Over the past couple of weeks, a lot of businesses have gotten money from the PPP loans, so we want to make sure that you are as informed as possible about how the loan forgiveness works. In this episode, we are joined by Jody Grunden and Adam Hale to talk about PPP loan forgiveness and how to get the most forgiven. Listen to learn about how you can use this loan to help your business get through the COVID-19 crisis.
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“Don’t try to game the system with these. The government is going to be really scrutinizing the details with this.” - Jody Grunden
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Jamie Nau: Hello everyone, welcome to today's podcast. Today we have Jamie, Jody and Adam again here from Summit, and we're talking about the loan forgiveness on the PPP loans. Over the last couple of weeks I know they just issued some new money out there, but a lot of loans have been given to people for these PPP loans so we want to talk about how to get the most forgiven. That's today's topic. Jody, I'll start with you. What kind of expenses are included in that forgiveness?
Jody Grunden: Yeah, expenses included in the forgiveness. So when we're looking at the PPP loan we have to kind of back up a little bit and kind of explain how the forgiveness has actually taken place. So once you've received the loan, you basically can use, payroll, mortgage interest, rent and utilities and benefits for your people, those are the primary expenses that they allow. What they do is they look at that and they say hey, up to 70 or at least 75 percent of those expenses have to go towards your actual PPP loan. Then no more than 25 percent of what you claim as an expense for payroll would go towards the rent and the other stuff. So what the idea is they want to make sure that we're paying our people and continue to keep people on the payroll versus having them go on unemployment. so that's the reason for the stipulation there. Now, banks are going to look at that, that's going to be kind of a difference, we don't know if they're going to take a hard stance and say, hey, you can have more than 75 percent. The way it's written right now, you can have 100 percent. We don't know what the different interpretations are, so that's kind of coming out. I'm sure that will be addressed here probably over the next few days as we go through this period. But when it comes back down to the types of expenses, again, payroll is the major ones. So you're looking at your payroll for that period of eight weeks and then you're also looking at your retirement benefits in a similar way. You calculated the actual loan dollar amount, so you're looking for that. And then for utility expenses, you're looking for your electric bill, your internet, I'm reading that you could potentially take your telephone expenses, which I'm sure they'll clarify what that actually means over the next week or so. But telephone, utility, gas, all that kind of stuff. All your utilities. Then I would say on the rent side, you have to make sure that you have your lease in place. That has to be in place prior to February 15th. You'll need a copy of that, I'm sure, because you will take that dollar amount for the rent with that period. One thing I would say is don't try to game the system. The governments are really, really looking at these and scrutinizing these things to make sure that you're truly deducting or taking against the counts that you really deserve to take, and plus if you qualify for the loan. If they see that you're taking four months with the rent, or if you are giving all your employees thirty thousand, forty thousand dollar bonuses, they're going to say, hey, that's not the intent of this. You know, bonuses are allowable. Incentives are allowable. But making sure they're within reason, don't be crazy with things. Don't, you know, take three or four rents in a month, that sort of thing. It's really important. So I guess those are the expenses that I would look at. You guys have any additions or subtractions to that?
Adam Hale: Yeah, so a couple of clarifications, because I know there is some misinformation out there about whether it was net pay, or gross pay. So definitely gross pay right? We are all on the same page that its gross pay. There were some banks out there saying, hey, you've got to take it after their federal withholding. Not the case. The other thing is state unemployment tax qualifies, right? So your state unemployment, you're suey if you're looking at your payroll tax records. Then whenever you're talking about, like employee employer benefits, like 401K match, that's just the match portion, not the employee share. So make sure that's distinguished. Then your health insurance. Health insurance would include dental and vision. So anything that's like a Section 125 would be included. So that's just the health, dental and vision insurance. Those all go towards that 75 percent bucket, right?
Jody Grunden: That's correct.
Jamie Nau: One common question we've gotten a lot about is contractors. Contractors are still not included in that forgiveness part, correct?
Jody Grunden: That's correct. Originally they were, then they decided we don't want to double pay them. So they took them out.
Jamie Nau: Great. So Adam we obviously listed off a lot of things there. I think documentation is going to be super important. Do you want to kind of talk about what we're talking about with our clients in terms of keeping all this documented over this period?
