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Accounting and Tax Planning Special Coverage

Reading the Fine Print

By Julie Quink

 

The economic stress created by the COVID-19 pandemic compelled business owners and individuals to apply for the relief funds provided by the Small Business Administration (SBA) in the form of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans (EIDL).

The rollout of these programs came at a time when the reality of the pandemic began to unfold, creating a frenzy for businesses and individuals to apply for the funding, in some cases, before the funding ran out.

Before the ink on the guidance and requirements for these stimulus funds was dry, applications for the funding were being processed, and funds were in the hands of businesses and individuals. To expedite getting funds to those who needed them, much of the clarification about the use of the funds, taxability of the funds, and criteria for forgiveness were ironed out after the funding was in hand and being spent by the recipients. What ensued was months of additions to the SBA’s frequently-asked-questions (FAQ) document clarifying the eligible uses of the funding to ensure forgiveness and further attempts by Congress and the SBA to adjust program requirements as the pandemic continued.

More than 50 FAQs were issued to clarify the PPP requirements, and 20 relating to the EIDL loans.

In the frenzy to obtain the funding for the PPP and EIDL loans, it became clear that not everyone read the fine print, or that the fine print changed as clarity was provided for these programs. The fine print provided recipients with additional requirements for the funding they may have been unaware of at the time of application or even during the spend-down period.

As trained professionals, accountants and business advisors spent months learning the requirements and pivoting as they changed. It would be unreasonable to assume that those who received the funding could keep up with the fast-paced changes that were occurring, including the fine print. For accountants, there have been times we could barely keep up with the changes.

Julie Quink

Julie Quink

“With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.”

The result is that those receiving the funding need to be aware of those items in the fine print for the PPP funding and the EIDL loans that may impact them.

 

EIDL

Recipients of the EIDL loans, which could be up to $2 million in amount, were required to sign loan paperwork, outlining the terms of the funding. In the fine print of these loan documents are provisions that the borrower should look out for and be aware of. Some of the provisions are:

• For loans under $25,000, collateral is not required. For loans of more than $25,000, the SBA is provided collateral through business assets, current and future. Transfers or sales of collateral, except inventory, require prior SBA approval. In addition, prior approval is required by the SBA in the event these business assets will be used to secure other financing;

• Borrowers are required to keep itemized receipts, paid invoices, contracts, and all related paperwork for three years from the date of disbursement;

• Borrowers are encouraged to the extent feasible to purchase only American-made equipment and products with the proceeds of this loan;

• Borrowers must keep all accounting records five years before the loan and three years after in a manner satisfactory to the SBA;

• Borrowers must agree to audits and inspection of assets, if requested by the SBA, at the expense of the borrower;

• Borrowers have a duty to provide hazard insurance on collateral and may be asked to provide proof;

• Within 90 days of the borrower’s year end, financial statements, in the format specified by the SBA, are required to be furnished by the borrower;

• The SBA may require a review-level financial statement for a borrower upon written request by the SBA at the borrower’s expense;

• Prior approval from the SBA is required for distributions of the borrower’s assets to the owners or employees, including loans, gifts, or bonuses;

• Borrowers must submit, within 180 days of receiving a loan, an SBA certificate or resolution. For most borrowers, the SBA has followed up or is following up on this requirement now;

• Default under the provisions may result if a borrower merges, consolidates, reorganizes, or changes ownership without prior SBA approval; and

• The loans can be prepaid, without penalty, if the borrower does not need the funds or secures other financing.

For most borrowers, the requirements may be routine considerations, but for others, these may be new requirements.

 

PPP

In the fine print of the PPP loan documents are also provisions that the borrower should consider, as follows:

• For borrowers who received a PPP loan greater than $2 million, the SBA has indicated it will likely audit those borrowers for compliance with spending requirements;

• Although Congress has confirmed that the proceeds of the PPP loan are not taxable and the expenses paid with PPP are deductible, some states, such as Massachusetts, are not following the federal laws relative to forgiveness of the PPP loans as they have their own rules. For individuals in Massachusetts, the loan forgiveness is taxable income. This affects sole proprietors, S-corp shareholders, and partners of partnerships. A bill, co-sponsored by state Sen. Eric Lesser, state Rep. Brian Ashe, and five other co-sponsors, has been proposed to allow for non-taxability of the forgiveness amounts in Massachusetts;

• Depending on when the PPP loan was funded, the borrower may have a repayment term of two or five years for the loan; and

• Although forgiveness may be granted, the borrower should retain the records used for forgiveness. Generally, most records should be retained for seven years.

