PPP Loan Forgiveness For Contractors: Next Steps Before 2020 Ends

Have you started your PPP loan forgiveness application? Receiving full forgiveness might seem like a fantasy, but with expert navigation of the ever-changing landscape of rules, you can put yourself in a much better position — before they change again.

Watch this webinar to hear from CPA and PPP expert Hannah Smolinski, CEO of Clara CFO Group, how loan forgiveness works for contractors and what steps to take next.

Find out:

• The forgiveness process basics based on entity type
• Top reasons you might not get PPP forgiveness to avoid
• Immediate steps to take to maximize your PPP forgiveness

Don’t forget to subscribe to Hannah’s PPP YouTube channel for in depth videos covering everything touched on here and more.

Transcript

Hannah Smolinski: (00:59)
All right. So thanks so much to level-set for having me today and also for upside financial, who is sponsoring this session. Um, my name is Hannah Smolinski. I am a CPA in Washington state and the owner and founder of Clara CFO group. My company really focuses on helping small businesses with their strategic financial decisions. So we help them try to make, do the best they can with the, with the money that they have and what we’ve really been focusing on and more recently has been helping clients get through the PPP loan, getting the PPP loan, using the money and now applying for forgiveness. So that has been really my focus over the past, what eight, nine months since the, since the cares act came out. And, um, that’s what we’re going to be talking about today. So I just want to thank level-set real quick for that.

Hannah Smolinski: (01:48)
And we’ll go ahead and just get started. So kind of the, where, where I want to start when we talk about the PPP is just remembering, what was the point? What was the point of the paycheck protection program? Well, it was all about trying to keep employers, keeping their employees on payroll. So we want to keep people employed. Um, when coronavirus hit, there was a big, um, just a spike in unemployment. People were getting laid off. And, um, I think the government really saw that in order to keep employees employed, they were going to need to provide some funding. So that is all what the PPP program was really all about. And it’s important to kind of keep that in mind because when we go through applying the rules and the guidance of the PPP, we really sometimes have to go back to like, what was the intention of the rule?

Hannah Smolinski: (02:36)
D does this achieve the attention intention of the rule? And if it does, usually we do have to apply some just basic logic to our decision-making around forgiveness. Um, so just a couple of the basics about it as we’re growing. And you’re thinking about applying for forgiveness, the loan needs to be used at least 60% of the loan needs to be used for payroll costs. And then up to 40%, the other 40% can be used for non-payroll costs. Um, so that changed from the original. If you originally got alone, you might have seen that you needed to use 75% and 25%, but when the flexibility act was passed in June, they changed this to, so they lowered the amount that you needed to use for payroll. So now it’s 60 40, um, and that’s at least 60% for payroll cost. Okay. If you use a hundred percent for payroll, totally fine.

Hannah Smolinski: (03:29)
Um, and then the other thing that the flexibility acted, which is pretty interesting for everybody, and you should know about is that you now have 24 weeks to use the money. So when you got the money, um, you have 24 weeks after that point to spend all of your PVP money. So I thought I’d just go into kind of recount recapping what counts as payroll costs, because, um, this there’s lots of little nuances here, and this is obviously where we need to be spending the majority of our money. So there’s lots of things here we should try to cover. Um, the first thing I just want to bring up, because I’m noticing this with some contractor clients and people that I’ve talked to, um, is that the, the money needs to be spent for employees. So employees are, you know, your people that you’re actually paying W2 wages to now in the contracting industry and in construction, oftentimes there’s subcontractors and there’s independent contractors, and there’s other people that you might pay and you consider labor costs, but all those people can’t be included in payroll costs for the purposes of PBP, unless they are truly employees.

Hannah Smolinski: (04:39)
So I wanted to make sure that that was really clear. And then, um, we get into what, what actual compensation can be included so we can include cash compensation to your employees. So this is includes your hourly salary wages, um, like your hourly wages that you pay, or if anybody’s on salaries, this can include bonuses, tips, and any type of cash stipends you might give to your employees for, for maybe some like fringe type benefits. Like maybe you give your employees a healthcare, a stipend, or something like that, or even a gas stipend or something, um, that can be included as cash compensation. You can also include retirement contributions, the employer side of their retirement contributions, and then also employer contributions to healthcare, as well as employer contribution or employer, state, and local taxes that need to be paid on payroll. So things like unemployment insurance through your state, that would be, um, a cost that’s includable under payroll costs.

Hannah Smolinski: (05:39)
So a couple of things that might not be included, uh, that you need to be aware of is any salaries or wages that you are paying to employees where their annualized salary is over a hundred thousand dollars. You can’t include that part. That’s over a hundred thousand. So all employees need to be capped at a hundred thousand dollars cash compensation wage limit, essentially. And then you’re also not able to include federal payroll taxes. So your FICA and Fuda that you are always paying, the employer has to pay. You cannot include those for the purposes of PPP, as well as workers’ comp insurance. So for whatever reason, we don’t know why the workers’ comp insurance, um, has never been included specifically as a payroll cost under the PPP guidance. So that’s a huge thing for people in the construction industry. So I wanted you guys to know about that and until we get further guidance saying that it’s allowed, we have to, um, we have to leave it out for now.

Hannah Smolinski: (00:00)
Care or whatever it might be. If those are paid out in cash, on your payroll reports, those can be included. You can also include employer contributions to retirement plans and healthcare plans, just the employer portion. Remember, and then also state and local yeah. Taxes. I would say that. Um, yeah. And that’s the state and local taxes you’re paying as an employer now, I think just as important as what important as what you can include is also what you can not include. So I’m going to go over that real quick. Um, one of the things I think will be really important for contractors is that so far workers’ compensation insurance, which I know that you guys have rates that are really high for some reason, that is not included as a PPP payroll cost. So want to make sure you guys know about that? Um, additionally, federal payroll taxes can not be included.

