I want to welcome everyone to this quick video series.

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Today,

we're going to be talking about Qualifying Payroll Expenses

and how to document such. We are going to discuss some things

that we are taking our best guess on. Some of these characteristics

of PPP Forgiveness have not been set.

We are waiting for final procedures from the SBA and the

Treasury Department.

So some of this is open to interpretation.

We're going to try to take our best guess and of course, we

don't know your unique situation.

So if you're on this call, you most likely have a unique

situation that requires a professional so we highly recommend

that you seek your CPA, your accountant, your lawyer out to ask

them these questions. That said, we're going to give our best

shot at providing the information we have today. With me on

the phone to do that,

my name is Chris Nichols CenterState Bank, and with me are

two subject matter experts: Josh Harris, CPA and our Credit Administrator

for CenterState Bank and the one in charge of actually approving

PPP forgiveness applications.

It's his team that's going to be signing off on all this

and if you have contact with someone from credit, it's going

to be him. And then we're lucky to have John Carpenter,

Principal from Cherry Bekaert, CPA firm that we've partnered

with to help us with both PPP Forgiveness Education and for

review. Today as I mentioned, we're going to be talking about just

payroll expenses.

We're going to have other videos on non payroll expenses.

So be sure to check that out for payroll expenses

when you file your forgiveness.

They have to be at least 60% of your payroll amount,

and so we're going to be talking about that today. Josh,

what else can you add to this slide?

Josh Harris: Just one quick comment.

I wanted to, you know, kind of provide for our listeners.

There is some confusion from folks about that 60% ratio

and what are they applying it to.

So when when you have that 60% payroll box, some

folks are, you know, thinking "hey, do I need... does that need

to apply to my original loan amount or does it apply more

so to just my forgiveness claim?" And so, I just wanted to help

folks understand that let's say they had, for easy numbers,

$100,000 PPP loan, when they think of that ratio they did

they basically need to think of the pool of or the bucket

of eligible costs that they apply for forgiveness and they

need to think "okay,

if I'm... if I have a $100,000 loan and I have

$100,000 of eligible expenses, at least 60%

of those

eligible expenses need to be related to payroll."

So the question that's come up is "what if I don't necessarily

hit that full $100,000 loan amount?

I had a loan for a $100,000, but I can only come

up with $80,000 of eligible expenses."

Well, what you would then do is apply that ratio to

the pool of eligible expenses.

So if you only have $80,000 of eligible expenses that you're

claiming, then it be point six times, you know, $80,000.

$48,000 would need to be the minimum payroll percentage.

So I just wanted to try to highlight that for folks

just in case it helps eliminate some confusion.

So hopefully I didn't introduce more confusion, but that's

something that's come up several times.

Chris Nichols: Okay, I'll transition over to you, John.

John, payroll can make up a 100% of your forgiveness

applications, is that correct? 

John Carpenter: That is... That is correct. That is correct.

And as Josh said that is going to be applied if

your pool of forgivable expenses may be larger than your

loan amount.

You can't forgive more than a 100% of the loan, but you

can get to a 100% forgiveness,

perhaps just on payroll alone.

So let's talk about what are the kind of payroll expenses

that get included in this bucket.

And we've got a list here: salaries and wages.

If you're part of a PEO, then your salaries and wages, even

though the PEO is the payer, those are still your salaries

and wages in your company,

you can count those and you see the other categories tips

and bonuses; bonuses are fine.

At least we recommend you keep them reasonable.

But bonuses are fine, hazard pay, vacation pay. We do note under

"leave" there

are certain mandatory leave that had to be paid under

the families first Coronavirus Relief Act though

you're eligible for tax credits

when you pay those, thus they are not eligible to be included

for forgiveness. Sick leave pay, and then on the benefits side,

the employer's portion of Group Medical,

and such as health, dental, and vision, but not short-term disability

or long-term disability or life insurance, are eligible to

be included and the employer portion of retirement benefits.

If you happen to have a pension plan for a few companies

do employer contributions are eligible, employer match for

401k, employer payments into a simple IRA are all eligible

to be included.

