I want to welcome our PPP borrowers to this session.

♫♪♪ 

This is a focus session on the Paycheck Protection Forgiveness Program,

specifically looking at Owner-Employee expenses since

the rules are a little different. With me today,

I have Josh Harris and John Carpenter.

I'll introduce them in a second. Before we get to that,

I just want to issue this disclaimer that this is the best

information we have - it is still evolving.

We are still waiting for the SBA to clarify some more information.

We are taking our best guess and since we don't know your

exact situation for your business or your situation, it's

best to consult your professional: your tax accountant, your

accountant, your CPA, your attorney for the best advice on

what to do with your particular instance. With that, again,

I have Josh Harris.

He's a CPA and heads up the review portion, the credit underwriting

portion, of PPP origination and forgiveness and we have John

Carpenter, Principal at Cherry Bekaert, a CPA firm that we partnered

with that is also involved with assisting us both in the

education of PPP forgiveness and of the approval. With that,

John, let's start with you. Tell us about as you file, as owner

employees file, what should they be aware of and how does

a covered period work?

John Carpenter: Yeah, actually Josh, I think you're going to cover this part.

Josh Harris: Oh okay. Certainly.

So I'll give a quick just overview of some of the high-level

things that our applicants need to be aware of, but the first

thing we're going to cover is just helping folks understand

the payroll cost incurred or paid.

So that's one of the very first things that folks need to

realize is that as we go into this forgiveness period, it

is we're first and first off looking at payroll cost incurred

or paid. And so what we would do is point people back to their

covered period which by way of reminder is 8 weeks or

24 weeks based upon their election of wages beginning when

the loan is funded.

So that funding date is important for folks to mark and remember

and once they've elected their 8-week or 24-week covered period,

payroll costs incurred or paid during that time period would

be factored into their forgiveness request. That would include

severance pay for any terminated employees. It would also

include any earned payrolls paid in the first payroll after

the loan is funded.

So what that would mean is let's say you have a payroll period

that overlaps your funding date, you could include that payroll

period in your covered period in your forgiveness request.

So again, just alluding back to the covered period of 8 weeks,

which as you can see here translates to 56 days, or

24 weeks which translates to 168 days.

Payroll that are paid on the first payroll date following

the covered period may also be included where applicable

to payroll periods occurring during the cover period, so what

we're saying there is there's two things that folks need to

understand. Clearly,

there will be payroll cycles or payroll periods that fall

directly within the covered period. However, there's a chance

that the first payroll period in their covered period may

have some type of overlap but won't fully be contained. But

you can include that. There's also this situation on the back end

where you can have a payroll that is incurred, the cost is

incurred, during the tail end of your covered period but it's

not paid until after your covered period is expired.

So it's just, you know important for folks to be aware of

those two variables the very very front end, the very very

back end, both may be included.

So I'll just open it up real quick, John,

did I say anything there that you want to correct or did that

adequately kind of summarize that slide for everybody?

John Carpenter: Yeah.

No, I think that's great, Josh.

Chris Nichols: Hey, Josh?

Josh Harris: Okay.

Chris Nichols: What happens if I'm a business and I reached my maximum

forgiveness at Week 10?

Can I go ahead and file before the end of the 24 weeks?

Yeah, that's really a good point to understand.

So to Chris's question, to Chris's point, for anybody who does

reach maximum forgiveness,

let's say you elect 24 weeks as you're covered period but

you actually use all your funds after only 10 weeks.

The nice thing is that the SBA allows you to go ahead and

submit your application as soon as you have used or exhausted

your funds.

So the short answer is you do not need to wait until the

full 24 weeks has expired in order to apply.

Chris Nichols: And tell us about the $100,000 maximum and how

you adjust that for 8, 24 weeks or even 10 weeks.

Josh Harris: Certainly. So as we look at this next slide, we get into that topic and

if folks remember on the front end when you applied for your

PPP loan, there's a $100,000 cap per employee,

per owner and that same cap is now rolled forward into the

forgiveness request.

So as you submit your application, as you tally your numbers, both

employees as well as owner-employees still need to pay attention

to that $100,000 cap.

So as we dive in here, you're going to kind of see what that

works out to be. So you can include reasonable bonus payments.

And the issue here though, regarding that $100,000

cap, is that if you're using the 8-week period, that

translates to a cap of no more than $15,385. If you use

the 24-week period, your cap would be $46,154. Now

kind of going back to Chris's question about "hey what happens

if I elect for 24 weeks, but I exhaust my funds after only

10, what happens to my cap?"

Well in that case, your cap would be prorated for purposes

of calculating your maximum owner-employee compensation.

This would be actually employee compensation. For owner-employees,

it's no more than $15,385, so that would be the max 

$100,000 cap for the 8-week period or $20,833 during

the 24-week period and folks need to understand that

that's capped at two and a half month equivalent to their 2019

compensation. So there's kind of a limiting factor there.

You can't just bump up your payroll for this year

if you didn't have the same or equal or greater payroll in

the prior period, so you need to pay attention to what you

paid yourself in 2019 and you will be capped at two and a

half months equivalent of your 2019 comp. So as the final

note there indicates to folks, the government's just trying to

make sure that we don't encourage any windfalls to the owners

where they just can kind of let go of their employees but

then pay themselves a nice windfall.