 

Bottom Line

Navigating the fine print is key for those who received the PPP and EIDL loans. The navigation becomes increasingly more difficult when the requirements continue to change and the funds have already been received and used to operate the business.

With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.

 

Julie Quink is managing partner with West Springfield-based Burkhart Pizzanelli; (413) 734-9040.

Accounting and Tax Planning

Round 2

By Jonathan Cohen-Gorczyca, CPA, and Amila Hadzic

On Dec. 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law to assist businesses who have been financially impacted by the COVID-19 pandemic. As a result of the Economic Aid Act, the Paycheck Protection Program’s second-draw loan program was created.

This program will allow the U.S. Small Business Administration to provide eligible businesses with additional loans, similar to those from the original Paycheck Protection Program (PPP). The last day to apply for the second-draw loan is March 31, 2021, and there are eligibility and documentation requirements that need to be met during the application process.

 

Eligibility

This loan can only be made to a business that has received a first-draw PPP loan and has used the full amount of the loan on eligible expenses before the disbursement of the second loan. A business that was ineligible for the first loan cannot receive the second-draw PPP loan.

In order to be eligible for this second-draw PPP loan, the business must have 300 or fewer employees. The business must have also experienced at least a 25% reduction in revenue in 2020 compared to 2019. The revenue reduction can be calculated by comparing one quarter in 2019 with the same quarter in 2020. However, if the business was not in operation for the full year in 2019, there are other periods that can be used for this calculation. If an entity was in operation for all four quarters in 2019, then the annual revenue can be compared with 2020.

 

Loan Amount

The maximum loan amount for the second loan is the lesser of $2 million or two and half months of the business’ average monthly payroll. For those who are assigned a NAICS code with 72 or are a seasonal employer, the loan amount can be greater than two and a half months. The borrower can use either total wages paid in 2019 or wages paid in a 12-month period before the loan was made to calculate average monthly payroll. There is also the option to use 2020 wages.

 

Application and Documentation

In order to apply for this loan, the SBA Form 2483-SD needs to be completed. Form 941, state quarterly wage unemployment forms for the applicable quarter used, and other payroll records may be needed depending on the payroll period used to calculate the loan amount. For ease of applying for a second-draw loan, it is recommended that you apply using the same lender, as much less payroll documentation will be needed because it should already be on file with the institution.

The documentation requirements are similar to the first PPP loan. If the loan is greater than $150,000, documentation will be needed to show the revenue reduction at the time of application. Bank statements, annual tax forms, and quarterly financial statements can be provided as documentation. For loans under $150,000, this information can be submitted during the loan-forgiveness process.

 

What If I Did Not Receive a First-draw PPP Loan?

The SBA is also accepting applications for first-time PPP borrowers. The loan is capped at $10 million for eligible businesses. If the loan is used to pay for payroll and other eligible expenses during the eight- or 24-week period, it is eligible for forgiveness. Eligible costs for both the second-draw loan and first-draw PPP loan include payroll costs, business mortgage interest, rent, lease payments, utility payments, worker-protection costs, property damage costs due to looting and vandalism not covered by insurance, and other supplier and operation costs. Payments made to an independent contractor do not qualify.

As with the first-draw PPP loan, it is best to reach out to both your accountant and loan provider to find out if a second-draw PPP loan is right for you. They will be able to help you determine what is right for your business and help walk you through the application process.

 

Jonathan Cohen-Gorczyca, CPA, is a manager, and Amila Hadzic is a staff accountant with the accounting firm Melanson, which has offices in Greenfield and Andover, as well as Merrimack, N.H. and Ellsworth, Maine.