Now there's some common, we'll call it misconceptions, about

what cannot be included. The most notable one and some of

you may have heard this on the front end when you were funded

on your PPP loan, anything you pay to a 1099 contract worker

is not part of your qualifying forgiveness expense. 1099ers

can basically... could have... were eligible to apply for PPP loans

on their own and they accumulate their own forgiveness expenses

but amounts you paid a 1099, through your company are not part

of your pool of forgiveness expenses.

If you have any employees that for some reason are... they're

actually sitting on a payroll of another company, they get

their W2 from another company,

they would be part of forgivable expenses for that other

company, but not your company. Social Security and Medicare

taxes, not qualifying. And then we've had this question quite a bit:

How about the costs of actually running payroll, your fees

to a third-party payer or a bookkeeper?

Those are not payroll expenses and they are not included

in forgiveness.

Those are really viewed as administrative expenses.

So as we said, it's got to be at least 60% of whatever

your loan forgiveness amount is, it's not an all or nothing

proposition, and in the Forgiveness period, you know, is

now the option of either 56 days or 8-weeks 

or 168 days, 24 weeks, or could be something in between

if you spend all your PPP money before you get to a 168 days.

Note that the eligible payroll are for employees whose primary

residence is in the U.S.

That has nothing to do with citizenship,

nothing to do with tax home, just is their primary residence

in the U.S., and it's for all wages from the PPP funding

date through the end of your forgiveness period, we'll talk

in a second about some alternative periods that are in effect,

and what is considered the effective date of payroll?

It's the date you either originated your ACH direct deposits

or you distribute paychecks.

Those may be two separate dates.

That's okay.

We would recommend going with the earlier date, which is

probably when your ACHs are originated for direct deposit

and with the change in the forgiveness period or the

allowance of a forgiveness period up to 24 weeks,

the maximum amount that can be forgiven for each employee

is capped at $15,385 per person if you use 8-weeks,

$46,154 if you use 24-weeks, and although this has not

been made clear by SBA, we believe it's common sense that

if you have a forgiveness period that's between 8 and 24 weeks, 

then you would prorate that cap to correspond to whatever

the number of weeks in your forgiveness period might be.

Chris Nichols: And John, those caps are just salary and wages or

is that a gross amount including everything, including benefits,

etcetera?

John Carpenter: That is good, good, great question, that is only salary and wages.

So employer contribution for health and retirement is in

addition to those amounts except for owners and we'll get

to that in a second.

So for a lot of people your forgiveness period is going to

start on the day

your PPP loan was funded. If you have a pay cycle that

is bi-weekly, namely every two weeks, or more frequently,

probably weekly, then you do have an option of using what's

called the Alternative Covered Period, which on the first day

of the next pay cycle that occurs after your PPP funding.

If you were going to stick to an 8-week forgiveness period, 

or cover period, then you may want to look at

this Alternative Covered Period because it could allow you,

because you can count payroll that's paid, immediately after

you got your PPP funding or after your cover period

starts, and you can cover accrued payroll through the end

of your covered period so long as it's paid on the next regular

pay date after the cover period ends.

This is a way that effectively, if you time it right,

you can perhaps get close to 10-weeks of pay in an 8-week

covered period. If you're not worried about trying to get

all of your forgiveness expenses in an 8-week covered

period and you can go up to 24 weeks, then it might not really

make a difference whether you use this Alternative Covered 

Period or not.

Chris Nichols: So John, in an example, if my loan was funded on

say April 27th, and my semi-monthly payroll period starts 

on May 1st, that is I always pay my employees May 1st and May 15th

or the on the 1st and 15th of each month,

what do I do, there is that sub period between the 27th my funding

date and the first, do I take a pro rata portion of that and include

evidence of my last payroll period, how might my business

 handle that? 

John Carpenter: Actually if you were funded on April 27th,

then that entire payroll on May 1st can be included in forgiveness,

even though the pay period started prior to your PPP funding.

it's clear that, that entire payroll amount can be included

and let's say your forgiveness period is going to end say

roughly around June 20th, then, and then you can obviously count

the payroll that hit on say June 15th and you can count the

accrued payroll from June 16th through the end of your forgiveness

period of 8-weeks, say, it's roughly June 20th,

you can count those few days as long as you paid out that

accrued amount on the next regular pay date, which probably

would have been June 30th.

