In this episode, we are joined by Jamie Nau and Jody Grunden to talk about some of the changes in the loan forgiveness laws. We recorded this episode on May 27th, and it’s possible that things could change rather quickly. But we still wanted to record this episode, because you should be keeping up with these changes as they come out. We will likely have more episodes coming out on this topic, helping you keep up on all of this information in real-time.
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“Documentation is key when it comes to calculating how much forgiveness you have.” - Jamie Nau
The finer details of this episode
Episode resources
Jamie Nau: Hello and welcome to today's podcast. Once again, you have Jamie Nau and Jody Grunden, here from Summit CPA. We're going to hit on a topic that just came out last week. So last week, the Treasury and SBA released some new guidance on some of the loan forgiveness rules. I know we just did a podcast on this, but we wanted to have a follow up podcast to really clarify what came out in those new rulings and new guidance’s, because it's really important. There were some pretty significant changes, and we want to make sure that those changes are covered. So we've broken those changes into four categories. So, Jody, anything from a big picture view you want to get into before we talk through those four categories that people should know about this new guidance?
Jody Grunden: Yeah, so actually the big picture is these are just simply guidance’s right now, and you definitely want to follow them. They are what they are. But the house and senate right now are going through another bill, so anything that we talk about today could change anytime this week depending upon how the bill passes, what's actually in the bill. So as of today, May 27, here's what the rules are so far. But I would say overall, I was pretty happy with what I saw. I mean, it's going to make things a lot easier, especially on our end as accountants, to gather the information, and for clients that don't have accountants it's a lot easier for them to gather information as well. So I think these were definitely positives for sure.
Jamie Nau: So you're saying this podcast might be a trilogy, like Star Wars? We may have to do a third one?
Jody Grunden: Possibly. My guess is we probably will for sure.
Jamie Nau: So again, you and I kind of pre talked, and we talked about the four categories. The first one is related to compensation. So do you want to go into what changes came out related to compensation of both employees as well as owners?
Jody Grunden: So the biggest thing that compensation is, again it just reinforces that we're looking at an eight week period. You’re not looking at forcing payrolls into periods so that we can make more of a benefit. So looking at eight weeks that's the key there. One of the biggest things that they're looking at not only when its incurred, but when it's paid, you can choose which ever you what. They call it the alternative method for determining it. What that is is it was paid in that eight week period or it incurred during that eight week period and paid the following week. So that was a big plus, especially if you have biweekly payroll, or weekly payroll, or it gives you the option of looking at a couple different things like maybe your first payroll is bigger than your last payroll. That type of thing. You can play with what makes the best sense in this situation. So that was the biggest change there. The second biggest change, there was a lot of a lot of debate over whether or not you could bonus employees, give them hazard pay. It's clearly defined now that that's completely okay. As of today that's completely okay. They just can't exceed that fifteen thousand three eighty five mark over that eight week period. That’s the big key there. So if you're going to give a bunch of owners a bunch of extra money to get your payroll over, that's not going to work if their payrolls over the one hundred thousand dollars annual salary. So it has to be to employees that make less than that and cannot exceed that one hundred thousand dollar mark. So that's a another a big change there. And like I said, salaries include, you know, defined there as salaries and wages and commissions and tips and, you know, all the different stuff that would normally go into payroll. So that's a real positive one for sure. Another one that came through, and this was kind of unexpected, is they limited what the owners could make. So we already knew that the owners could make fifteen thousand three eighty five for that eight week period, but they limited to the lesser of eight weeks during 2010, and then what they made during that period in 2020. So you've got to use the lesser of the two. So what that's preventing an owner that's playing the distribution game where their salary distributions are kind of offsetting each other to avoid paying the FICA tax. They can't automatically just raise their salary from a low salary to a high salary, even though they're receiving the same money through distributions or whatever. They can't do that in order to get the forgiveness. They've got to use the lesser of the two, which is a kind of a bummer for some of those that are taking advantage of that. So I think those are the big three things that I saw happen. And again, the pay day or incurred day on the payroll, deciding which one you could use and kind of deciding which one benefits you the best, the forgiveness on the salary, wages for hazard pay and bonuses ,you know that that's definitely acceptable. Again, it's just limited to the fifteen thousand three eighty five. Then the limit on what owners could actually make, you know, being eight 50 seconds, you know, eight weeks out of 52 weeks of 2019. So they'd take the 2019 salary divide by fifty two times eight, that's going to be the number, the lesser two between those two. For self-employed filers like Schedule C, again, we're still using the Schedule C information for 2019, that's how we're determining forgiveness. For partners it is still a little bit unclear. I think we can make the assumptions its going to be treated similar to the Schedule C, because as partners they're typically, unless they receive a guaranteed payment, they're pulling money out of earnings. So I'm guessing it's going to be a similar thing. They will look at how the loan was actually determine, and that's the amount they're going to allow their partner to be forgiven during that period. But again, that wasn't written in there. Hopefully there is more clarification on how that's going to be going forward. Schedule Cs are pretty black and white. I think partners are a little bit different. Then of course partners as employees, you know, again, a different phenomenon altogether. You have the payroll plus the partner salary again, what's on your schedule? K1 during 2019 is going to really help determine how much that partner is going to be able to be forgiven.
