Dear Clients and Friends:
As we continue to navigate the current environment, Cassady Schiller’s CARES Act Task Force has the following updates and comments based on questions we have received. It is important to disclaim that the following interpretations are based on information available to us today (April 14), and that these interpretations will likely evolve over the coming weeks as we have access to more information.
We have fielded many questions about restrictions around payroll costs and how to deploy awarded loan principal in order to satisfy the requirements for loan forgiveness. Please see the following comments to our questions:
- Question 1: Are there any restrictions on the forgiveness amount of payroll costs (i.e., payments for “excess comp” for employees making more than $100,000)?
- Answer: While we expect further guidance from the Treasury and SBA, we believe that payroll costs subject to forgiveness is capped at $15,384 per employee. The $15,384 reflects 8 weeks of the $100,000 maximum ($100,000 divided by 52 weeks then multiplied by 8 weeks). This is exclusive of any non-cash benefits, such as 401k employer match and healthcare.
- Question 2: Is the forgiveness based on the loan amount or the amount spent? For example, if the loan awarded was for $1,500,000, but only $1,000,000 was spent, would we have to only use $750,000 (75% of the spending) to cover payroll?
- Answer: This question was raised during our webinar last Friday, which we would like to clarify. Although more guidance from the Treasury and SBA is required, our current assumption is that forgiveness will be calculated separate from the loan principal amount. So, in this example, the $1,000,000 would be forgiven, as $750,000 (75% of the amount spent) was used to cover payroll related costs.
- Question 3: Can I include payments for sick leave in my forgiveness calculation?
- Answer: It depends. If the sick leave is not related to the COVID-19 Pandemic (i.e., an employee needs an emergency appendectomy), it would be included in payroll costs and fully forgivable. However, if the leave is due to a quarantine mandate because the employee has tested positive for COVID-19, this leave is covered under the Families First Coronavirus Response Act and cannot be included in the forgiveness calculation.
Another topic revolves around the deductibility of expenses paid using the forgivable loans.
- Question 4: Can I deduct expenses on my tax return for items I paid for using the loan proceeds that have been forgiven?
- Answer: While we believe it was the intent of Congress to allow for those expenses as a tax deduction, there is definitely uncertainty as to whether those expenses would be considered expenses attributable to tax-exempt income and, therefore, not be allowed. We are still waiting on additional guidance from Washington as to how those expenses will be treated for tax purposes.
Finally, yesterday (April 13), the Treasury Department and Small Business Administration (SBA) released additional questions to their Paycheck Protection Program (PPP) FAQ document. While we do not believe this additional guidance alters our previous interpretations that we may have provided to you, we wanted to make you aware of this updated document now posted to our COVID-19 Resource Center on our website. Additional remarks in the revised FAQ document include:
- Examples detailing the application of the affiliation rules for organizational structures that include entities within the hospitality and food service industries.
- Application of the $10 million maximum loan amount for franchises.
- Documentation requirements for 20% owners for either existing banking relationship or new banking relationships.