So lastly, the mandated paid leave wages cannot be included.

So I think that covers that slide. 

Chris Nichols: Excellent. And before we leave this slide, when we talk about a prorated portion for 

10 weeks, if you take a $100,000 divide by 52 weeks,

and multiply by 10 weeks or if your period is 16 weeks, you'll

get the applicable cap for the regular employee.

Josh Harris: Yes.

Thank you.

So moving on to Slide 6, we're going to talk about other

payroll costs that are incurred or paid and these would include

qualified health care costs for employees.

That would be the employers share.

So obviously the employer cannot factor in anything that

the employee contributed to those costs that are incurred

during the 8 or 24-week period. It also includes health care

premiums and the cost of self-insured plans.

We also believe that includes dental, vision, these HDHPs, HRAs, FSAs

and other kind of typical health coverages, but not HSAs.

So the next bullet indicates that self-insured health benefit

paid by the employers general assets or a special health

plan bank account would also be included. It is however important

for folks to realize that we can't kind of stuff expenses in here.

So we should not be including prepaid premiums or prepaid

contributions to health plan accounts.

So that's, I think, important for folks to realize.

Chris Nichols: And this is in addition to the $100,000,

is that correct for your average employee? 

Josh Harris: Yes, for your average employee, correct.

These are what's called non-cash costs.

So the $100,000 cap is related to cash compensation,

which is basically wages, and for employees you can tack on

on top of that these non-cash expenses such as health care and retirement.

Chris Nichols: And for borrowers that are going through our

online channel, you'll be asked to enter your cash payroll

amount and then we'll cover the non-cash for the additional,

the healthcare benefits, the additional payments having to

do with payroll next.

So you'll see each section.

Take us to the next slide, retirement plan.

Josh Harris: Yeah, so we kind of already alluded to retirement plans,

but this would be the second primary component of non-cash

compensation. So we said cash compensation is basically wages,

non-cash compensation is basically, for the most part, but

it'd be health insurance premiums as well as retirement plan

contributions. So again, as our applicants are going through

their application, they're going to want to pull aside their

documentation for any contributions to their retirement plans

for their employees.

Again, that would be the employer share of any costs paid

during their 8 or 24-week period. We also can look at the

2019 contributions that have not previously been paid,

so that could be factored in. And then also looking at the

2020 contributions for the employer match, discretionary profit sharing

contributions and maximum allowable defined benefit plan

contributions, if funded in the 8-week or 24-week period.

So again, we just have to remind folks to be careful not to,

you know, lean towards prepaids. That could stray towards

some danger, you know towards maybe stretching a little bit.

So no prepaids in this situation.

But yeah, I think that kind of wraps that piece up so

I think at this point we're going to jump back to John.

John, are you comfortable rolling from this point?

John Carpenter: I am, thank you, Josh.

So let's talk more specifically about owner-employees and

what they're allowed to include for forgiveness purposes.

So the first thing is let's be sure everyone's clear on who is

an owner-employee. And what you'll see here is basically any

shareholder of a C Corp or an S Corp, any member of an LLC,

any partner in a partnership, and all sole proprietors are

considered owner-employees.

This is regardless of how large or small their ownership

percent is, so it doesn't matter if you've got some owners

that have very small, you know 1%, even less than 1% ownership.

It does not matter,

they still count as an owner-employee.

Now, who doesn't count? If you have individuals who hold options

or phantom stock or other types of synthetic equity.

They would not be an owner-employee.

Basically, someone who got a K1 as a result of their ownership

is an owner-employee. If they don't get a K1, which of course

doesn't happen in a C Corp, but in a pass-through entity anyone

who has a K1 or is receiving a K1, is considered an owner-employee.

And so over time in PPP there have been a number of changes

around how much compensation paid to owner-employees can

be allowed during the forgiveness period or can be forgiven

as borrowers apply for forgiveness.

And this will vary according to the different entity types

that are out there and we're going to go through those.

So as Josh mentioned, your basic forgiveness amount is capped

at either $15,385 for an 8-week period, $20,833 for

a 24-week period or the two and a half month equivalent of

an owner's 2019 compensation.

So how does that work?

If you're a C Corp owner, you're capped at two and a half

twelfths of your 2019 W-2. There are no K1s obviously in a C Corp,

it's not a pass-through entity.

So this one is fairly simple: two and a half twelfths is the

same as 20.833%.

So C Corp owners are going to be limited to the lesser of

the dollar amounts shown at the top or two and a half twelfths

of whatever their 2019 W-2 was. Plus, C Corp owners can count

in forgiveness

the employer portion of health and retirement.

S Corp owners, a little bit different and here there's a split between

S Corp owners who have less than 2% ownership,

and S Corp owners who have more than 2% ownership.

In both cases, like the C Corp owners, S Corp owners are limited

to the lesser of those dollar amounts

you see at the top or two and a half twelfths of their 2019 W-2.

However, where there is a difference is with health and retirement.