Speaker 1: (00:50)
Um, they’ve decided that that money needs to be that money. I used to be going to help pay for all the programs, um, and then cash compensation for anybody on your team or anybody on your payroll that is over a hundred thousand dollars annualized. So if you pay somebody more than a hundred thousand dollars over the year, you have to cap all those salaries at a hundred. So that’s just something to keep in mind. Um, so those are payroll costs, and honestly, I’m going to go back to payroll costs real quick, honestly, with the new 24 weeks, that a lot of people are with the 24 week period that you have to spend this money. A lot of people are going to be able to apply for forgiveness, just using these payroll costs. And that’s totally okay. So if you don’t want to go and try to find all your utility bills and all of that, that’s totally fine.

Speaker 1: (01:39)
You can disregard that if you can come up with a hundred percent of your PVP money that you’ve used it for payroll costs, um, that happened, especially for people who got there, the loans originally, they thought they had eight weeks to spend the money. So they were trying to spend it. And then all of a sudden this rule came out saying, no, nevermind you have 24 weeks. Now you have 24 weeks to come up with these costs. So now most people, what I’m seeing as I’m helping people through forgiveness, I’m seeing that most people can prove out a hundred percent of their PPP loan just with the money they’ve spent on payroll costs. And that it’s totally okay. You don’t have to include the ones that we’re about to talk about. Okay. So, but if you don’t, for some reason, let’s say that you did not have enough payroll costs to come up with a hundred percent of your PPP loan.

Speaker 1: (02:27)
You can use, you can spend money, use PPP money and get forgiveness for these other costs. So, um, the first one that I thought would be really interesting for contractors is that you can include mortgage interest, but this is not just mortgage interest, like on a home or a property. This could be including any interest for a secured loan. So if you have loans on equipment, let’s say you have equipment that you own for you industry and for your business, that interest portion can be included for the purposes of the PPP. Um, also if you like own land or anything like that, you could also include that interest. It just has to be a secured loan. So it’s collateralized with something that you own for the business, or you can also include rents, rent, payments, lease payments either one and then utilities. So this is your typical like, um, electricity, uh, phone, internet, that type of thing.

Speaker 1: (03:23)
Okay. Now the important part for all of these costs is that they are not new after, after you got the PPP loan. So they had to be in place as of February 15th, 2020, because the PPP was really meant to try to maintain status quo. They weren’t, once you wanting you to go out and like get new costs onto your P and L. Okay. So they’re saying if this was in place as of February of 2020, and you were paying it during the covered period, you can request forgiveness for those mounts. Okay. I know there’s going to be questions. I’m seeing them come up, but we’re going to, we’re going to save them. Um, all right. So timeline, uh, this, I kind of thought it would be good to just kind of break this out visually because I got kind of confused and I think more and more people were confused as time went on about, you know, 24 weeks, 10 months loss, everything starts to get a little bit confusing.

Speaker 1: (04:19)
So we broke it out for you guys on this slide. And, um, the really kind of key points that we want to start everything with is the date of disbursement. So this is the date you got the money put into your account. That is the date that you’re covered, period starts. So that’s when you can start spending the money. And then when, if you got your loan originally, you thought you had eight weeks to use the money. You can still apply for forgiveness using this eight week period, if you want to. But everybody, all loans were defaulted into the 24 week period after the flexibility act was passed, which was in June of this year. So everybody has 24 weeks that they can use to spend this money. Most people will use that time period. There are some people that it makes sense to use the eight weeks, especially if you maybe had to close your business or, um, you had to lay a lot of people off maybe in July or something like that.

Speaker 1: (05:15)
It might make more sense for you to use an eight week time period. Um, but after the end of your covered period, you have 10 months to apply for forgiveness. So that’s a long time. I mean, for most people, I don’t see the reason to wait that long. I’m actually encouraging people to try to apply as soon as they can. Um, but this, some people have been worried about that because some banks are not taking forgiveness applications yet. And I just want to calm some fears. It’s okay. You have time. So don’t worry too much about that right now. Um, do you keep in touch with your bank? See what they’re saying? See when they’re opening their portals for forgiveness, but you do have some time. All right. Now, once the, once you apply for forgiveness, we’re going to go down to the second timeline down here, the date of your forgiveness application.

Speaker 1: (06:04)
You’re going to submit that to your bank and then your bank can hold onto it for up to 60 days. They have 60 days to review your paperwork before they send it to the SBA. So they review it and then they send it to the SBA and then the SBA will look over it and, and come up with a final forgiveness number. Um, now what I’m hearing from people right now, the SBA can hold onto it for 90 days before they have to make a determination. What I’m hearing right now, though, is that the SBA is turning these around pretty quickly. So, um, I’ve heard as little as three days, which w which is pretty amazing. Um, now that’s all going to be based on capacity. So the more applications that go in, you know, the longer they’re going to have to process through, but they have up to 90 days, but it does sound like they’re trying to get those out as quickly as possible.

Speaker 1: (06:50)
So once the SBA approves the forgiveness amount, then they’re going to fund your bank. So if your PPP loan was a hundred thousand and you know, it’s determined that $90,000 of it is forgivable, then the SBA will send that $90,000 of cash to your bank to pay off your loan. And then your bank will let you know, okay, there’s $10,000 left that you now need to start repaying on, but you don’t have to start making payments until you get this forgiveness determination. Okay. Um, some banks I’ve been hearing just a little bit of like maybe PPP gossip for you. Um, some banks are trying to get payment on PPP loans right now. And, um, you actually legally do not have to make any payments. So please just kind of stand your ground on that. And, um, you know, if we need to find the guidance and send it out, we can, but there’s actually no requirement for you to pay on your PPP loan until you get a forgiveness determination, or excuse me, or you’re past this tenant months timeframe.

Speaker 1: (08:00)
Um, if you get after 10 months of your covered period, then payments would kick in. Um, but usually people are going to have a forgiveness determination way before that. So just something to keep in mind. All right. So kind of some of the top concerns that I’ve been seeing, um, from people, contractors, people in the construction industry overall, um, is a few things we’re going to go high level, and then we’ll dig into each one of these. So a lot of people have gotten too much money and, or George’s the wrong amount for, of their PPP loans. We’re going to talk about that. Another thing that has happened is some people have been really unclear on how this affects their taxes. We’re going to touch on that. Um, we’re going to talk about owner’s compensation because when everybody first applied for the PPP loan, there was no documentation around how owners would be treated.