Jamie Nau: So in essence they answered three questions that were pretty common, at least among my clients and Summit clients. Like how do they work with bonuses? How do you work with hazard pay? You know, then kind of a third question there was how do we work with cash verse accrual basis. They came up with some pretty clear guidance on that. Then they kind of answered a fourth question that wasn't really out, what are we going to do about owners comp? Because like you said, there's a lot of owners out there that, you know, pay themselves a small salary, but then pay themselves distributions and they could see oh yeah, I could just switch it around for these eight weeks and then cash back. So they kind of predicted a question that might not be out there yet, that people might be thinking. So I think that was some pretty good clarification there. So the next one is probably another area that is a very common question that I'm seeing, again related to, one: rehiring employees, and then also: what's a full time equivalent considered. So I kind of group these into employee questions. And so they come up with some clarifications around both of those. You want to dig into those a little bit?
Jody Grunden: Yeah sure. With the employee full time equivalent, so let's say there are a bunch of part time employees. How is that determined for the forgiveness? So what they do is they're basing it on 40 hours. So you can take the total amount employees work, divided by 40 hours per employee, and come up with a decimal place. So that decimal place may be 38.18 for instance. Or what they said is hey, we'll make it even simpler and said if it's a part time employee, let's give it a half an employee count. So they did allow for a shortcut give for part time employees half accounts versus the exact decimal place. So that's how are determining the employee count now. A 40 hour work week.
Jamie Nau: Okay great. So that's pretty simple. Again, this goes into the calculation where, you know, your forgiveness is only based on having a similar number of employees. So again, we're getting pretty specific on that, where it basically we are taking those hours and figuring out how many full time equivalent did you have prior, to how many full time equivalents you had during the period, and that's how you're considering whether you get 100 percent, 90 percent, 80 percent comparing those two numbers to. Pretty good clarification on that. Then the last question that comes with this as well as is, what if I hire someone back on the last day? My loan ends on June 30th, what if I hire them back, how is that going to work?
Jody Grunden: They created a safe harbor. What they did is that said if you bring your employees back by June 30th, let’s say you had to lay a ton of people off, you brought them back by June 30th, then you would not be hindered at all. That would be what we consider a safe harbor. So that percentage gets null and void completely. So again, June 30th is the date to bring back your employees for that safe harbor to allow full time equivalents to be considered employees. The other thing is what if an employee decides they don't want to come back? Because, you know, as we know, the way that the law is written now with federal unemployment, the extra six hundred dollars added to unemployment, we've had a lot of folks out there making more money than they would be if they were actually working their time job. So what incentive do they really have on coming back? Other than getting their job back, which for some is a good incentive. For others it may not be. So that's the issue that a lot of our clients have, especially in the restaurant industry and so forth, where, you know, maybe it is more conducive to stay at home. What they did is they did come out with guidance there, and they said that in the event that an employee turns your offer down in writing, then that would not count against you with your count. So if you had 40 employees and one person turned you down because they don't want to come back, because they are making more on unemployment, then it wouldn't be 40 employees. Now, your denominator changed to 39 employees. The trick to that is it has to be in writing. Then what the SBA and the Treasury said is what we're going to do is we're going to require you to notify the state unemployment office within 30 days of that rejection as well. So that was a thing that, hey, we just don't want people sitting out there on unemployment, we want to give them an incentive to come back to work. So they would eventually lose their unemployment through a rejection letter there. The same holds true if a person leaves at no fault of your own. So, like, let's say you've got an employee that's been with you for, you know, 10 years, 5 years, whatever, and they find a better job. You know, they find something that's closer to home. That also does not count against you in going forward. So it's only those folks that you actually let go, or laid off during that time, is what they want to include in the account. So make sure you also have that in writing. They've turned down the job because they found a different job, you know, something like that. So you're not prevented, or not losing out on that part of the forgiveness.