Construction

Something to Build On

By Joe Bousquin

The term ‘construction’ appears 636 times in the $908 billion pandemic relief package and $1.4 trillion omnibus spending bill passed by Congress and signed by President Trump at the end of December.

In other words, while the relief package was less than half the size of last spring’s $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, there’s still plenty in the overall bill for contractors to be happy about.

“Lots of construction spending is always a good thing, as long as everyone has access to it,” said Kristen Swearingen, vice president of Legislative and Political Affairs at Associated Builders and Contractors. Her cautionary tone refers to the Protecting the Right to Organize Act, which many non-union contractors oppose, potentially being passed in the 117th Congress after Democrats regained control of the Senate earlier this month.

But in general, construction advocates said the new pandemic relief package should be viewed as a win.

“This bill for the construction industry has a lot of good things overall,” said Jimmy Christianson, vice president of Government Relations at Associated General Contractors of America. “I would say, on the list of the many things we were asking for, we got probably 80%.”

“This bill for the construction industry has a lot of good things overall. I would say, on the list of the many things we were asking for, we got probably 80%.”

Nevertheless, one lament is that the package doesn’t include liability protection for employers against lawsuits from employees who were exposed to or became infected with COVID-19 at work.

Here’s a closer look at some of the provisions that should help contractors in 2021:

• Paycheck Protection Program. There are several wins for contractors in the the legislation’s renewed PPP funding, including a provision to ensure expenses paid for with forgiven PPP loans are tax-deductible, an issue many contractors were wringing their hands over last fall.

• Expansion of the Employee Retention Tax Credit. This gives qualifying employers a $5,000 credit per worker for employees not paid with PPP funds in 2020, as well as a $7,000 credit per worker per quarter in the first half of 2021.

“That’s a huge deal for construction companies and employees to help manage the continuing uncertainty that’s still happening,” Christianson said.

• State transportation funding. One of the headline numbers for contractors is the $10 billion earmarked for state DOTs, many of which saw their funding decline in 2020. That should provide relief for road and other civil builders who have increasingly felt the impacts of stalled projects.

“It will help mitigate the impact of bid-letting delays and project cancellations that we saw in 2020 throughout the country,” Christianson said. “And the fact that it’s dedicated funding means that states can’t use it for other things.”

• School construction. The package also includes $82 billion for education, at least some of which can be used for construction and renovations post-COVID-19, when students return en masse to classrooms.

 

Joe Bousquin reports on the construction industry for Construction Dive.

Opinion

PPP: The Feds Need to Do More

As you read the accounts of individual companies grappling with the pandemic in the June 8 issue of BusinessWest — we call them ‘COVID Stories’ — a number of themes and similarities emerge.

The first is that virtually every business in every sector of the economy was hit, and hit extremely hard by this. We talked with people in healthcare, service, tourism and hospitality, the sector known as ‘large events,’ marketing, retail, and more, and all of them said the same thing — that the floor was virtually taken out from under them back in mid-March.

Another theme is that businesses have responded with imagination and determination, finding new revenue streams, new products to develop, new ways to do things, and new opportunities wherever they arise.

Still another theme is that these new revenue streams and opportunities haven’t produced results that come anything close to what these companies were doing before the pandemic, a time that now seems like years ago, but was really only three short months ago.

Which brings us to one more common thread among the stories presented this month in a series that will continue into the summer — the fact that these companies needed help, received it, and will very likely need more help if they are going to fully rebound from this crisis.

Indeed, most all the companies we spoke with received support in the form of loans from the federal Paycheck Protection Program, or PPP, an acronym now very much part of the current business landscape.

“Most of the companies we spoke with are not even close to being out of the woods. In fact, some are counting down the days until the PPP runs out with a certain amount of dread and a painful question: ‘what happens then?’”

Some struggled to get it and waited nervously for the money to land in their accounts. Others haven’t really touched it yet and don’t know exactly what to do with it because they can’t bring their people back to work because there is, as yet, no work to do.

The program isn’t perfect, and there are some bugs to be worked out, but overall, this measure has done exactly what it was designed to do — provide a lifeline to businesses that desperately need one. PPP has enabled companies to meet that most basic of obligations — meeting payroll — at a time when so many would not have been able to do so.