Speaker 1: (08:51)
And then now, um, the last one is that we’re going to talk, which application to use because we have three forgiveness applications. And those are also confusing everybody because they are confusing. So let’s get in. Um, so what if you got too much money, um, people were getting too much money or just the wrong amount of PPP. So then they’re trying to spend it and then more guidance has come out. And then they said, well, this is not what I should have gotten. Um, when, when the banks were first accepting applications, many of the bankers, the individuals did not know how to guide people in requesting the right amount. So it was kind of up to the borrower to read guidance and apply for the correct amount of money. Now, the timeline on all of that, if we think back when the cares act happened, and then when the PPP applications opened up, it was a super short timeline.

Speaker 1: (09:51)
So if you were in that first or even the beginning of the second round of PPP funding, there was so much misinformation happening. A lot of people were applying with independent contractor wages in payroll costs, and then a lot of people were, um, using the wrong numbers from tax returns to be able to apply for these loans. So, or tax returns were not even finished because we were talking about applying in April and some people aren’t doing their tax returns until September. So we were, we were getting a lot of wishy-washy numbers that, um, was really just a struggle. And so there were a lot of loans that came out that, you know, maybe were the wrong amount. So if you did get too much money, the good news is, is you now have 24 weeks to spend it. Um, where, when you originally applied, you only had eight weeks.

Speaker 1: (10:40)
Um, so far there has been no requirement to send back additional money. Even like, let’s say you should have gotten 50,000 and you got 70,000 instead. There has not been any requirement for you to go back and send that additional like 20,000 back to the bank now, but with this new 24 week cover period, you now have additional time that you can spend the money. And I do want to tell you guys too, that when you spend your money in this time, there’s two ways you can spend the money. You can either pay it out with cash and you can also incur it. So this helps you kind of stretch the boundaries of the covered period a little bit. If you let’s say you got money on May 1st, that’s your, the beginning of your covered period and your payroll was paid out May 5th for April labor.

Speaker 1: (11:31)
You can include that in the PPP because you paid it out in cash. And then on the end of that, let’s say, September payroll wasn’t paid out until October after your covered period ends, you can still include that because it was incurred. The labor was incurred during the time period. So this allows you to kind of, um, you can do this with utility bills as well, utility bills and rent. So let’s say your rent was in September, but you didn’t pay it until a couple days after October. Um, but in your covered period was over. You can also include that portion and you can prorate that as well. So if you’re covered, period ended halfway through the month, you can prorate a portion of your rent or your utilities. Now that’s a way for you to kind of stretch the money a little bit more and maximize your PVP forgiveness.

Speaker 1: (12:22)
Okay. Now, um, the tax effect of the PPP, you may have heard that it’s not taxable income and that’s correct. So it does, it’s not going to show up on your P and L when you’re looking at your profit and loss statement, it’s not going to show up there as PPP income up at the income line, because that’s not how the IRS has decided to treat it. And that’s how, that’s what the cares act said, that it’s not taxable income. However, the IRS has come out to say, if you get these expenses forgiven, then those expenses that would otherwise normally be tax deductible are not tax deductible. So what that practically means is that if you had a hundred thousand dollars in payroll costs that you believe you’re going to have forgiven or has been forgiven, you have to essentially remove that a hundred thousand dollars off of your expenses for your business.

Speaker 1: (13:16)
So this can have a big impact for a lot of small business owners. Now, a lot of people in this industry, um, and across the board across America have experienced losses this year. So if you’re taking out expenses related to the PPP, some of that is just bringing them back up to break. Even some of that is putting them into a profitable position where then they’re going to have to pay out some taxes. And then for some people, I mean, I know I can’t hire a contractor right now to save my life. So, um, some people are really busy. So if your business is booming right now, and you are very profitable, you do need to take that into consideration because, um, you are going to have additional tax liability because you were getting PBP money forgiven. Okay. So just keep that in mind. I like to estimate about 25, 20 to 25% is kind of the, the estimate that I do.

Speaker 1: (14:09)
So if I had a hundred thousand dollars loan and a hundred thousand dollars of forgiven expenses, then I’m going to estimate somewhere around a 20 to $25,000 tax effect from that. Okay. Um, I would say, uh, that is something that you want to talk over with your CPA, or whoever’s doing your taxes as soon as possible, uh, because this is kind of a big issue for tax planning and making estimated tax payments for the 2020 year. Um, another thing that I want to bring up is the concept of owner’s compensation. So going back to like the original part of the original intention of the PPP rule was that it’s to keep employees employed. Um, but they also realized that keeping owners paid is also very important because we can’t go out as owners and go and get, um, you know, unemployment insurance, the way that our employees might be able to, if you were to lay them off.

Speaker 1: (15:06)
So, um, we, so they did allow owners to take compensation under the PPP, but they didn’t want owners laying off all their employees and then giving themselves big bonuses and saying, okay, yay. I got, I used up all my PPP money on payroll costs. Um, so in order to avoid windfall to the owners, they have put in some restrictions on owner’s compensation, the, they have done this by saying, okay, essentially, whatever your owner’s compensation was in 2019 is kind of the limits of what you can take in 2020. So this is based on tax status and how you’re taxed. So if you are a schedule C filers, or if you’re a sole proprietor or you’re taxed as a sole proprietor, then you take your, take home, pay out of the profits of the business, the net profit. Um, you’re going to look at 2019 net profit to help you determine how much you can take in 2020 under the PPP.

Speaker 1: (16:06)
Um, and if you’re using the 24 week time period, you can take two and a half months of compensation. Okay. Unfortunately, we’re not allowed to be treated similar to like employees where we could take 24 weeks of compensation. Our compensation is kept okay as owners. Uh, now another thing, and this, if you’re a C Corp or a S-corp and you pay yourself on a W2 wage, then you would look at your 2019 W2 to help take that, make that calculation. And this is a concept too, that I have a full video on it is it gets a little bit detailed with some numbers. So I like to put in a spreadsheet and just kind of go through all of it. So if that’s helpful to you definitely check out that video, um, owners that have less than 5% of owner ownership are treated like regular employees.

