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Posts Tagged ‘Paycheck Protection Program’

How CPAs Can Minimize Liability When Assisting Clients With PPP Loan Forgiveness

Posted on: July 21st, 2020

By: Nancy Reimer and Elizabeth Lowery

The CPA’s client received funds from the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and is asking if and how they will qualify for PPP loan forgiveness. As of this date, there is uncertainty over some of the program details and businesses worry about meeting and maximizing the loan forgiveness requirements. With the uncertainty surrounding the loan forgiveness process how can CPA’s protect themselves from liability while assisting clients seeking loan forgiveness? 

The best protection tool in a CPA’s arsenal is the Engagement Letter. An engagement assisting clients seeking loan forgiveness under the PPP is considered a consulting engagement in accordance with the Statement on Standards for Consulting Services issues by the American Institute of Certified Public Accountants (“AICPA”). Like any engagement letter, the PPP loan forgiveness engagement letter should spell out the nature and scope of work to be performed, the CPA firm’s responsibilities, the client’s responsibilities and the work product to be delivered to the client.  The Engagement Letter should also contain limitation of liability and indemnification clauses. 

In drafting the engagement letter, the following considerations should be taken into account:

  • The terms and scope of the consulting services should be discussed with the client and clearly described in the letter
  • Describe the engagement’s objectives.
  • Describe the scope and limitations of the engagement.
  • List the services that are not within the scope of the engagement.
  • Summarize the tasks to be performed and completed.
  • Describe the deliverables.
  • List the applicable professional standards.
  • List the client’s responsibilities.
  • List the CPA’s responsibilities.
  • State when the services will begin and conclude.
  • State the limitations on the use of the deliverables.

We also recommend stating the CPA is not involved with and has no influence upon the loan forgiveness process and cannot guarantee the Application will be approved. It is important for the client to accept responsibility for the accuracy and completeness of all certifications included in the Application and maintain all required documentation to support the application.

While clients may be anxious to apply for forgiveness keep in mind the following factors:

  • Most lenders are not ready to process forgiveness applications as they are awaiting guidance from the Program.
  • Many lenders are developing forgiveness portals to make the process more efficient.
  • Businesses have 24 weeks to use the PPP funds leaving more time to take steps to help qualify for forgiveness
  • Payroll costs are a significant component of PPP forgiveness. Most payroll providers are developing special reports to help the process. But they too are waiting for guidance.
  • Payments are not due yet. Borrowers are not required to make loan payments before they apply for forgiveness or until 10 months after the covered loan period ends.

While it can be difficult for a client to be patient with the ongoing uncertainty prevented by COVID-19, as their trusted advisor, a CPA can help calm the fears while awaiting proper guidance from the PPP.

Even apart from Coronavirus issues, CPAs should periodically review and update their engagement letters. Stay tuned for our upcoming Webinar on Engagement Letters.

If you have questions or would like more information, please contact Nancy Reimer at [email protected] or Elizabeth Lowery at [email protected].

Congress makes PPP forgiveness easier to obtain in passing the PPP Flexibility Act

Posted on: June 5th, 2020

By: Justin Boron

You just got a reprieve on your forgiveness.

In passing an amendment to the Paycheck Protection Program on Wednesday evening, Congress—among other changes it made to the PPP—extended the period to spend forgivable loan money from eight weeks to 24 weeks. 

The PPP Flexibility Act—which passed by unanimous consent in the Senate and 417-1 in the House—became law upon the president’s signature Friday and aims to resolve several of the problems that have emerged during the PPP’s implementation through the SBA and private lenders. 

In addition to the extension of time to spend the PPP loan proceeds, the PPP Flexibility Act makes several other changes that will give borrowers more flexibility to ensure 100 percent forgiveness of their PPP loans:

  • Reducing the amount of payroll costs required from 75 percent to 60 percent.  This will allow borrowers to spend more on forgivable, non-payroll costs, i.e. certain payments on rent, utilities, and mortgage interest.  However, a question remains about the consequences of failing to meet the 60 percent threshold:  Is forgiveness reduced proportionally or is it an “all-or-nothing” requirement? Based on floor speeches for the bill, we expect the SBA to issue guidance allowing for a sliding scale on forgiveness.
  • Extending the period of time to restore workforce and wage levels.  This will give employers more time to re-constitute their workforces without sustaining a reduction in forgiveness.
  • Formalizing exceptions to reductions in forgiveness.  The SBA’s guidance allowed borrowers to avoid reductions for employees who turned down good faith written offers to be re-hired or recalled.  Additionally, the bill allows borrowers to avoid forgiveness if they could not find qualified employees or were unable to restore business operations due to COVID-19 related operating restrictions.
  • Increase the payback period from 2 to 5 years.  The SBA set the maturity date on the loans for two years.  Congress elevated the minimum to five years, so PPP lenders will have to adjust the maturity date on the notes for PPP loans accordingly.  That means any unforgiven loan amount could be repaid over five years.  The interest rate remains at 1%.
  • Extending payroll tax deferral to PPP borrowers.  PPP borrowers were excluded from the payroll tax deferral under the original CARES Act legislation, but the new bill affords them that option as well.  That means PPP borrowers may also defer certain payroll taxes—i.e. the employer portion of the social security tax—from March 27, 2020 through December 31, 2020.  Fifty percent of the deferred tax would be due by December 31, 2021, and the remainder would be due by December 31, 2022.

If you have questions or would like more information, please contact Justin Boron at [email protected].

SBA Updates PPP Forgiveness Guidance: The Good News and The Bad News

Posted on: May 27th, 2020

By: Justin Boron

If you borrowed less than $2 million for all of your businesses under the Paycheck Protection Program, you can feel re-assured that you won’t be questioned by the government on whether you really needed the money.

The Small Business Administration made clear that those circumstances amount to a good-faith certification of need under the PPP’s requirements. 

That doesn’t mean that you are home free.  There are still important limits to how you spend the money so that when you apply for forgiveness, you can in good-faith certify that your business used the money to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments, according to the guidelines.

Fortunately, the SBA recently published a model forgiveness application that instructs borrowers on important issues related to how they can spend their PPP money to maximize forgiveness.

Probably No Bonuses for Owner-Employees, Self-Employed, and General Partners

The PPP’s most recent guidance on forgiveness caps compensation for “owner-employees,” self-employed individuals, and general partners to “the eight-week equivalent of their applicable compensation in 2019.”

If you fit one of those categories and you made more than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed $15,385. 

If you fit one of those categories and paid yourself less than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed the eight-week equivalent of your compensation in 2019.

Without saying it expressly, the SBA’s guidance tells business owners that they may not increase their compensation or pay themselves bonuses using PPP funds for which they seek forgiveness. However, there is still an open question about whether the SBA will forgive compensation in the form of bonuses for non-owner employees.

Timing of Forgiveness Period

To obtain full forgiveness of the loan, the PPP requires the borrower to spend all of the loan proceeds—and at least 75 percent on payroll costs—in the eight weeks from when the loan is disbursed.  That requirement has proved daunting to some employers, particularly seasonal ones or those whose employees refuse to return to work.

There was hope that before it adjourned Thursday, the Senate would pass a House-approved bill that extended this period.  But that did not happen.  As a result, the eight-week period remains in place.  But the most recent SBA guidance does provide some limited flexibility.

First, it allows employers to line up the eight-week forgiveness period with their payroll using the Alternative Payroll Covered Period.  Second, it makes clear that forgivable expenses must be either paid or incurred during the eight-week forgiveness period.  Additionally, costs incurred during the eight-week period but paid outside of it must be paid during the next regular payroll or billing date.

Full-Time Equivalent Employees

The PPP requires a reduction in the forgiveness amount of a loan if an employer fails to maintain certain headcount levels of employment.  The PPP measures this head account according to Full-Time Equivalent (FTE) employees.  But the PPP didn’t define FTE.

Although the SBA and the Internal Revenue Code had defined this term in other contexts like the Affordable Care Act, the SBA chose a different definition than used in those contexts.  For purposes of the PPP, an FTE is a person that averages at least 40 hours per week during the relevant period or the combination of multiple employees whose part-time hours add up to 40 hours per week.

Here’s how you calculate your FTE level according to the SBA guidance:

For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.

Salary-Reductions

The PPP also requires a reduction in the forgiveness amount of a loan based on an employee pay reductions.  Frankly, the statute that Congress passed didn’t make sense and would have inevitably resulted in a reduction in forgiveness if the language was applied literally as it read.  Fortunately, the SBA’s guidance fixed what was likely a drafting error: as long as an employer maintains 75 percent of its salary or wage levels when compared to the first quarter of this year, it can avoid reductions in forgiveness.

If you don’t do that, it gets complicated.  On page 7 of its forgiveness application, the SBA has supplied the formulas to use in its model forgiveness application.  You should work closely with a legal or accounting professional in assessing the reduction in forgiveness based on compensation reductions.