But as these stories make painfully clear, most of the companies we spoke with are not even close to being out of the woods. In fact, some are counting down the days until the PPP runs out with a certain amount of dread and a painful question: ‘what happens then?’

What should happen is the government offering another round of support to companies that can demonstrate real need — and, again, that’s most of them. The recovery is not going to be V-shaped or even U-shaped. It may be several months before there is, in fact, real recovery.

And the federal government has an obligation to help businesses get to that point. When the PPP was first conceptualized, the thinking was (we presume) that, in eight weeks, the worst would be over and things would start to return to normal. It’s still early in the game, but mounting evidence suggests that is not the case.

‘Normal’ is still a long-term goal, and it’s clear that companies will need additional support to be able to keep paying people and staying upright until better days arrive.

As one business owner we talked with said, and we’re paraphrasing here — ‘the government caused this problem by ordering a shutdown … so now, they own the problem.’ He’s right.

Already, there are far more ‘for sale’ and ‘for lease’ signs on properties across the region than there were three months ago. A number of businesses, many of them in the broad realm of hospitality and tourism, have already failed. Many more will fail in the months to come if they don’t get the support they need — not only from local consumers, but from the federal government itself.

PPP isn’t perfect, but it works. And we’ll likely need at least one more round of it to enable businesses to survive this pandemic.

Coronavirus Features

The Questions Keep Coming

The Paycheck Protection Program (PPP) was created by the CARES Act to provide forgivable loans to eligible small businesses to keep American workers on the payroll during the COVID-19 pandemic. The SBA recently provided updates to its PPP guidance and also released the form application for PPP loan forgiveness, which will help small businesses seek forgiveness at the conclusion of the eight-week covered period, which begins with the disbursement of their loans.

Here are five common questions area attorneys have been hearing from business owners concerned about how PPP funds may be used in order to be forgiven.

Where can I spend my PPP loan in order for it to be forgiven?

“You’ve got to use 75% of what was loaned for payroll purposes,” said Kathryn Crouss, shareholder with Bacon Wilson. “Obviously, that’s salaries and wages, but other money employers spend on payroll costs count as well — vacation pay, parental or family leave, paid sick leave, or if there’s an employer match for plan premiums. So the definition of ‘payroll costs’ is relatively broad.

“The remaining money can be spent on other approved expenses — keeping the lights on or mortgage or rent or utility bills, those sorts of things,” she added. “Assuming you can prove to the government that you have spent 75% of the loan on qualified payroll expenses and the remaining portion on other qualifying expenses, then the loan should be forgiven and becomes a grant rather than a loan.”

In addition, she added, “if an employer brings an employee back on and that employee used to make, say, $3,000 a month, if they pay them less, they have to be within 75% to be forgiven. That’s not true for head count — they still have to have the same number of employees; not necessarily the same people, but the same head count.”

How do you measure whether an employee’s salary or wages were reduced by more than 25%?

“This may be the area that was causing the most angst among business owners, since it seemed mathematically impossible to not have reduced compensation by at least 25% if you were comparing compensation in the first quarter of 2020 — 13 weeks — to the covered period of eight weeks,” said Scott Foster, partner with Bulkley Richardson. “Fortunately, the SBA has opted to focus only on either the annualized salary for exempt employees, or the average hourly wage for non-exempt employees. Also, with respect to the salaried employees making more than $100,000 per year during the first quarter, as long as the annualized salary remains above $100,000 during the covered period, then any reduction in salary is not considered a reduction under this test.”

What about employees that were furloughed or laid off, but now refuse to return to work?

“For any employee the business has offered to re-employ in writing, and the employee (for whatever reason) refuses to accept re-employment, this will not reduce the loan-forgiveness amount,” Foster said.

Amy Royal, CEO of Royal, P.C., noted that she’s had many questions of this type. “They’re asking, ‘if I want to make sure I get loan forgiveness, how do I address a situation where I’ve offered to bring people back and they’ve said, thanks but no thanks?’ Obviously, those people have their own unemployment issues because if they’ve been offered a job and continue to take unemployment benefits, that could, in certain circumstances, be fraudulent.”