Adam Hale: Yeah, just really the payroll reports. That goes to Jody’s point earlier. He was saying don't run for rents. We assume that it'll be kind of accrual based, meaning it'll go by the pay period. You know, I assume they won't make us go out and change our pay periods to sneak into payroll right at the 11th hour to get it into the eight week window. So having your payroll reports. What we're recommending to all of our clients is to, you know, keep track of all these bills as you pay them, put them in a separate loan forgiveness folder. So as you're paying your utility bills, put them in there. If you get a bill for rent, great, put it in there. If you don't just make sure that you have a copy of the lease that spells out, as Jody mentioned, the lease being in effect before February 15th. Otherwise that won't qualify if it's like a self-rental and you've bumped up the rent since then. Then those payroll reports. We're also telling clients to track the forgiveness amount as they go. So that’s really important. You know, we gave all of our clients a spreadsheet to track all this. But I think we're going to elaborate a little bit more on it and have the people individually, so like week by week, even if you get paid biweekly, we'll have you break it down into a weekly basis. You know, put the hours down, put the dollar amount, and then that way you can track your head count for the four weeks and track your totals. And then the supporting documents for that will be the payroll forms. The problem is, of course, is that the banks will have their own form, their own requirement. So don't think you're going to get out of anything by doing this. The nice thing is you already have it kind of figured out. You'll already know what you're forgiven vs. unforgiving portion of the loan will be. And then you can just enter it really quick on their form.
Jamie Nau: With that point, tracking it as you go is super important. I think, again, Jody said we don't want to be gaming the system, which all three of us agree with here. At the same time, you want to make sure you know where you're at. So if you're in week four and forgiveness is a lot less than you think. and you're thinking about making a hire at that point, it can help you make an educated decision there. Saying what does this hire do for my forgiveness? Or other things like that. So it is important to make good decisions with this loan money, but you don't necessarily want to game the system as well.
Adam Hale: Yeah, and I think in terms of like, the bonuses are really important because I don't know about the two of you, but what I'm seeing with my clients is there's like a small, unforgiving portion just because for those clients, you don't have a high amount of rent, you know, because having 25 percent is nice for rent. If you're not in the high rent district, it might be one of those situations where we're just naturally going to have this built in unforgiving portion. Which for some clients, as we know, the unforgiving portion is a loan. You know, it's deferred for six months and then it turns into a loan paid over two years at one percent interest. So kind of a good deal. But one of those things where we'd prefer it to be forgiven. So the bonuses are kind of a big question mark for a lot of our clients. As Jody mentioned, I think it has to be kind of a normal course. But we know we also can't pay an individual over that eight week period over, 15,300 dollars?
Jody Grunden: Correct.
Adam Hale: So it's not like if somebody was already on pace to make 80000 dollars a year, and they were going to make 13000 dollars, or whatever the dollar amount is, you couldn't give them a bonus. It's going to exceed that anyway because it’s not going to qualify.
Jody Grunden: You can definitely still give them the bonus, but only part of it would qualify. Obviously we don't want you to game the system there. So the 15350 dollar, eight week period is really the maximum. That is the maximum you can make in that period. So even if you started somebody halfway through the year and their commission ramps up or down 15350 dollars is the max they can make in that eight week period. So it is real important to understand the way the guidelines are written right now. Who knows? They may come out and revise those in the next eight weeks, and have better clarification on what they happen. Right now, it's simply that 15350 dollars for eight weeks.
Adam Hale: Are you two having clients ask contractors to jump on the payroll? How are you getting your head count up?
Jody Grunden: Again, gaming the system, if you bring them on payroll, guess what? They're going to stay on payroll from here on out for eternity. So if you do something like that, you know, the IRS, no issues with that because they'd rather them be employees anyways, but they would continue on only as employees after that fact. Oh, the other thing I wouldn't do is I wouldn't raise all their income to maximize your forgiveness amount and let them go in week nine. That also probably wouldn't be a great idea just because, again, gaming the system there. So the idea is keep them off unemployment. So you have to be real careful what your actions are within that eight week period, because the worst case scenario, I actually don't even know what the worst case scenario would be if you got caught trying to game the system, it would not be very good. You'd have to repay that entire thing. I'm sure there'd be major penalties assessed and I'm sure that it would not be a good situation for you. So don't do anything really stupid. Don't give yourself some really big bonuses during that period. You know, play it out as you normally would, from a day to day perspective.
Jamie Nau: Yeah, I want to go back to your contractor question Adam, real quick. I think what I've been doing is, again, not gaming the system, but I have several clients that have had contractors they've been thinking about turning into employees anyways. My advice to them is, hey, if you're going to do it now is the time to do it. You know, might as well get the benefit for them because you're going to obviously move them into an employee, which you're thinking about doing in the first place, and you'll get more of this forgiveness. So I've had a couple of those conversations with clients, and I was aware we had those type of contractors.
Adam Hale: I think it's also important, maybe you do have a little short stint project that you want to get accomplished over the next three months, instead of hiring a contractor to do that it's just a short term employment engagement. They know going in that I only need you to complete this thing for three months, and then it's on the payroll, it helps with the headcount. It's covered under the forgiveness portion. The other more creative thing that I've seen for people that are, you know, maybe it applies more to hourly folks, or people that are on the front lines, is hazard pay premiums for hourly folks. That sort of makes sense for people that are, maybe not listening to this podcast, but that's one of those things you hear circulated as well.