Speaker 1: (16:54)
That’s the one little caveat there. Okay. So using the right forgiveness form, there have been three forgiveness forms that have put, been put out and it started with a 35 Oh eight and then everybody saw it and they said, wow, this is so confusing. This is like way overkill. So then they came out with the easy form, which was easier for sure. Um, but it still was complicated. And then they came out with the 35 Oh eight S so the 3,508 S is the newest form. And this is for people who have PPP loans of less than $50,000. Um, if you have a PVP loan of less than 50,000, this is a benefit to you. It doesn’t mean that you have blanket forgiveness on the loan. You don’t have to document anything. That’s not what it means, but it does. The form is very much simpler to fill out.

Speaker 1: (17:47)
And it also doesn’t make you prove out any head count differences. Okay. So it kind of gives you a little bit of like blankets safe Harbor is what I like to call it. Blanket safe Harbor for if you had to, um, change your full-time equivalent head count. Okay. So if you can use the S forum, you should use it because it is way simpler. So definitely check that out again. I have videos like a couple of videos on the S form. Um, the easy form is a little bit like if you can’t qualify for the S then you want to see if you can use the easy form. And the easy form says, Hey, if you, uh, didn’t reduce your wages by more than 25% of your employees, and you didn’t increase, reduce your head count, then use the easy form. Or if you didn’t reduce your wages by more than 25%, and you were affected by some type of government shutdown because of COVID and you had to comply, then you can use the easy form.

Speaker 1: (18:46)
Um, and this would be, you know, maybe if you were considered non-essential and you weren’t able to operate your, your typical business means you go into people’s homes, but you were not allowed to go into people’s homes. Um, then that would qualify as a shutdown. Now you want to document that and like who it was that shut you down so you could not operate. Um, but in those situations you can use the easy form. And if neither of those apply to you, you would use the full 35 Oh eight form. And there are still certain like safe harbors you can do to help you. Um, you know, still not have to worry about your reduction and your PPP amount, but it does take a little bit more effort to fill out the 35 Oh eight.

Speaker 1: (19:30)
All right. One thing that I really want to just like stress to everybody is that documentation is going to be really important when it comes to getting forgiveness. Your bank is going to be asking for documents. They’re going to be asking for things like payroll reports. They’re going to be asking for, um, federal tax returns and state and local tax returns for your quarterly employment taxes. They’re going to be asking for any statements of any type of expense that you are trying to ask for forgiveness for. So, you know, think of this almost like you’re getting an IRS audit and think of it like that. Like, you’re going to have to save receipts. You’re going to have to like, prove out your expenses and you need to hold onto this documentation for six years because the SBA can come back couple of years down the road and ask to see your documentation similar to what the IRS can do on your tax returns.

Speaker 1: (20:24)
Okay. Um, so I would highly recommend saving anything you possibly can around the PPP. And then if you are proving out your head count reductions, please be sure to get any type of documentation around why an employee left if they left on their own, because they went and got a new job, save that documentation if they left, because, um, they just wanted to stay home and help out around the house, like save the documentation around that, whatever you can, if that’s an email, if that’s a text message, if it is, you know, a phone call that you documented, like make a note and document all of that, um, and save it into a file somewhere. That doesn’t mean the bank is gonna want to look at it, but you want to have that just in case the SBA comes back down the road and they want to see like, Hey, I heard, you know, these three employees left and you said that you didn’t have any employees leave.

Speaker 1: (21:20)
So what’s the deal with these people and you can come and you can prove, well, these three people left voluntarily, and this is exactly what they told me on these dates. And then you have proof and you have, you can cover, cover your bases in that way. Okay. Um, really documentation is all about just kind of, um, prepping for the future and just, you know, kind of saving, saving yourself from worrying down the road. Um, I, right. So as you guys know, like PPP has been changing. I mean, we originally had the cares act and then there was a whole new act. The flexibility act was passed and then, you know, additional rules came out and this and that. And so I would say, you know, we still have to keep our ears out on this. I think for the next year, there still could be some things shifting around the PPP.

Speaker 1: (22:10)
Um, we also have this looming unknown of a new administration and a potential for a second stimulus package. So we are kind of just sort of waiting to hear if that’s going to have any effect on PPP. Uh, there’s been lots of talk about blanket forgiveness for loans under a certain amount. And we don’t know, we just don’t know that could be involved in the second stimulus if there is one could not be. So it’s just something to kind of keep your, keep your eyes out for, if you do have a loan over $2 million, which is kind of rare, but if you do, there is a new form that just came out a couple of weeks ago, um, on that piece too. So something to think about what else could change. I mean, we still don’t know we’re getting these new forms that come out where she was trying to keep up with the SBA as best as we possibly can.

Speaker 1: (22:58)
So really, it’s just a matter of like trying to keep your ear to the ground and staying as like aware of things as you possibly can. In my opinion, I feel like if you look at your, your expenses and you feel like you can get a hundred percent of your loan forgiven, I don’t see any reason to wait for a potential stick is second stimulus, or to wait for blanket forgiveness, because if you’ve done the due diligence of spending the money, the way that you should have, and you know, you can get forgiveness for it. There’s really no reason to be waiting on this. So when it comes to actually applying for forgiveness, if you do feel like you need help, because guests it’s complex and maybe you don’t know where to start, or maybe you do know where to start and you just have some questions, there are some options.

Speaker 1: (23:43)
Um, you know, you could go and kind of be your own expert. All of this information is available on the treasury website. So you could go and read all the guidance. Um, you could rely on your bank for some assistance. I would say that more often than not, I’m seeing the banks be the least helpful, honestly, of everybody that I’ve run into. Um, you occasionally get a very helpful Baker, but you might start there and see kind of what their reactions are and whether or not they’re going to be helpful to you. Um, you can consider outside CPA firms and consulting companies like mine. Um, we do PPP forgiveness. Um, the, the deal with that is usually it’s more expensive on an hourly basis. And then we have upside financials pro-advisor service. So this is an awesome option for people who are looking for flat rate forgiveness, regardless of your loan size, and still want to actually be able to talk to people and talk to PPP professionals to help on their forgiveness. So definitely something to check it, check out if it’s, if you’re wanting actual help on your loan. Okay. That was a lot, but I think, um, we covered a lot. Are we ready for some Q and a,

Speaker 2: (24:59)
Uh, thanks. You have a lot of questions. Um, and, uh, so I’m going to do my best to try and weed out, anything that you touched on, but even, I can’t remember everything that you touched on. So some of them may be a good refresher for all of us. Um, I’ll try my best. We have, uh, quite a few questions. Uh, one thing I know 1% of the question that around the idea that anything below $150,000 there was going to be a blanket forgiveness, is that, is that no longer true?