As for the employer, “if you make a good-faith offer to rehire someone with PPP money, make sure that offer is in writing,” she added. “If the employee rejects the offer, make sure you, as a business, have documented that. It will help you when you apply for loan forgiveness. That issue has been a real concern.”

Crouss agreed, noting that some employees may have legitimate reservations about returning to work — for instance, because they have a 95-year-old parent and don’t want to infect them.

“Make sure that conversation is in writing,” she said. “If they say they can’t return, get that response in writing as well, save that correspondence, and put those documents in their personnel file. Where we’re heading is, the head-count piece may be forgiven if they have that kind of documentation.”

Interestingly, Foster noted, “the application states that any employee fired for cause during the covered period does not reduce the borrower’s loan forgiveness. Oddly, this could mean that an employee that was fired for cause prior to the covered period would still count as a missing FTE during the covered period.”

My employees have nothing to do until my business is allowed to reopen and ramps back up. What if I want to save the PPP funds for after the eight-week period?

For example, Royal said, “if you’re a restaurant, you’re not open now. Maybe, if you’re lucky, you’re doing takeout, but the bulk of your business is full service. So the timing has presented issues because they can’t be fully ramped up now, but they’ve got to avail themselves of the funds right now before they run out.”

Businesses may absolutely hang onto the money and use it beyond the eight-week window, she explained — but they will have to pay it back over two years with 1% interest.

“That’s a very attractive loan,” Crouss noted. “Many businesses are making that decision — which is a perfectly sound decision. This only goes for eight weeks, and when you get that amount of money, it should cover your payroll for eight weeks, but what happens if the world hasn’t righted itself? So maybe it makes sense to save it for a rainy day and think of it as a loan and not a forgivable grant.”

Do I have to claim the PPP loan as income?

“The good news is, the IRS has spoken and said no,” Royal said. However, expenses paid for with PPP funds are also not deductible. “That makes sense — you can’t double dip. The way I conceptualize this is, it didn’t happen. We’re going to pretend this period didn’t happen for tax purposes.”

—Joseph Bednar

Coronavirus

Mixed Bag

Matt Sosik helped Char Gentes

Matt Sosik helped Char Gentes secure a PPP loan through bankESB that kept Riverside Industries employees paid for eight weeks

Char Gentes calls the Paycheck Protection Program “a lifeline.” Her nearly 200 employees no doubt agree.

Gentes is the president and CEO of Riverside Industries, a nonprofit that serves people with disabilities, helping them find ways to achieve daily independence, from securing and maintaining jobs to undertaking activities like voting and going to the store.

In mid-March, the organization was shut down by the same mandate that has shuttered the doors on countless businesses and nonprofits across Massachusetts. Four weeks later, Riverside hadn’t laid anyone off — but that situation was unsustainable.

“We had been keeping our employees paid as we were waiting to hear what the state reimbursement was going to be; actually, a lot of nonprofits were doing that,” Gentes told BusinessWest. “The senior management, myself, and the board were all on the same page — we wanted to keep our employees home, we wanted to have their back, and we wanted, as much as possible, to continue to pay them 100% and make sure they had health insurance. These human-service workers are often people who live paycheck to paycheck.”

When bankESB approved a Paycheck Protection Program (PPP) loan to Riverside Industries, Gentes could breathe a little easier, as the loan will allow it to pay its employees for the next eight weeks.

“We’re grateful for those eight weeks, and we certainly hope to be able to open our doors sometime in June,” she said.

While Riverside’s Easthampton facilities are closed, its mission has not stopped, as the organization continues working with clients under a new remote service model. Without the PPP loan, Gentes said that she would be facing some difficult decisions on how to keep her organization operational.

That contrast — between desperation and relief — explains why so many small businesses are frustrated with the PPP, which quickly ran out of money, and also generated plenty of confusion in the banks where business owners applied for loans.

The PPP is a small-business stimulus program included in the federal government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP initially provided $349 billion for U.S. Small Business Administration (SBA) lenders like bankESB to fund loans to businesses in order to guarantee eight weeks of payroll and other costs to help businesses remain viable. To qualify, businesses must have 500 or fewer employees and demonstrate that they have been negatively affected by COVID-19.