Chris Nichols: So that's a real important point for our borrowers.

I heard you say earlier, John, about this,

if I opted a 24-week period and I've hit a 100%

of my forgiveness say in week 12, I can go ahead and

file. Is that correct?

And then, what happens to my FTE?

What happens to my employees, do I have to keep them employed

for the whole 24-week period? 

John Carpenter: You do not. The, and yes,  

you can apply once you've spent all your PPP money and we would 

generally suggest that borrowers should run some calculations

and make sure that they are, in fact, at or above a 100%

forgiveness. To us,

it would really make no sense to apply for forgiveness after

12 weeks and then find out that you really don't qualify

for a 100%. Chances are you can probably go another

few weeks and get to a 100%. And what SBA has said

is that borrowers are making their certification about their

FTE counts as of the date of their application, so there is...

there seems to be, from the SBA guidance, some incentive for

borrowers to go ahead and apply for forgiveness reasonably

as soon as possible because once you make your application

for forgiveness, then your counting of FTEs

really can stop and at that point owners can really do what

they need to do,

if there need to be changes to FTE counts, then they are

free to do so once they've applied for forgiveness.

They do not have to continue tracking FTE counts all the

way through to 12/31/2020.

So I think we probably talked about most of these. This is,

you know, again 8 or 24 weeks. Severance is okay.

We talked about the earned payroll paid right after loan funding,

that can be included.

Let's go on to the next slide, Chris.

Bonus payments are fine,

so long as everybody remembers there is still a cap for each

employee and then owner employees.

Well who are owner employees?

They are either sole proprietors, partners in a partnership,

or members in an LLC of any percentage, doesn't matter if

it's only 1%, they're considered an employee and all shareholders

and S corps and C corps.

are owner employees. Congress wrote in some special rules

for the owner employees:

they are capped at the same $15,385 if their using an 8-week

period, but their capped at a lower amount if they're going

beyond 8-weeks, so on a 24-week period their capped at $20,833,

or this is the lesser of their capped at that or the lesser

of two and a half months equivalent of their 2019 compensation,

and that includes health and retirement.

How is that going to be looked at?

It's going to be looked at by virtue of borrowers having

to submit W-2s, schedules, copies of Schedule C or F, and copies

of K1s from their 2019 tax return.

So owners, or companies applying, will need to keep in mind

that they will need to submit those tax documents for their

owners demonstrating their 2019 compensation.

Chris Nichols: And John, I'll just jump in here with a plug that we 

have a whole webinar, an hour-long webinar, with Q&A coming

up or if you're listening to this on recording,

it may be on the website at this point.

So do check that out

if you're in an employee as those restrictions and additional rules 

get somewhat complicated and you want to spend some time there. 

John Carpenter: And then we'll touch on the other non-wage 

parts of payroll costs which are basically health and retirement,

and we don't need to read through all this slide,

but owners do need to understand that they can include

the health care costs for their employees only, 

remember owner employees are capped at the amount, and

we'll talk about that in the other webinar, but it's the

employer share of costs paid

for healthcare premiums, if you have a self-insured plan, those

costs are included.

So does include medical, dental, vision, HRAs, FSAs;

as I've said self-insured plans are fine.

And the question about how about prepaid, about prepaying

amounts into a health plan?

This is still kind of unclear by SBA whether prepayments

made during the forgiveness period can be forgiven or not.

And then it is... 

Chris Nichols: We are hoping for more clarification on that, too, from 

the SBA, but until then

it looks like your position, John, that there, this should

be allowed.

John Carpenter: We think they're allowed, we think they're allowed, 

we would, but we'd sure love to have some clarification on that.

And in a similar vein, retirement contributions. Again, these are

employer contributions on behalf of the employees; anything

going into traditional pension plan, 401k, simple plans,

those types of things, the employer match discretionary cuts,

profit-sharing contributions are okay.