If you have questions or would like more information, please contact Justin Boron at [email protected].

Finding Shelter from the Storm: SBA Issues New Guidance on Safe Harbors for PPP Borrowers

Posted on: May 20th, 2020

By: Anastasia Osbrink

The safe harbor period for businesses that received the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans expired on May 18, 2020 after a 4-day automatic extension. That safe harbor provided that businesses that repaid loans by that date would automatically be deemed to have satisfied the “good faith” requirement of the PPP wherein borrowers certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This safe harbor arose after reports of large businesses, such as Shake Shack and the NBA, receiving loans under the program. Under normal circumstances, a business must provide documentation of making unsuccessful attempts to obtain loans from other sources prior to receiving an SBA loan. However, the PPP required self-certifications of good faith and eligibility without requesting separate documentation. The purpose of this was to quickly get an injection of cash into the economy – particularly to small businesses – so that companies could retain and rehire employees. When it came out that large companies were also receiving these loans, a public outcry ensued and the SBA provided additional guidance allowing for this safe harbor period so that large businesses would be encouraged to repay loans without facing any further investigation, audits, or consequences based on the “good faith” certification. Many of these larger businesses may still satisfy the “good faith” requirement, but making quick repayments creates good optics for these companies and eliminates further audits based on this certification.

Now, in a further effort to conserve resources and protect small business’ payroll capacities, the SBA has announced an additional safe harbor. This second safe harbor provides for an automatic assumption of good faith for any borrower that, along with its affiliates, received under $2 million in PPP loans, regardless of whether that loan was repaid by May 18, 2020. This means that audits for good faith will only be conducted for companies that received over $2 million and did not repay that loan by May 18th. The SBA cited three reasons for this additional safe harbor: 1)  borrowers that received under $2 million are more likely to satisfy the “good faith” requirement because they are less likely to have had access to other loan sources; 2) it will help promote economic stability by helping small businesses retain and rehire employees that otherwise may not have the ability to do so; and 3) it will enable the SBA to conserve resources by only investigating and auditing those companies that received bigger loans, which could yield larger returns if successful. It should be noted, though, that neither of these safe harbors apply to other requirements, such as the eligibility certification, or outright false statements or fraud. However, except where there is evidence of actual fraud, it appears that companies that fall into one of the safe harbors are unlikely to be audited.

It also seems that the SBA is less focused on punishment and more focused on recouping loans that did not satisfy the good faith requirement. That is because the SBA additionally stated that if it does determine a company failed to satisfy the good faith requirement after being audited, the company will not face any further action or fines if it repays the loan in full. This though, again, does not apply to determinations of actual fraud.

As the focus shifts to larger companies and the safe harbor for these larger loans expires, the Securities and Exchange Commission (“SEC”) is ramping up its investigations of public companies that received PPP loans. The SEC is seeking information from several of these public companies in order to ascertain whether they satisfied the PPP requirements. As part of this sweeping probe, the SEC is sending out letters to these public companies entitled “In the Matter of Certain Paycheck Protection Program Loan Recipients,” in which it requests additional information and documentation. This again demonstrates the focus of audits and investigations on large companies that received significant loans rather than on small businesses.

If you have questions or would like more information, please contact Anastasia Osbrink at [email protected].

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

CARES Act and Paycheck Protection Program

Posted on: April 1st, 2020

All businesses with 500 or fewer employees, including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – can apply for loans that may be forgiven. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries

The Department of Treasury has released the Paycheck Protection Program Application and explanatory information explaining how to complete the application process.  Additional information regarding other programs and assistance can also be found on the Treasury Department’s website.  

You can click on this link for the Application and Instructions.  You can click on this link for the associated Borrowers’ Guide

While most banks and credit unions should be able to process your program Application, you should verify that your existing bank intends to support the program and, if not, potentially seek out another lender willing to meet the program requirements, which for lenders can be found here Lenders’ Guide.

As a reminder, a forgivable loan from this program: 

  • Can reach up to 250% of your average monthly payroll over the last year (up to $10 million)
  • Have a loan term up to 10 years; interest rate at a maximum of 4%; and with a potential 6-month deferral
  • Can be used for employee salaries under $100,000, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments;
  • May be 100% forgivable, for the principal value of the loan, if used for the above purposes, the employee headcount for the 8-week forgiveness period remains same as compared to 2019, and certain additional conditions are met

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you. We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests. We cannot respond to all unsolicited requests for representation. If you need legal advice, please contact an attorney and enter into a valid, written attorney- client relationship. See also our terms of service for this website.**