When the $349 billion ran out in less than two weeks, the shortfall generated an immediate outcry — not only for a second infusion of funding, but because of news that large, national companies were claiming tens of millions in PPP funds while small businesses couldn’t get access.

That second round of funding — $310 billion in total, approved by the U.S. Congress on April 22 — may not last much longer, but banks have likely learned lessons from the first round.

Sense of Urgency

Matt Sosik, president and CEO of bankESB, remembers those first days of the PPP well.

“It was harrowing. They did, in fact, rush it because they felt the urgency … but the program was not ready for prime time,” he recalled. “When it rolled out, a lot of people were frustrated, but — and I’m not trying to sound defensive — I wish people wouldn’t blame local banks. We were in the dark; the customers knew what we knew, and it wasn’t enough. They didn’t provide enough instruction.

“In the end, we made it out on the other side, and we got caught up,” Sosik told BusinessWest in mid-April, noting that the three banks in the Hometown Financial Group family, including bankESB, approved $100 million under the program, and spent the next week getting money into the hands of the people who were approved.

“It was very, very difficult — a massive amount of work by our employees. They kept grinding and got us out on the other side of things,” he said.

U.S. Treasury Secretary Steven Mnuchin reported that, following the PPP launch, the SBA processed more than 14 years’ worth of loans in less than 14 days.

“The PPP enjoyed broad-based participation across the country from lenders of all sizes and a wide array of industries and businesses,” he noted. “From its start on April 3, PPP provided payroll assistance to more than 1.6 million small businesses in all 50 states and territories. Nearly 5,000 lenders participated in this critical program, including significant lending by community banks and credit unions. Nearly 20% of the amount approved was processed by lenders with less than $1 billion in assets, and approximately 60% of the loans were approved by banks with $10 billion of assets or less. No lender accounted for more than 5% of the total dollar amount of the program.”

“It was harrowing. They did, in fact, rush it because they felt the urgency … but the program was not ready for prime time.”

The majority of these loans — 74% — were for under $150,000, he noted, but that didn’t stop a swell of outrage following reports of large companies, from Ruth’s Chris Steak House to Hallidor Energy, claiming eight-figure PPP loans.

Few in Washington balked at the need for additional funding. The second round of $310 billion is part of a larger, $480 billion relief package that also includes money for hospitals and expanded COVID-19 testing. Of the $310 billion, $60 billion will be set aside for smaller lending facilities, including community financial institutions; small, insured depository institutions; and credit unions with assets under $10 billion.

The Next Wave

Bankers hope for a smoother process getting the new funds approved.

“It got off to a rocky start and got a lot of bad press — I Googled and found maybe one story with a remotely positive angle to it,” Sosik said, before coming back to Riverside Industries. “This is a story about the good parts of humanity — the work Riverside does and our ability to play a small role in helping them stay alive. They do such incredible work, such necessary work.

“Riverside is a strong organization financially,” he went on. “It’s just that, when funding isn’t coming in, it doesn’t have a war chest to keep dipping into.”

As for Gentes, she’s hoping the loan helps her not only take care of employees, but prepare them to return when the governor says it’s OK to open the doors and restart person-to-person services.

“When we’re ready, we need our workforce to come back, and we need them to be ready to come back,” she said, adding that the organization’s roughly 150 clients are called once a week, maybe twice, to make sure they’re OK. “We’re in the process of developing remote learning, and assessing what each client has available to them in terms of technology to make this happen.”

Countless other small businesses and nonprofits have equally pressing needs, and could use a lifeline, she told BusinessWest. “Without it, a lot of nonprofits will go under.”

Sosik likes hearing that.

“I have to admit, it’s heartwarming to make a difference,” he said. “And I’ve heard some other good stories. There’s so much uncertainty — ‘I’ve put all my blood, sweat, and tears into my business; is it all over for me?’ To relieve that pressure has been a heartwarming experience for us.”

Joseph Bednar can be reached at [email protected]

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