We do note now,

it's getting kind of late in the year for anyone to have

not made their contributions for the 2019 year, but if for

some reason you have not made 2019 contributions during the

forgiveness period, or prior to forgiveness period, and if

they're paid in the forgiveness period, those can be included

in the forgiveness amount. And just like with healthcare,

we believe that any contributions made for calendar

year 2020 during the forgiveness period are included in forgiveness.

That, again, has not been made really clear by SBA,

but we do tend to think that that's going to be okay.

So people can keep that in mind.

Everyone should also keep in mind where it gets, it's certainly a

little trickier with retirement plans, is that you do need

to keep in mind that the contributions you're making still 

have to comply with all the provisions of your plan document.

So it's worth it for employers to check that and perhaps

have a call with whoever the plan administrator is for 

the type of plan there, 

they've got in place.

And owner employees, as Chris said, we'll have a much deeper

webinar on this coming up,

but these are all owners of LLCs, 
S Corps, C Corps, sole

proprietors, and they are capped at a lower amount than the

$46,000 over 24-weeks that the non-owner employees, they receive

during forgiveness.

And Josh will tell you...

Chris Nichols: Josh, do you want to pick up with Qualifying Payroll Expenses and how to document?

Josh Harris: Certainly, so when it comes to documentation, there is a

significant documentation burden as part of this forgiveness

application and we're going to lightly touch on those items

here, and I also just as I kind of get this kicked off,

if our listeners are wondering where we're pulling this information

from, I would point them to Page 6 of the 3508 instructions.

So what we've basically done here is provide a brief summary

of what is discussed in more detail on Page 6 of the 3508

instructions. So, if anything, if anybody walked away with

confusion or additional questions, that's where they can

go to try to get to the root of where these items are coming

from. So when they do that, they will see a page that basically 

outlines documentation that the Borrower, that the Applicant,

must submit with their application and they'll also see a

list of documents that the Borrower must maintain in their records,

but are not required to submit.

So for those documents that they must submit, they're generally

broken down into three categories: that would be payroll

support, which is what we're talking about today, FTE supporting

information, and non-payroll

information. But in terms of our topic today, specifically

on payroll,

what we tried to do here is highlight for our listeners those

items that are most urgent or most important in documenting

their payroll costs claim.

So as you can see here, we've got five items that we've listed

on this slide. The IRS Quarterly Form 941 or the Borrower's

equivalent, so not every industry

files 941s, not all borrowers file 941s, but you know, given

your industry type, given your business type, given the type

of salaries and wages that you pay, if you have a quarterly

payroll tax report that you're filing, those should be provided

with your application and they should be the ones that overlap

the entire covered period. So the second item that we'd be looking

for is payroll reports or schedules from a payroll provider.

Quite often, they have already, a lot of these

higher quality or more well-known payroll providers have payroll

reports and schedules that are even specifically designed

for the PPP program as well as for this forgiveness base.

So if they have those, fantastic, if not, just their general

payroll report summaries and schedules from a good payroll

service provider would be a document by to provide as well.

Number three, pretty obvious, any bank statements showing payroll

debits and what that's showing is, it's kind of putting together

the audit trail for the Bank and for the SBA, saying

"hey, here's the number that we're claiming and here's

proof via the Bank statements of these amounts were actually

paid." Alternatively, you know, canceled checks or other evidence

of payments,

for example, ACH proof.

And then finally, a schedule of employees with name, employee

number, compensation, and the period of time that you're using

for this calculation.

So, like we said, you can always reference back to page 6

if you want further details.

So I, Chris, unless anybody else has anything to offer,

I think we can go to the next slide.

Chris Nichols: Well that does bring us the Safe Harbor. 

Now Safe Harbor, these are documents that the Borrowers are 

not turning into the Bank,

but that said they should keep it for their record.

So John or Josh,

what's your advice here?

Josh Harris: Yeah, I think the... I'm sorry, John, I'll just jump in real

quick. And then if there's anything that I didn't cover please

chime in.

I think one noted highlight here is that we want

folks to be aware that there are safe harbors in the event

that you're unable to replace your employees or in the event

that there were reduction hours

that were outside of your control.