Speaker 1: (25:32)
That was, um, proposed as part of that second stimulus package. When I, I believe that Democrats had that in their original, well, they’ve had it in there, I think for quite a while. Um, I can’t remember where that’s come up, but all that to say it’s not actual legislation. So if you’re hoping for blanket forgiveness, we don’t know that it’s going to happen. It’s up in the air.

Speaker 2: (25:59)
Okay. Thanks for a sole proprietor. Are they absolutely required to go by their 2019 tax return for forgiveness purposes? The context is what, what would happen if the forgiveness decision doesn’t take place until 2021, could the normal expenses be written off as usual, and then take that loan forgiveness be taken into account in the 2021 tax per year?

Speaker 1: (26:26)
I don’t think so. Um, I think the whole point of going back to 2019 is to say, we’re trying to keep people at status quo for 2020. Um, so if you had, I mean, if you got the money in 2020, and then you were making different decisions because you had the PPP loan, they’re really trying to kind of get a baseline of, you know, before COVID, what was it looking like?

Speaker 3: (26:53)
Okay.

Speaker 2: (26:55)
Another good question. Uh, when you talked about how you can use some prepaid expenses to enroll those into the forgiveness period, would that also be applicable to prepaid rent plans for rent forgiveness?

Speaker 1: (27:10)
Yes. You can prepay rent. Um, I think there’s a limitation on how much prepaid rent you can do. So that might be a good one to kind of follow up on and get some actual, like, hard numbers on that. Um, I know you can definitely pay, like if you’re covered period ended September 30th, you can definitely prepay for October. I don’t think you can pay much more prepaid for much more than one month though. So I feel like we’d have to kind of clarify that piece.

Speaker 3: (27:40)
Okay.

Speaker 2: (27:42)
Let’s see. Another good question. Uh, there’s there’s been a lot of questions on, uh, ownership, con compensation. I think you addressed most of them, but one person did ask how employee stock option plans or stock ownership plans are factored into ownership con compensation.

Speaker 3: (28:04)
That’s a good question. I actually don’t know the answer to that so we could look that up. Yeah,

Speaker 2: (28:15)
Yeah. I thought it was, that was a good one. I had

Speaker 1: (28:19)
To stump me with.

Speaker 3: (28:21)
Yeah.

Speaker 2: (28:23)
Um, just for clarification, did you mention if worker’s comp insurance costs can be included as well?

Speaker 1: (28:30)
Yeah. I, I had searched for this because I think it’s a legitimate cost that should be covered by the PPP, but, um, it has not been specifically included as a cost.

Speaker 3: (28:43)
Okay.

Speaker 2: (28:45)
We had another question in regards to, if the forgiveness doesn’t happen, doesn’t happen until 2021. So I’m just going to encourage everyone to attending, to follow up with Hannah. If you want to dig a little bit deeper into this specific topic, um, on the forgiveness not happening until 2021 and how you would, how you would take the associated expenses and their deductability or non deductibility.

Speaker 1: (29:07)
Yeah. I would say quickly to that. Um, the IRS just came out on another, another rule specifically around that. So I’m actually going to be doing a video specifically for that topic. Cause it’s kind of a hot, hot button right now.

Speaker 3: (29:22)
Yeah. Okay. Let’s see.

Speaker 2: (29:28)
I think you touched on this, but in regards to the easy form and box to the context is if, if one were to offer to rehire an employee that turned that and they turned that down because of, um, they, they have to stay at home and, and be the family caretaker. How does that specifically need to be documented in reference to box two on that easy form?

Speaker 1: (29:53)
Yeah. Um, I’ve, I’ve wondered a lot about like voluntary, cause I would consider that if somebody chooses to stay at home, that’s considered like a voluntary reduction of head count, right. They chose to reduce their own job, not the employer doing their work. Um, I would just keep that documentation. And if it’s a, if it was a formal email that the employee set out like work, you offered to bring the person back. Like maybe if you let them go and you offered to bring the person back and they said, sorry, no, I need to be at home. Um, you would just keep that documentation if it, if it is an email that’s okay. I mean, emails are kind of how we’re communicating these days. So I think that’s probably the best form we can have. Just, you want to get something specifically from the employee saying what it was notes to your HR file are not as good as evidence as an email coming from that employee directly.

Speaker 2: (30:54)
There’s a lot of sole proprietor questions. And one is you, you had mentioned that rent forgiveness is eligible or rent expenses are eligible and forgivable expenses. If someone works from home or uses their home as an office, how are those different forgiveness is taken into account?

Speaker 1: (31:16)
Yeah. Um, I would say, first of all, if you’ve got your correct loan amount to begin with, then you won’t have to take any, um, any home expenses. You won’t have any money left because if you apply with two and a half months of payroll costs, you will take those same two and a half months and you won’t have any loan amount leftovers. But if you got a loan that was too big and you’re trying to kind of come up with some extra expenses, um, if you take your home office deduction on your schedule, like if you were taking it on your schedule C you’re taking it for your business tax return, you can take a portion of those expenses prorated, but really by the time you take out rent, which really, if you’re doing home rent, I don’t, I don’t think you can usually claim that on your schedule C but if you are taking like mortgage interest and you’re taking some utilities and you’re doing all that, and you’re coming up with, um, you’re coming up with your home office deduction, you can take a portion of that, but it starts to get so small that it almost, and it’s really hard to prove.

Speaker 1: (32:20)
Like, cause then you’ve got to pull all of your documentation from the different things. You know, you have to see if that dollar amount is going to be like worth trying to claim. Um, I would look at maybe utilities. Now, one thing that you can claim for, um, on under utilities is transportation costs. So there’s, um, you can actually, I was, I think I even like grabbed the text from it, but you can, if you are using gas to operate your work vehicle, that can be included as a utility cost. So that right there could be huge for a lot of people who are operating out of their trucks.