Jamie Nau: I mean, you've mentioned this a number of times, but I want to emphasize this, documentation is key. Make sure you have it in writing. Make sure you keep that writing somewhere in a safe place so you have access to it, and have the actual documentation to pull up pretty quickly when it comes to calculating how much forgiveness comes in. I'm confident bankers are going to be asking for that one when you're doing the calculations. They want to see exactly how that works. So it's important to have that document. So real quick, before we get into the last category here, I want to throw our email address out there. Again, we try to make this show for our listeners and make sure we have as many topics as possible that relate to our listeners. So you can always email us at: vcfo@summitcpa.net. We have started to see some email flow through there, and we've tried to answer the questions directly, but also did a podcast recently that really related to one of the questions that came through. So we appreciate the listeners reaching out to us and we'd love to hear from you again. So the last category we have here was again a very common question that we've had from a lot of clients. And again, this isn't exactly clear, but they did clarify a little bit. This relates to those non-payroll costs and what's included there. So Jody, can you kind of go into those details of what's included in those?
Jody Grunden: So the first part of the non-payroll will be interest, rent and utilities. So what they did decide is they came out and clearly defined the interest, which at one point we thought was going to be just mortgage interest only, but it did say that interest in personal property. So that would be interest on your loans would be included there. Not the principal portion of the loan payment, but the interest only portion of the loan payment would be included as a forgiveness item. Rent same boat. So if you're renting personal property as well as renting real property, that also is included. So if you've got a bunch of computer leases, something like that, that going into the forgiveness calculation. Then last but not least in this part, in this little section here is the utilities. With utilities, the same thing. Utilities would be, you know, they defined utilities kind of funny, they define utilities in a strange way. They said, which we all know is going to be electricity, gas, water, telephone, which I would assume and include cell phones or internet access. But they also threw one in there called transportation. Not really sure what transportation means at this point. So we need further guidance on that. We can make some assumptions on there. It could be who knows, maybe subway costs or parking, or something like that. I just don't know on that one. So that was kind of a wild card out there, hoping to get more clarification on that. But what I would always fall back to is the bank has the final say on it. So you may want to find out, if you've got a lot of transportation costs, you may want to reach out your banker directly and say hey, what are you guys accepting as transportation expense for transportation costs? And they'll tell you, you know, we're not accepting anything. Okay, well that answers the question. Or they are accepting this, but not accepting that. So that's always a huge fallback. By now, you should have a strong relationship with your banker. If you don't, I hope you do. I hope you learn something from this. Always have a great relationship with your banker because they're key in helping your business with success. Especially with this, it is another thing you can just give them a call asking about the transportation. The cool thing about the expenses that we know there with utility payments there, again they're looking for two sets, so meaning two months’ worth. Don't throw a third month in there because you can't pre payments or utilities. You've got to have it just the two months are the two month period, which is, again, the eight week period. So two phone bills, two cell phone bills, two transportation, whatever that might be, two Internet access. Internet access is just that, internet access. It's not like Netflix or all the extra stuff that you third party costs in addition to that. It's only the internet costs, which is, you know, forgiven in that period there. So it's very similar to what the guidance they came on with paid or incurred. So you can use the same methods.
Jamie Nau: So you can't say paid. Then I'm going to pay a third one.
Jody Grunden: Yeah paid or incurred within that two period. So again, I would look at the greater of the two, what makes the most benefit for you incurred or paid. That's going to depend upon the usage during that time frame there. So another real key thing there, which is really cool, is the cost of the payments, utility payments, clearly defined now outside of transportation. We don't know what that means for sure, but everything else is pretty straightforward.
Jami Nau: Great. So I want to make sure we talk about this one last point here. I think again, this guidance is still preliminary, and as Jody said we might have a third podcast coming out on this. I think the big thing is, the reason we're doing this as they come out is you should be tracking these costs that are incurred. You should be making sure you're knowing where you're at. There's like people listening right now, and they're either in their fifth or sixth week of this period. So it's really important to know where you're at, because you want to make sure you get as much forgiveness as you can. So you should be looking at your payroll costs, looking at your rent costs and seeing how close you're getting to that forgiveness each week to make sure that there's nothing you need to do, and you are make sure you are trying to get more of that forgiveness. Again, we don't want you to go crazy and pay a bunch of bonuses you haven't paid before. Don’t do anything like that. But we do want you to get as much forgiveness as you can. So it's really important to be tracking this every week, and having a spreadsheet where you're going through and saying okay, these are the costs. I can't include this, and his is how we have to calculate his. So you know what portion you're going to get from that. That's why we're releasing these episodes as we know more, so that you're not going to be stuck in week nine and be like oh man, I wish I would've known that was included. That's why we're doing these podcasts as they come out. And it's really important that you have some method for tracking.