So for example, if you were shut down or something like that

by the Health Department authorities, but one thing we would

offer here is that a lot of times this is going to require

input from your accounting professionals to help

make sure that you're handling the nuances of this 

these Safe Harbor exemptions properly.

So that's just a quick introduction, John,

what else did you offer?

John Carpenter: No, I think you've hit on it, this is FTE reductions

and the calculations that go with it are probably one

of the trickiest parts of PPP and just very nuanced and so

we would encourage everyone to spend some time with that

and know that every loan is subject to audit and these

documents do need to be retained for 6 years after loan

forgiveness. 

Josh Harris: And it's okay.

Chris Nichols: And try to document your support what you're claiming

so if you can't hire an employee

back or your employee asks reduced hours or quits or moves

out of state all that in some way would be great to document

either, if nothing else in your notes as a business owner,

you keep that for your records, but also any emails or advertising

you do, etcetera.

Josh sorry...

Josh Harris: Yeah, that's exactly what I was going

to kind of echo,

Chris, is the name of the game in this especially with

the Safe Harbor exemption.

The name of the game is documentation.

And so while there's a lot of nuance and there's a lot of

just gray area that folks are going to have to navigate, 

the real emphasis here is document, document, document

whether it's text, email chains, letters, whatever

notices you've received from Health Department officials

or your local county or state.

Like I said, the name of the game is document.

Chris Nichols: So as we wrap up you want to talk about 

documenting qualifying benefit expenses and healthcare, etcetera.

Josh Harris: Certainly.

So as we round up our kind of conversation on payroll, 

what we've talked about so far is primarily what the

SBA is referred to as kind of cash compensation.

So kind of classic wages, you know, salaries, bonuses.

The other element of payroll would be what they call kind

of Benefits Related Expenses and for all intents and purposes

that's going to essentially fall into two categories, which

would be healthcare and retirement.

And so, basically two different categories that you

would look for here is just copies of the benefit statements

would you know that kind of show the numbers paid

by the entity and then supported by that, you'd have

canceled check, payment receipts, that just show evidence

that the expenses actually were paid.

So, you know two basic things:

one is the documentation showing the, you know, the costs,

and the second would be, you know, evidence that the costs

was actually paid. 

Chris Nichols: And I'll add one more thing to that 

that not only should you show the costs and the payment of that, but

anytime you can highlight for Josh's team and John's team

how those expenses relate to the period and that if you could

tag them and say this relates to my, you know, May 1st

cycle or the first part of my covered period or however you 

want to say would be immensely helpful because, you know,

we have to go through 10,000 plus applications, approximately,

and the easier you make it on us, the faster you get processed,

the more clear, the less questions and so it just benefits

everyone by being as clear as you can on both the payment,

the evidence and the payment of that and which period and

what you're claiming.

John, Josh...

Josh Harris: Yeah, I'm glad you...

Well, I was just going to kind of piggyback on what you said there,

Chris, which is anything that our applicants can do to

to show us how they arrived at

the number would be beneficial.

So to your point of view that specifically an example of

like a health insurance statement,

if they're not claiming, let's say the health insurance

statement has an amount of $1,500 on it, if that $1,500 is not

actually tracing through, or flowing

through to the amount that they're actually claiming, it would

save time if they said hey, they circle the $1,500 on

the statement.

Then they show what they subtracted to arrive at

the number that they're actually claiming.

So that is a good point and it would help expedite things.

Chris Nichols: So importantly, we'll have a whole video 

on just documentation and how to notate your PDFs

and what form of documents you're going to need and

what other documents you could upload to us

and what documents you don't need upload to us.

So be sure to check that out.

In the meantime, if you or anybody has any additional questions

they can get back to either myself, Josh, or John, or they'll

get anyone on their team, so be sure to hit that up.

Be sure to check out our live webinars and our additional

videos plus our website. 
John, Josh, anything else

to add? I thank you guys very much for being here.

John Carpenter: Thank you.

Josh Harris: Yeah, nothing left from me.

Thank you, Chris.

Chris Nichols: All right.

Thanks for tuning in and we'll talk to you soon.

Take care.

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