Speaker 3: (33:01)
Okay.

Speaker 2: (33:03)
This, I remember getting this question back in the original PPP webinar that I did and it wasn’t, I can’t remember the answer, but our union health benefits eligible expense lists,

Speaker 1: (33:15)
Um, union health benefits. So is the employer, if the employer’s paying into union health benefits, I would think yes. Cause that would be employee healthcare costs, right?

Speaker 3: (33:28)
Yeah.

Speaker 1: (33:29)
I think you would just want to show like what the obligation is. Um, if you have some type of like rate that you pay per employee or something like that, you’d probably have some type of statement, you know, save all of that documentation, but that if that’s essentially providing healthcare for your employees and yes.

Speaker 2: (33:48)
What about this around utility? Uh, does this include cell phone utilities? Like w how, how liberal are utilities as a forgivable expense or the, is there any guidance around what that actually would, the definition is

Speaker 1: (34:04)
They say phone, they say phone. And so, I mean, I think, I think it was a little bit of an oversight, um, from the SBA. I wish they would come out with really specific guidance on what’s included for utilities. Um, I mean, it would be all the typical things you’d be thinking about, you know, your electricity, your gas, your, um, phone internet, um, cell phones have been a gray area, but I mean, in my opinion, I feel like they should be included because that’s how people are operating their business these days. You know, it’s not like we all have landlines anymore, especially if you’re operating out of your truck and you’re going all around. And like, you’re always mobile. You’re not going to have a landline. You know? Um, so phone has been specifically included in the text. So my interpretation of that would be that cell phones should be included, um, that might actually come down to your bank or the SBA making a final decision on that. Now I would say like, what I try to do is I try to get as much forgiveness as possible on the clearest things that are no-brainers. So payroll costs, you know, all those payroll costs that we went through. Like, those are no brainers, no problem. The smaller you get into these non payroll costs and you get down into utilities and the nitty gritty, if you really have to go there, like you can try to include it in your forgiveness past package, but try to get at these other ways first.

Speaker 2: (35:29)
Yeah. That makes a lot of sense. Is there a maximum amount that a company could have received in order to still use the 35 Oh eight easy form?

Speaker 1: (35:39)
So I have been looking for that because I have a borrower I’m working with has a large loan and I have found no documentation with a limit. So even, even people over $2 million loans, which have a lot of restrictions on them and they’re going to have a lot of scrutiny. Um, they technically, there’s no rule that they can’t use the easy form if they can qualify using the, you know, the safe harbors and check those boxes.

Speaker 2: (36:08)
Does, does the inclusion of state and local taxes mean the inclusion of state unemployment obligation?

Speaker 1: (36:17)
Yes. Yeah. So in, in that, that goes to like the worker’s comp question again, cause some people have state sponsored or like state workers’ comp programs, you would have to leave out that workers’ comp I wish they would take it.

Speaker 2: (36:37)
There’s there’s a ton of questions still around owner’s compensation. So I’m asking very specific one, if you’re an LLC falling into an escort, a schedule K the owner’s income that is on payroll is part of the total payroll costs. Is that correct?

Speaker 1: (36:54)
Yeah. So what you’ll have to do what I’ve been seeing banks do when you go to apply for forgiveness is they want you to pull out owner’s compensation as a separate line. Um, so they’re going to ask for specific documentation. So they’ll ask for the owner W2, um, and ask you to back that out of payroll costs. So ultimately we’ll all get rolled back into payroll costs, but you’re going to, when you go to actually apply for forgiveness, you’re probably going to have to separate it out and just prove it out separately.

Speaker 2: (37:28)
And we had someone who missed the, uh, payroll forgiveness section, uh, just to confirm that federal tax withheld from the employee is forgiven, but the company portion is not, is that correct?

Speaker 1: (37:40)
Yeah. So we go on gross wages. So the gross wages before all of their deductions, you know, so that essentially that covers their employer or employee federal taxes. And it includes the employee, you know, healthcare side of things. It includes their retirement. So we go to gross wages. And then from there you add the employer stuff.

Speaker 2: (38:06)
Okay. Sorry, I’m just scrolling through. They’re almost coming in faster than I can. I can monitor some. Yeah, I appreciate everyone’s patience. Um, let’s see. Okay. We touched on union, um, just to give me some airspace, we touched on union benefits, but what about, uh, union pensions?

Speaker 1: (38:29)
Um, you know, I had, I don’t have any clients with union dues, but if it’s, is it matching some type of contribution typically to, for the, I mean, it’s a retirement plan and then it’s employer contribution into a retirement plan. Yes. Yeah. The union would make it any different, you know?

Speaker 2: (38:50)
Yeah. I think, and it’s probably good for you to touch on this. I know that a lot of the SBA and treasury guidance has been very far from specific. So maybe you can touch on how a lot of these things it’s really helpful to get someone like you or guidance or anyone’s guidance, because a lot of these things are very opaque and not really specific. So there’s a lot of stuff that it comes down to interpretation.

Speaker 1: (39:16)
Yeah. I think that’s one reason why, um, it is kind of good to just kind of start with that high level and then kind of filter it through, well, what is the intention of the rule? Is this expense going for the intention? Like if it’s helping keep employees employed, if it’s helping them get their Purell costs and helping them keep health care and like keeping them at status quo, then to me, that’s, that’s pointing to, well, it’s probably, it’s probably, um, a allowable expense, especially around funeral costs.

Speaker 2: (39:52)
Can you touch on the, um, the timeframes and the counting mechanisms for employee head count? So if you have some, some turnover you were able to rehire different people, just touch on again, that process of voluntary people voluntary, voluntarily leaving, and then you rehiring or not being able to, and how you document those changes in head count on a number basis, even if it’s different people.

Speaker 1: (40:22)
Okay. Yeah. And we’ve got like a good little video clip on this too, but I’ll touch on. I’ll kind of go high level and if somebody wants to go deeper, they can find it. Um, we’ve got so, um, when we’re talking about head count, let’s say you’re using the 35 away because you can’t, you can’t use the other forums. And you’re trying to prove out the fact that your head count was reduced, but you feel like you, um, you still were using the funds how they’re supposed to be used. So what happened is a lot of people let people go in March and April before they got PPP money. And then once they got PPP money, they were like, Oh, we need to bring people back. And a lot of times they were offering people jobs. And because we had a very lucrative unemployment system happening, we had people refusing jobs or just not responding or, um, you know, maybe not able to rehire the positions that they really were trying to fill.

