenses and lost revenues.
  • Providers should calculate the total amount of federal assistance received to determine applicable reporting requirements. Providers receiving more than $150,000 should calendar 10 days after the end of each calendar quarter.  That is when the quarterly reports must be submitted to HHS and the Pandemic Response Accountability Committee.  Although it may be necessary to continue with quarterly reports for multiple quarters, HHS has not issued any guidance on that issue.
  • Providers should familiarize themselves with the required data elements for subcontractors or subgrants if they are, or are considering, awarding General Distribution Fund monies to subcontractors or subgrantees.

 

Key Resources

  • General Information from HHS on the General Distribution Fund, including eligibility requirements, attestations, and links to data submission portals
  • Portal for Verification and Attestation

 

Items Needed

  • TINs for entities that received payments
  • TINs of subsidiary organizations that received payments, but that do not file separate tax forms
  • Amount of payments received
  • Payment transaction ACH/EFT numbers/check numbers
  • Copy of most recently filed tax forms for all applicable entities

 

For more information or assistance in navigating this process, visit our COVID-19 Resource Page HERE.

PPP Loan Forgiveness Application Released

On May 15th, The U.S. Department of Treasury’s Small Business Administration (SBA) finally released the Paycheck Protection Program (PPP) loan forgiveness application, which can be found HERE.

The application will include two critical supporting schedules: Schedule A and the worksheet to Schedule A. PPP loan borrowers will submit this application to their lenders to request forgiveness of part or all of their PPP loan.

The SBA identified in its press release that it would be issuing additional regulations and guidance to assist borrowers in completing the application and provide guidance to lenders on their responsibilities in the forgiveness process. The application itself answered early questions on how forgiveness will work:

  • Clarifying the requirement that 75% of PPP be used for payroll costs. The application confirms that the requirement that a borrower spend 75% of its PPP loan on eligible payroll costs could result in a reduction in the forgiveness amount, but such failure will not be a breach of the loan requirements or result in none of the loan being forgivable. It also provides that the 75% test applies only to the forgiveness request and is not an absolute requirement that a borrower spend 75% of the total loan amount on payroll costs during the eight-week period. In addition, the application makes the 75% test an alternative to the tests for FTE reductions and reductions in compensation of employees making less than $100,000 per year, not as an additional reduction. Per the application, a borrower’s forgiveness amount is the lesser of: (1) eligible costs reduced by the CARES Act’s FTE and compensation reduction tests, (2) the borrower’s full PPP loan amount or (3) an amount equal to the eligible payroll costs incurred or paid by the borrower during the covered period divided by 0.75.
  • Eligible costs include costs paid or incurred during covered period. Costs eligible for forgiveness include eligible costs paid or incurred during the borrower’s covered period, whether or not actually paid during the covered period. Using payroll costs as an example, the application indicates that the full amount of a borrower’s initial payroll paid during the covered period is an eligible cost, even if it included compensation attributable to work performed prior to the covered period. In addition, all employee compensation earned during the covered period will also be an eligible cost whether or not actually paid during the covered period—as long as the compensation is paid to the employee on or before the first payroll date following the covered period. The same concept applies to non-payroll costs.
  • Certain borrowers can use actual payroll periods for determining eligible payroll costs. A borrower can elect to calculate payroll costs using an alternate period for administrative convenience that aligns with actual pay periods if the borrower’s payroll is bi-weekly or more frequent. In that case, a borrower would use the eight-week period that starts on its first payroll date following disbursement of its loan. The alternate period would also apply to the FTE comparison and compensation reduction calculations for purposes of determining any reductions in forgiveness based on those tests. However, the alternate period would not apply to non-payroll costs, which would still be measured for the eight-week period following disbursement of the loan.
  • An FTE is an employee working on average 40 or more hours. The CARES Act requires that a borrower’s forgiveness amount be reduced to the extent that its average monthly full-time equivalent employees (FTEs) during the covered period is less than the average monthly FTEs during either: (a) the period from February 15, 2019 to June 30, 2019 or (b) the period from January 1, 2020 to February 29, 2020, at the borrower’s election, but it did not define “FTE”. The application states that a 1.0 FTE is any employee working 40 hours or more per week on average during the applicable period and any worker working less than 40 hours during an applicable period will be considered less than 1.0 FTE (rounded to the nearest 10th). The application also permits a borrower to simplify its FTE calculation by providing that employees who work 40 hours or more per week count as 1.0 FTEs and employees who work less than 40 hours per week count as 0.5 FTEs.
  • Certain employees are excluded from the FTE reduction calculation. As suggested by previous SBA guidance, the form provides exclusions that will not reduce forgiveness for: (1) positions for which the borrower made a written good faith offer to rehire an employee during the covered period which the employee does not accept, (2) employees fired for cause during the covered period, (3) employees who voluntarily resign during the covered period and (4) employees who voluntarily request and receive a reduction in hours during the covered period, as long as the applicable position was not filled during the covered period. The application also restates the CARES Act safe harbor which provides that for FTE reductions between February 15, 2020 and April 26, 2020, forgiveness will not be reduced if by June 30, 2020, a borrower has restored its FTE levels to the levels in the pay period that included February 15, 2020.
  • Any compensation reductions are based on the employee’s compensation rate. When calculating potential forgiveness reduction due to a borrower reducing the compensation level of employees making less than $100,000 per year during 2019, the application provides that the borrower compares each such employee’s average annual salary or hourly wage, as applicable, between January 1, 2020 and March 31, 2020 to the employee’s average annual salary during the covered period. If the latter is not at least 75% of the former, then there will be a reduction in forgiveness. The reduction amount is the difference between the actual compensation an employee received during the covered period and the compensation the employee would have received during the covered period if the employee’s average annual salary or hourly wage, as applicable, were 75% of what it was during the first quarter of 2020. The application also includes the CARES Act safe harbor for this test, that if an employee’s average annual salary or hourly wage as of June 30, 2020 is equal to or greater than that employee’s average annual salary or hourly wage as of February 15, 2020, then this test will not result in a reduction of forgiveness.
  • The application defines the formula for applying the FTE and compensation reduction tests. To determine potential forgiveness reduction for the FTE and compensation reduction tests, the application provides that all eligible payroll and non-payroll costs are added together, then that amount is reduced by the wage reduction test amount (if any) and then any reduction due to the FTE test is applied.
  • “Covered rent obligation” includes real and personal property leases. In defining non-payroll costs eligible for forgiveness, the CARES Act refers to “covered rent obligation” and defines it as “rent obligated under a leasing agreement in force before February 15, 2020.” The application clarifies that this includes such leases for both real property and personal property.
  • The application establishes documentation requirements. The application also specifies the documents a borrower will be required to submit with the application and the documents a borrower must maintain, but will not be required to submit (see page 10 of the application). Such documents are also required to be maintained by the borrower for six years after the loan is forgiven or repaid in full. It also makes clear that the SBA may request and/or inspect additional documentation in connection with reviewing forgiveness or whether a borrower was eligible for a PPP loan at all.
  • SBA may direct lenders to disapprove forgiveness. While the application does not provide much additional insight concerning the eligibility audits for loans in excess of $2,000,000, it includes the statement that “SBA may direct a lender to disapprove the Borrower’s loan forgiveness application if SBA determines that the Borrower was ineligible for the PPP loan.”

Borrowers preparing an application should review the form carefully as the instructions are detailed and the above bullet points are not intended to replace the form, but to summarize some of the key aspects. There are also some areas that are not entirely clear at this point, such as the requirements concerning “restoration” of FTE employee levels and employee compensation by June 30, 2020, including what will and will not qualify as such. Borrowers should be on the lookout for the additional guidance the SBA will issue, which will hopefully provide further clarity on issues such as this.

As we have seen throughout the PPP loan process, policy and guidance are slow coming, but decisions still need to be made quickly. We at BiggsKofford have correctly anticipated and interpreted the Treasury and SBA’s guidance at each step. The forgiveness aspect of this process appears to be no different in that respect. Visit our COVID-19 Resource page HERE for more information or advice along the way.

THE SBA’S MOST RECENT FAQ CLARIFIES SAFE HARBOR RULES

In the Small Business Administration’s (SBA) most recent Facts and Questions (FAQ’s), updated May 13th which can be found in further detail HERE, clarifies that ONLY loans over $2 Million will need to have further due diligence to verify that the loan was “necessary”.

FAQ 46, which asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?” answers the question as to which loans the SBA will be reviewing for the necessity of the Paycheck Protection Program (PPP) loan.

