Looking Ahead – PPP Loan Forgiveness
The Paycheck Protection Program (PPP) application was relatively easy – send the bank documentation, certify the information is correct and that your pharmacy has been negatively impacted by COVID-19, calculate your “payroll costs”, which was anyone’s guess, and complete the three-page application. A simple and easy way to get your hands on some potentially tax-free cash.
Now the hard part begins. How you use these funds and how these funds are forgiven is going to be complicated. The rules regarding forgiveness are not clear. They are inconsistent and vague. Currently, we have more questions than answers. I’m even willing to bet, just like the application process, many banks will end up making their own rules, after all they administer the program. Here are some of the current issues, questions and concerns that you should consider as you start your eight-week journey towards loan forgiveness.
Please be careful, the following considerations are focused towards S and C Corporations, not Sole Proprietors, Sch. C or Partnerships. These types of entities have overlapping guidance, but they do have their own set of regulations and myriad questions outside those in this article.
Borrowers have eight weeks from funding to use the PPP funds for eligible expenses. Eligible expenses include utilities, rent, retirement, group health insurance, interest and payroll costs. We’ll discuss payroll costs separately. There is much confusion regarding these eligible expenses:
- The total forgiveness on the PPP loan will be “an amount equal to the sum of the eligible costs incurred and payments made during the covered period”. This language is confusing to many. For example, is payroll incurred in March but paid within the eight-week covered period in April eligible or not?
- Utilities are defined as electricity, gas, telephone, internet, water and transportation. There is no firm guidance on what “transportation” expense means, at this time.
- Is related party rent an eligible expense? Are other “rent” payments such as leases eligible? Would you be able to prepay July rent even if it is not “incurred”?
- Interest must be mortgage interest paid if you are looking for 100% forgiveness. You can use the PPP funds to pay other eligible interest, it just won’t be forgiven. Not sure why the law was written that way but as far as we know, that is what we are working with.
- Finally, if these expenses are forgiven, are they tax deductible against income or do you have nondeductible expenses? If they are tax deductible and you get a tax-free grant, that would be a very unusual occurrence in the tax world but then again, it’s been a rather unusual 2020 so far.
Payroll costs is the other eligible expense in this program. During the application process, this figure was a roll of the dice until everyone received guidance from the SBA. To summarize, payroll costs begin with Medicare wages, then adjustments need to be made for employees paid over $100,000 on a prorated annualized basis (definition/application unclear here), add state unemployment, add local taxes based on compensation and/or subtract sick or family medical leave paid under the Families First Coronavirus Relief Act (FFCRA). Please note, this is not an all-inclusive list and payroll costs do not include employer payroll taxes and it is not net payroll.
To meet the standards for forgiveness, at least 75% of the PPP funds must be used for payroll costs. When you applied for the PPP, payroll costs included employer paid health and retirement amounts, but it is unclear whether these are included when considering forgiveness. We believe this language will be applied consistently from application to forgiveness. Either way, it could have a material impact on meeting the 75% test.
If you don’t meet the 75% test you will either see a reduction in forgiveness or it may all be unforgiven. We are not sure how this will unfold due to the lack of guidance, but we’ve heard some banks say they will do an all or nothing deal with loan forgiveness. If it is a reduction, which it likely will be, how will that be calculated or determined?
It is suggested you run the calculations each pay period and towards the end of the program to ensure you have the right payroll costs to meet the 75% test. Careful planning will be needed especially considering the $100,000 annualized cap per employee and how that applies, the adjustments for pay under the FFCRA, and other questions regarding forgiveness we touch on below.
Let’s not forget about the loan forgiveness criteria. As mentioned, at least 75% of the PPP funds must be used for payroll costs. Furthermore, you must not reduce your number of staff and you can’t decrease your payroll by more than 25% for any employee that made less than $100,000. If you do not meet these conditions, you may see your forgiveness amount reduced or eliminated, again, we’ll have to wait for further guidance.
Additional questions remain in determining if you have reduced your staff levels. The law uses Full-Time Equivalent (FTE’s) employees to determine this number. The law does not clearly defined FTE’s, although there are standard methods and calculations used to determine this metric. Once you have calculated all your FTE’s over the time periods and pay periods you will be able to elect how you want to apply the metric and then you’ll be able to determine if you meet this standard. It may sound easy, but more guidance will have to be issued to finalize this process definitively.
What if you reduce your salary levels? Let’s just cut to the chase, more guidance is definitely needed.
Documentation will be key. Work with your bank now to determine the criteria they will require; the goal is 100% loan forgiveness. You want the bank to easily understand the manner in which you spent the funds and that you meet the forgiveness criteria. Proactive planning and documenting this process will be critical.
We have eight-weeks to go so be careful, be thorough, do your best and continue to stay tuned for information concerning additional guidance. As leaders in pharmacy accounting, tax and advisory, Sykes & Company, P.A. will keep pharmacies updated as we learn more.