Jody Grunden: I would say that the other thing, which was kind of an unsure thing, is that seventy five percent rule. Where they came out and said hey, payroll has to be at least seventy five percent, and there was a debate on whether that's a cliff or not. We found out it's definitely not a cliff. What it does is they want payroll, in order to get full forgiveness, payroll needs to be seventy five or better. So if you have eighty five percent, or 100 percent payroll, that's one hundred percent forgiven. What they did say is they want to make sure that the non-payroll costs utilities, rent and all that kind of stuff, is not greater than twenty five percent of the amount forgiven. So that's not twenty five percent alone, but twenty five percent of the amount forgiven. So, you know, just keep that in mind when you're actually doing your calculation with your payroll that you have that. It's not a bad idea. Since they're going to allow you to do the bonuses and stuff like that, it’s not a bad idea to add a few bonuses in there to some of your team members if that's going to get you total forgiveness, if you don't need the cash because you've actually been able to retain employees. You know the cool part about this whole thing is that if you don't get forgiveness, it's not the end of the world. The cool thing about it is that it turns into a one percent loan. So it's a very nice loan over two years with six months of loan deferment before your actual payments due. So it's a nice concept altogether. You know, I will tell you what the Congress and, you know, whatever with their training or debating over right now as they're trying to do a couple things, and we'll see how that all plays out. But the big thing is that the 75 percent rule, you know, that may go away. That's been what they're arguing about right now. And then also the eight weeks forgiveness period, they're thinking about extending that to something higher. You may see it as high as 24 weeks, or you may see it as high as 16 weeks. They are looking to extend that. So that kind of plays another calculation here. So are they going to extend that? Or are they not going to extend it? When does your eight week period actually end? Because a lot of people are coming up on the period where they're eight week period is coming to an end. So it's important to understand that because what you don't want to do is you don't want to go out and give bonuses to your employees, and max it out, and then find out you've got another eight payrolls. You could have actually used it. So that's going to be an important thing. That's why it's going to be important for everybody to really pay attention to what happens over the next couple of days. Hopefully at this point, you already know that by the time you hear this. But it's important to understand what happens, you know, in that time frame, because it's going to dictate whether or not you want to do anything different. And keep in mind, is you use hundred percent for employees, that's perfectly fine. You know you don't have to use that at all for rent or anything else. You could use 100 percent of those funds to cover payroll. So that’s an important thing to note for sure.
Jamie Nau: Great. I know you've been attending podcasts and web conferences, listening to other podcasts like every week, every day. It seems like you've been listening to this stuff, so it's good to get some information. So final question. I know we have talked about this recently, but any changes to how this is going to be taxed? There's been no updates on that. Or any foresight on what you could see around that?
Jody Grunden: Yeah, for sure. So the positive thing, we all know they came out and said this loan is going to be non-taxable. So in income is going to non-taxable. Then the Treasury came out, the IRS came out and said no, it’s going to non-taxable but the expenses are not going to be deductible. Which in a sense makes it a taxable loan. So then Congress said hey, that's not how we intended to write the loan. That wasn't the purpose of it. So now there are battling both sides, which is really cool, saying hey, this part is going to be a non-taxable event. So the positive thing is that when this bill comes out, unless something really, really weird happens, more than likely it will be non-taxable at that point. But as of today, the 27th of May, it is a taxable loan. So make sure you hold things back. But just know there is a chance that with a new bill coming out it will be non-taxable.
Jamie Nau: So when this new bill comes out, we'll definitely release another podcast where we kind of go through what those final conclusions are, and make sure that people are aware of that. But that's what Jody is hearing right now, which, again, he's listening to a lot of this stuff. So that's really helpful for our listeners. So any final thoughts, Jody? You know, the things that we need to make sure our listeners are aware of around this loan forgiveness?
Jody Grunden: No. I think keep in mind, reach your best judgment here. Like I said, your banker is your best source of information at this point. They're going to be the ones that are actually going to be approving your loan. You know, if you hear something that we've said like, hey this is what Jody said, and the banker says something different, feel free to email us. We'll provide you with the support that we have. Just keep in mind that the bank's going to have the final say on your loan, unfortunately. That's just kind of how that that works. They'll use the SBA guidance for sure, but they'll have final say on any kind of interpretation that they may have on that. Interpretation may come across on transportation. Perfect example. Some banks may say a lot of things qualify. Some may not know what is. They may say hey, we're not qualifying anything, because keep mine if they qualify things that may not be forgiven, they could lose their guarantee on the loan. They do not want that to happen.
Jamie Nau: They do not want these loans on their books. Every banker we talked to, and the interesting knowledge we see is that the banks, for the most part, want to get these loans off their books and be forgiven. So I think they're in the same place you are. But sometimes, you know, their interpretation of guidance is a little different. So sometimes it's just going back and forth with the communication, and making sure we're all on the same page there. But I really appreciate you keeping up to date on all this stuff. I see you through our Slack channel sending out articles every day, and keeping us up to date. I appreciate you following this stuff. I know it's changing quickly, so I appreciate you staying up to date, and keeping our listeners in the same place. So thanks for join in and look forward to talking to again soon.