Speaker 1: (41:19)
So because of those reasons, um, if, if the employer has made good faith offers to rehire a position and there was a rejection or refusal or a non-response, then that FTE can be exempt. So they’re basically saying, Hey, you did your due diligence of trying to get this person back on payroll. And if you did, and they refused, then that could be exempt. And also if you try to hire for a position, so say you let people go and then you were like, well, I can’t get those people back. So I’m trying to hire three more people over here. And you were not able to find people suitable, like if they were, you know, didn’t have the required skills. I mean, this is an in industries where like skills really matter and you weren’t able to hire people at the proper skill level then, um, then that’s also a head count that you don’t have to restore.

Speaker 1: (42:11)
That’s an exemption now to document that you need to make sure that you put out, like you keep any, any documentation that you sent out to offer those positions. And then if you were doing any job search, save those job postings. And like, even, you know, if you put it out on indeed or Craigslist or whatever it is, wherever you’re looking for people, you know, you save those job postings and, um, you know, document, Hey, I interviewed these 20 people and nobody satisfied the position. Um, that type of stuff would help you just build that case file to show like, Hey, I was really trying to do the right thing here, and I could literally not find anybody to fit the need. Um, additionally, if somebody leaves voluntarily or if they were terminated, terminated for, cause say they never showed up to work. Like that’s, that’s a fireable thing, right. If they just never showed up, you’re not just going to keep them paid. So if they were terminated for, cause you just want to also keep documentation around that, um, when they didn’t show up why they were fired, how it, how it violated your policies, et cetera,

Speaker 2: (43:20)
Got a lot of escort questions. Um, I, I think I’m going to try and can bring a few into one question. Um, so if in an S-corp structure, the owner’s included on payroll for basic annual wages. Uh, the first question being, how is that treated? And then the follow-up question is how would then additional, uh, income based on profits B be taken into account for those wages. And then the third followup is if an owner’s spouse or relative is listed as an employee as well. Are there any special things that need to be taken into account from a documentation standpoint?

Speaker 1: (44:03)
Um, good question on the owner spouse thing, if they are not an owner of the stock. Um, so let’s say the, the, the owner of the business had a hundred percent ownership and the spouse is on payroll at 0% ownership or even, you know, less than 5% ownership, then that spouse can be treated totally like an employee, no notes to the file. Nothing like there’s, there’s no documentation, you know, concerned about related parties. Um, the S-corp owner can take their wages from 2019 on their W2. You basically take that number divided by 12 to get your monthly, multiply it times 2.5. And that’s the max compensation you can take in 2020. You can’t include any additional draws that you take from the profits of the business. Um, so that’s kind of how they’ve, they were like, Hey, we wanted you to be like, be paying yourself a reasonable compensation. Cause that’s what the IRS requires for escorts. So they’re kind of locking people in if maybe they weren’t operating quite like that.

Speaker 2: (45:10)
Yeah. And as though is the $100,000 maximum also in effect for that owner escort compensation. Yes.

Speaker 1: (45:17)
Yeah. So, um, definitely. And that, that, that goes across owners and employees, everybody’s kind of capped at that a hundred thousand and that would also include like bonuses. So if you got a hundred thousand plus a $20,000 bonus, you would still be capped at a hundred for cash compensation, but it doesn’t for benefits. So if you were like a C Corp and then you got, you could get cash compensation up to a hundred and then retirement contributions and, um, and uh, healthcare could be on top of that number. And that’s okay.

Speaker 2: (45:54)
A little bit of an aside question. If someone also got an Eid deal, do they need to keep, uh, payroll data for those and are those forgivable as well?

Speaker 1: (46:05)
Yeah. Idea loans are not forgivable. Um, there was a small portion if you applied in a certain window, some people got an advance on their loan of up to $10,000 and it would have been distributed to you separately from your Eid alone. Those amounts are going to be netted with the SBA when they, when they give your bank the money to satisfy your loan. So like if you got a hundred thousand dollars EDL and a $10,000 or a hundred thousand dollars PPP and a $10,000 EDL, they’re going to remit $90,000 back to your bank because they’re going to take that money back because they don’t want you to have free money in two places. Um, now the IDL is not forgivable at all. Um, standard 30 year loan, 3.7, 5% interest rate. Um, and then there was another question on the ideal,

Speaker 2: (47:00)
Um, yes.

Speaker 1: (47:04)
Payroll reports. Yes. I would say any, anything that you spend your Eid money on document that the same way that you would document your PPP, but you’re not going to be giving it to anybody. This is more like an IRS audit situation where you need to save your receipts. You need to save your documentation, but you’re not going to be turning it in anywhere

Speaker 2: (47:25)
Right related to the escort question. If structures in LLC is do all those same answers apply.

Speaker 1: (47:34)
Um, if they’re an LLC taxed as an S Corp,

Speaker 2: (47:39)
If they’re, if they’re an LLC and they have owned, if the owners are, or someone who’s an owner is also receiving standard payroll, but then they have comp they have their compensation or liability outside of that. And the LLC structure. Do the rules that you answered, the escort applies. Well, I’m trying to contextualize, because people asked what about an LLC right around the time you were answering that question. So I think that’s the question.

Speaker 1: (48:03)
Yeah. So the LLC can be an LLC from like a legal standpoint and then you’re taxed as either sold or an escort. So since, so if you’re an LLC taxed as an S Corp, you go under the escort rules that we just talked about. And then if you’re a sole proprietor you’re going to take, um, your, you shouldn’t be, if you’re a sole proprietor, LLC, sole proprietor, you really shouldn’t be paying yourself on payroll. Um, so that’s a little bit interesting because you would take your net profit number from 2019 and use that to determine your owner’s compensation. Now, if you did get W2 wages in that sense, you might be able to get the W2 plus your net profit. But I haven’t seen that too much. I like technically if you’re a sole proprietor, you really shouldn’t be on your, your as the, you, as the owner should not be on payroll.