Adam Hale: I think I could go for anybody, not just on the front line, but anybody coming back to work, and they're not 100 percent sure they want to come back to work, you know, give them an incentive to come back a financial incentive, just because maybe they fell, even if you're working in an office, that hazard pay could be justified in that case.
Jamie Nau: Definitely. So, Jody, could you touch on the timing of the forgiveness for us? I know that obviously there's the eight week period, but if I want to get that forgiveness what are the steps I'm going to take, and when do I need to take those steps?
Jody Grunden: Yes, I guess right after the eight weeks you need to then approach the bank and start gathering all your information. Ask them the information that you need. That's going to vary dramatically from bank to bank. I guarantee it. So whatever bank you're banking with just fall by what they want. So you'll gather that information, put it in a file form, you give it to them, and then afterwards they've got 60 days to forgive that, or to make a determination on the forgiveness of the loan. So you've got about a 60 day window afterwards in which you'll technically have a loan on your books at that point all the way through, and then 60 days after that that part of that loan, or all that loan or none of that loan will be forgiven. Then you'll be notified at that point the reason why of either way.
Jamie Nau: Then once you know what's not forgiven, how are we recommending people work with that differences? So Adam, I'll start with you on that. So is I have two hundred thousand dollar loan, and only a hundred fifty thousand dollars is being forgiven, what are we recommending clients do with that fifty thousand dollar difference there?
Adam Hale: Yeah that's a client by client determination, but in some instances where they haven't been as impacted there might be an opportunity there to pay that back. That’s probably the first one. Then other people that have been greatly impacted because it took a while to get the loan, so people's cash reserves might have been impacted pretty tough beforehand, so people use that as a buffer for the next year or two, just to kind of help with their cash reserves.
Jody Grunden: I would also add to that, there's so much uncertainty out there right now, even when people are coming back, just because you're cash heavy now potentially, or maybe you're in a position, you think, I don't need this money now I am going to send it back. I would probably still hang onto it for a little bit because there really is so much uncertainty. You really don't know how things are going to be impacted two or three months down the road. You might end up needing that money. So I wouldn't necessarily put yourself in the hole. Keep it there because it's such a low interest rate, one percent is very, very low. It's definitely, in my opinion, worth the risk in keeping it on the books and paying a little in interest just to make sure that you've got the money down. Then maybe in December if everything's recovered, you are feeling great, go and pay it off. But I would defiantly hold on to it, and keeping it in your cash reserve for at least a year or two.
Adam Hale: Yeah, there's no prepayment. It's not like you have to make that decision within that 60 day bank period.
Jody Grunden: Right.
Jamie Nau: Yes. I tell my clients it’s not like this is a payday loan where if it's a really bad loan that you want out of your books as soon as possible. This loan is pretty, pretty favorable for anybody that has it. Again, we have several clients that were not in a great spot prior to this. So any non-forgiveness they've found on this loan is going to be a pretty nice sized loan for them to pay over at a pretty low percent. So we've been talking to them about that as well. So the last question, related to taxes. Obviously there's a forgiveness portion here which we know is going to benefit us greatly. Do I need to pay taxes on the part that's been forgiven? How is that going work?
Jody Grunden: Luckily no, there is no taxes on the forgiveness portion, or taxes on the expenses that you're using against it. So the government has made this a completely tax free benefit for you as a taxpayer to receive this money in the way it was intended to be.
Jamie Nau: Great, that's really nice. Again, you're basically getting a certain amount of revenue for these eight weeks that are going to help you pay for those expenses. But again, you're basically getting that tax free, which is not reducing it at all. That's a great advantage to this. So any final thoughts? Anything companies should be thinking about in terms of this forgiveness?
Jody Grunden: The only thing that we're kind of still uncertain about is the employee head count, how that's going to be taking consideration, Keep in mind there's always two parts to this conversation. The first part is keeping the employee's wages to a certain dollar amount. The second part is keeping the employee headcount to a certain dollar amount. So we know what the headcounts going to be at the end, because you've got to have X amount of people at the end of your eight week period, or into June 30th, to determine where the headcount, or the headcount falls on the top part of the calculation. We're just not 100 percent sure of the clarification on the bottom part. So I'm sure that'll be coming out fairly soon. It's my understanding that if you just started in January, February, use those numbers on head count there. The average if you're seasonally, use last year's numbers during this period. For those people that aren't seasonal, we're not sure if you're using December 31st numbers, how you payroll loan was originally a determined, or if you are using February 15th numbers. There's not a ton of clarification on that out there yet. I'm sure, again, that will be something that will be coming down the down the pike as well.
Jamie Nau: Yeah we expect some additional guidance coming out here any minute in terms of final questions you will have on this forgiveness. So hopefully that comes out soon and we can do another podcast on it, or obviously it will be on our website, anything more we find. Great. Well that's all for the show. I appreciate you guys joining us. I think this is a great topic. Obviously, a lot of people have been talking about the PPP part and now it's the second part of that we really have to think about. So appreciate you guys joining.