FAQ 46 identifies, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”

This appears to be the SBA’s way of implying that any PPP loans under $2 Million should be accepted in good faith as “necessary”.

For those client’s with loans greater than $2 Million, the same guidance is still being recommended. Begin gathering documentation that will assist in justifying the “necessity” of the loan and prepare to explain what factors created the “economic uncertainty” that created the need for the loan.

HHS Provider Relief Funds – Automatic Payments & New Application Portal

Medical practices that serve Medicare patients can participate in the Provider Relief Funds under the CARES Act.  HHS provider relief funds were released in two automatic disbursals released on or around Friday April 16th and again on April 24th as automatic payments.

In addition to the Provider Relief Funds medical practices can also apply to either the General or Targeted Funds for additional support.

 

Automated Payments:

The CARES ACT provides for $100 billion in relief funds for hospitals and healthcare providers.  $50 billion of that has been allocated as a General Fund.  The first two distributions were made based on CMS cost report data already on file.  Providers without adequate cost report data on file will need to submit their revenue information to a portal opening this week at https://www.hhs.gov/providerrelief for additional general distribution funds.

 

Additional Support:

If a business feels they have been further impacted and would like to submit a request for lost revenues for additional funding funds can be applied for at https://covid19.linkhealth.com/docusign/#/step/1

A few highlights from the FAQ attached for this application process:

 

Who is eligible to receive additional payments by submitting an Application to the Provider Relief Fund Application Portal? Any provider who has already received a payment from the Provider Relief Fund as of 5:00 pm EST Friday, April 24 can and should apply for additional funding via the Provider Relief Fund Application Portal. 

 

What information do I need to have before I start the application process?

Eligibility – To enter the Provider Relief Fund Application Portal you must meet 2 criteria:

  1. You must have already received a Provider Relief Fund Payment by 5:00 pm EST, Friday April 24th
  2. You must attest to having received the payment via the Provider Attestation Portal, and you must agree to the Terms and Conditions on the attestation portal.

Data – Before you initiate your application via the Provider Relief Fund Application Portal, please collect the following data

  1. The Taxpayer Identification Number for the organization applying for relief funds. (“Application TIN”)
  2. The Taxpayer Identification Number(s) of any subsidiary organizations if and only if those organizations do not file separate tax returns, but rather consolidate into the returns of the “Application TIN”. If your organization has subsidiaries that file separate tax returns, a separate application must be made for each subsidiary that files a separate return.
  3. An estimate the organization’s lost revenue for March 2020 and April 2020. Lost revenue can be estimated by comparing year-over-year revenue, or by comparing budgeted revenue to actual revenue. For April 2020, an estimate of the total monthly loss based on data from the first few weeks in April or by extrapolation from March data is acceptable.
  4. A copy of the most recent tax form filed by the organization associated with the Application TIN.

 

Will I be penalized if I take several days to collect the necessary information? No. We will be processing applications in batches every Wednesday at 12:00 noon EST.   Funds will NOT be disbursed on a first-come-first-served basis, which is to say, an applicant will be given equal consideration regardless of when they apply.

 

What documents do I need in order to begin this process?

  1. TIN that has received prior Provider Relief Fund payments
  2. TINS of subsidiary organizations that have received prior Provider Relief Funds but do not file separate tax forms (i.e., subsidiary organizations that are accounted for in the parent organization’s tax filing)
  3. Amount of payments received
  4. Relief Fund payment transaction numbers / check numbers
  5. A copy of your most recently filed tax forms

 

Additional Resource:

 

Please keep in mind, any providers who receive funds will be required to sign the attestation confirming receipt of funds and agreeing to the Terms and Conditions.   https://covid19.linkhealth.com/#/step/1

 

As many already know, we have new developments regarding the Paycheck Protection Program (PPP) loans and the associated forgiveness aspect. Below is a brief summary of a few of the more recent updates. For more information, please visit our COVID-19 Resource Page.

 

Update 1 – Self Employed Individuals

The SBA provided some much-needed guidance relating to Self-Employed PPP loan applications and forgiveness. Generally, the PPP loan amount is calculated as 2.5 months of average monthly payroll expenses. However, since many Self-Employed Individuals do not have payroll, their loan amount is based on 2019 net profit divided by 12, to get a monthly average net profit. Multiply this number by 2.5 to get the PPP loan amount. Self-Employed Individuals with other employees may also receive additional PPP loan amounts following the same calculations as other businesses.