Speaker 2: (48:54)
And to clarify for the S-corp ownership question, uh, the annual limit for the two and a half months of compensation, that’s a hundred thousand dollars cap per owner.

Speaker 3: (49:08)
Yes.

Speaker 2: (49:10)
Assuming that they’re on, on payroll. Yeah.

Speaker 1: (49:12)
Yeah. So if three owners each got $80,000, annualized, you would basically, each person could have their own amount and that’s similar with part partnerships kind of do the same thing. Like it’s you, each partner can take up to their limit

Speaker 2: (49:31)
Just to cover this again. I think he touched on it, but, um, does, uh, given that a lot of contractors have equipment such as trucks, um, I know you talked about, um, mortgage interest being forgivable. What about lease expenses on, on a truck or similar equipment as well?

Speaker 3: (49:49)
[inaudible]

Speaker 1: (49:57)
This is digging back. I know I answered this question a long time ago. I’m like, what did I say about it? Um, I think that leases, I think we’ll have to get back to you. I don’t want to say the wrong thing cause I know that can have a big impact for a lot of people. Um, typically like, I mean, rent and lease has been mostly talking about like physical location. Um, but I feel like I’ve seen some documentation specifically around equipment and, and car leases.

Speaker 3: (50:29)
Yeah.

Speaker 2: (50:30)
Okay. We have, we have another couple minutes, 10 minutes. I can find another one to stump you. Um,

Speaker 1: (50:39)
So just good followup information we can say. Yeah,

Speaker 2: (50:42)
It’s good. Just to reiterate definitely. If you have, if any of these questions go on answer, do you want to dig deeper? Make sure to follow up with Hannah after the fact, and we’re going to be sending out these, the full presentation to everyone. So anything that you missed, you can go back and check. Let’s see. What about interest on a business loan? Can that be included as well? A loan outside of the PVB?

Speaker 1: (51:12)
It has to be collateralized. So like, if it’s just like a line of credit or, um, like even if the line of credit is collateralized with like the, the business owner’s personal, um, like personal wealth, um, no, like it has to be like secured loan specifically with like a specific item like this property or this piece of equipment, or,

Speaker 2: (51:35)
Well, what about, what about accounts receivable as a cloud or the collateralization?

Speaker 1: (51:40)
I don’t think so. No, I wouldn’t. I wouldn’t include that. Yeah. I mean, the here’s the other thing, if you were really getting to the point where you had 95% of your PPP loan covered and you knew like, Hey, 95% is locked in, I feel really confident about this, this 5%, little iffy. Not sure it could, it could go either way and you know, you can submit that documentation and try, and really it’s going to come down to, what does the bank say? And what does the SBA say? Because at the end of the day they might go, well. Yeah, sure. We can include that interest. Like really, we don’t know about what they’re going to do after you submit that after you submit that application. What I try to say is like, try to try to pull the costs as much as we can that are really concrete and there’s no gray area. And then, you know, if you really have to get into the nitty-gritty of some of these maybe more gray areas, do those last.

Speaker 2: (52:40)
Yeah. Yeah. That makes a lot of sense. Yeah. Okay. I think we have time for one more question. See if you find a good one. Yeah.

Speaker 3: (52:49)
Okay.

Speaker 2: (52:53)
I think this is a good one to finish on. Uh, just to maybe reiterate from something we touched on earlier, because I think it’s applicable to the construction industry in particular. Um, if someone’s hiring laborers that even before, uh, even before this year were coming and going, what advice would you give for somebody who is frequently turn, uh, turned over, um, outside contractors or employees that may fluctuate significantly throughout any given year? Not just 2020?

Speaker 1: (53:23)
Yeah. Um, I mean, you might be in a situation where you need to prove out your full-time head count, um, going through the full process. So going through the 35 Oh eight where you’re, where maybe you can’t qualify for any of the safe harbors, so to speak. Um, but the good thing about the 35 Oh eight is it still offers us some options to optimize on that. So they are giving you, um, the option of calculating your full-time head count during the covered period, and then comparing it to a couple of different periods to see if it’s more beneficial. So they give you an option of comparing it to last year during the same time period. So like, if you were kind of a seasonal type business, you could kind of compare it to last year and say, Hey, last year from February 15th to June 30th, what was my average full-time head count?

Speaker 1: (54:20)
You can use that as an option as a lookback period option, or you can do from January to February of this year. So like if January and February is a really slow period for you and you use typically ramp up through the spring and like into the summer, then maybe you’re in a situation where your head count was really low in January and February, but then the cover period was higher. So you can kind of look back to either one of those and you can point back and say, well, I had more head count than that period of time. And then there’s also an option to do it for a true like seasonal business. You can kind of choose your 12 week period to do a comparison point to. So if you have that, you can kind of sort of elect into, Hey, it’s more beneficial for me to use this time period as a comparison point. Um, because I think they kind of know there is going to be that variability. And then you also keep in mind, that’s where you want to document when people come and go, if they chose to leave for somebody else who was paying more, you know, that’s not on you, that’s not on you as the employer to, um, you know, own that head count, so to speak. So between those things, documenting those exemptions that you qualify for, and then optimizing on the lookback period, you can probably maximize your forgiveness that way.

Speaker 2: (55:36)
Great. Well, I think, I think we’re up on time. Uh there’s there’s still 27 unanswered questions. And so again, I encourage everyone to follow up with Hannah after the fact, if you, if anything went on answered, um, and I really appreciate your time and your thoroughness, the presentation was great. Um, and appreciate everyone who attended, uh, we’re again, going to be sending this out. We’re going to be sending out the presentation to everyone who attended and we’ll have it up on both of our YouTube channels. And here is our contact information for anyone who has any follow up questions.

Speaker 1: (56:13)
Yeah, definitely. Well, thank you so much for having me. I’m really excited to just be able to make the connections and I am pretty active on LinkedIn. So if anybody’s on there, just check it out and then lots of content PPP on YouTube. So definitely, um, let me know and then comment on stuff because a lot of times I make videos based on questions like the ones you guys asked today. So thank you so much and thanks for being engaged. Yeah. And thanks to upside financial as well. Absolutely. Yeah. All right, everyone have a great day. All right, bye.