The forgiveness calculation for Self-Employed Individuals is also different. Instead of spending the loan proceeds on payroll, Self-Employed Individuals get an automatic forgiveness amount equal to eight weeks’ of 2019 net profit. No need to spend anything. This is called “owner compensation replacement”. Mathematically, this is almost 75% of the loan amount that gets automatically forgiven. The remaining 25% of the PPP loan may be spent on utilities, rent, and mortgage interest expenses to be forgiven.

The compensation limit (in this case Net Self-Employment Income) is still limited to $100,000, as with the other payroll calculations in the PPP loan. For Self-Employed Individuals with no employees, the maximum PPP loan is therefore $20,833, with $15,384 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,449 can be forgiven if spent on the approved expenses over the 8 weeks of the PPP.

Update 2 – Is your PPP Loan Necessary?

The SBA has made a concerted effort to show emphasis, and clarification, regarding the certification that “….the loan request is necessary…”. This guidance has been released via the SBA’s Frequently Asked Questions (FAQs), which can be found HERE.

FAQ’s 31 and 37 address the qualification for the PPP loan for private and public companies with enough resources to continue operations without the loan. The guidance set forth by the FAQ states, “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This puts the pressure on each business as to whether or not they feel they can justify the loan.

FAQ’s 39 and 43 identify that PPP loan applications over $2 million will be audited, in addition to other loans as appropriate. This raises the question of what the meaning of the words “necessary to support the on-going operations of the applicant” actually mean. If the loan is found not to be “necessary,” criminal fines of up to $1,000,000 and imprisonment for up to thirty years can be imposed.

The confusion about what “necessary” means is kicked back to the answer that created it in the first place in the April 29th update, and no official clarification has been offered since. Despite the confusion, the SBA has announced a grace-period for businesses that do not “need” the loan—according to the SBA, they can return it by May 14th (extended from May 7) to avoid any criminal consequences related to taking a PPP loan unnecessarily.

Given the uncertainty created by these recent FAQ’s, BiggsKofford is currently advising clients to gather documentation and be prepared to support the reasons for obtaining the PPP loan. For many companies, these reasons are obvious (business was disrupted, closed, etc.). In other cases, “supporting ongoing operations” may mean preparing for a future downturn caused by the economic disruption.

Update 3 – Coordinate with Unemployment

Lastly, FAQ 40 identifies that a borrower may exclude an employee from loan forgiveness calculations if the borrower made a good-faith, written offer of rehire and also documented the employee’s rejection of that offer. The new FAQ, however, warns that employees could be banned from receiving unemployment benefits if they turn down a reemployment offer.

For more information on these topics and updates, or to discuss how to best navigate these circumstances, visit our Resource Page.

A primary aspect of the CARES Act was the Paycheck Protection Program. It is so popular that additional funds were appropriated for it. The essence of PPP is that a business borrows from the SBA based on 2.5 months of last year’s payroll. If it spends the money within eight weeks on payroll and certain other expenses such as rent, the loan is forgiven. Please see our earlier newsletters or visit our website HERE for further background on the PPP Loan or assistance in navigating this process.

Normally when a loan is forgiven, it results in income to the taxpayer. The CARES Act indicates that is explicitly not the case with the forgiveness of a PPP loan. This gave PPP an extra attraction compared to letting employees collect unemployment, possibly supplementing that with relief payments deductible under Section 139 that would not be taxable to the employees.

However, it was identified by some that code Section 265 denies a deduction for otherwise allowable expenses that are allocable to exempt income. The IRS was aware of this and finally provided a ruling in Notice 2020-32 which states:

Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

This reduces some of the incentive to use PPP over unemployment if you really have nothing for people to do. There is the matter of what your future unemployment rate might be, but modelling that is very challenging.

Most likely, this ruling will be challenged in court unless Congress provides clarification. Until that time, the PPP can still be an effective tool to provide some much needed cash-flow even though the full tax impacts may not be hashed out yet.

Visit our COVID-19 Resource Page for more information regarding the PPP Loan forgiveness.

COVID-19 RESOURCES