S Corp owners with less than 2% ownership can include

the employer portion of health plus two and a half twelfths of their

2019 retirement contribution by the Company.

S Corp owners who have greater than 2% ownership,

may include two and a half twelfths of their retirement, but may

not include any amount for health.

Let's move on and talk about partners and sole proprietors.

This gets fairly complicated: partners are limited to two

and a half twelfths times 0.9235, not 9235 times their 2019 self-employment

income as shown on their K1, less their portion of a Section

179 deduction, less their portion of unreimbursed business

expenses, and partners may not claim under any circumstance

employer portion of health or retirement pay during the forgiveness

period and that's a fairly complex calculation there and

why the 0.9235, it's the difference between 100% and

the 7.65 self-employment tax that gets tacked onto partners.

Sole proprietors: little bit simpler calculation. Sole proprietors

are limited to two and a half twelfths of their 2019 Schedule C net profit,

that's the bottom line profit. And just like partners, sole

proprietors may not include under any circumstance the employer

portion of health or retirement paid during the forgiveness

period. Now we note here LLCs. Most people know LLCs have a choice.

They can be taxed as a partnership that can be taxed as a

corporation. So in this case, the rules for members of an

LLC are going to follow how the LLC filed it's taxes.

So if an LLC is taxed as a partnership, you're going to follow

the rules shown for general partners. If you're taxed as

a Corporation, probably an S Corp,

then you're in a follow the S Corp rules.

This will, and so you'll follow the same rules depending on

how the LLC filed its 2019 tax return. One little,

not insignificant note at the bottom, for quite a while

it was somewhat unclear whether companies could apply for

forgiveness, submit all the necessary documents,

but what happens if a company was on extension and had not

filed, yet filed, its 2019 tax returns? Based on guidance that

just came out a few weeks ago,

it's now quite clear that SBA is requiring that owners

submit copies of the filed 2019 documents.

So again, if you're a corporation and the only thing the

owners have to file are copies of their W-2s, that's pretty easy.

W-2s were all issued last January.

However, if you are either a sole proprietor or in a partnership

and you have not yet filed your 2019 tax return, you will

need to do that before you can apply for forgiveness because

you will have to submit either your Schedule C or K1s

coming off of those 2019 returns.

So let's walk through a few examples here.

Sometimes numbers are worth more than just words.

So first example, here

we have a sole proprietor that as you see on the left during

their forgiveness or covered period, this sole proprietor

paid themself, $18,000 in wages, company paid $2,000 toward

health, $1,000 toward retirement,

so a total of $21,000. Now, they would be otherwise

be capped at $20,833, so there are a few dollars over

that but pretty close.

But this sole proprietor is going to be limited to

the lesser of $20,833 or some calculation against their

2019 compensation.

And so in this case the sole proprietor had Schedule C revenues

in 2019 of $246,000.

They had net income $24,000, two and a half twelfths.

So that is $5,000.

So in this case, this owner is not going to be eligible for

$20,833. Their maximum forgiveness amount is going to be

$5,000, which is two and a half twelfths, so that

$24,000 net off their Schedule C.

So in this next slide, here's another example about how these

calculations would work in an LLC taxed as a partnership.

So here we have an LLC with two partners: one owns 75%, the

other owns 25%. During the forgiveness period, Partner 1

took guaranteed payments of $25,000, the company contributed

$2,000 toward their health coverage, $1,000 in retirement

for a total of $28,000.

During forgiveness, that partner would be capped

at $20,833. Partner 2, the 25% owner, took $18,000

in guaranteed payments $2,000 toward health, $1,000 toward

retirement for a total of $21,000.

They would also be capped at $20,833, but obviously they're

pretty close to that cap.

But in each case, these partners also have to look back at

their 2019 compensation and take the lesser of two different

figures. So in 2019, the partnership flowed through a total

of $400,000 of income on K1s to these two partners.

How was that divvied up? Well, it was divided up according to

their ownership percentage.

So Partner 1 had K1 income of $320,000.

Partner 1's share of their 179 deduction was $10,000.

That's a net of $310,000 multiply that by 0.9235

which gives you $286,000 and

change, multiply that by two and a half twelfths and you get $59,643. 

That's well above the $20,833.

So for that partner, the company could claim forgiveness up

to the $20,833 max. Partner 2, however, lesser

ownership percentage, little different story. Partner 2's

share of K1 income was only $80,000. Partner 2's share of

the 179 deduction was $3,000.

So that's a net of $77,000 times 0.9235 produces

$71,109. Multiply that further by two and a half twelfths and

you have $14,814.

So the company for Partner 2 is going to be capped at $14,814,

the lesser than the $20,833. So these calculations

really have to be carried down to each individual owner's level.

In this case,

you had two partners or companies who may have upwards of

10, 15, 20, or 30 owners,

unfortunately, these calculations have to be done for each

and every owner.

Let's go to our last example and our last example here, similar

to the other one, but here we have an S Corp with two shareholders.

So the numbers on the left really the same as what we showed

in the LLC example. Again, we have two owners, two shareholders,

75/25 ownership split, the larger owner got $25,000 in wages.

You can see their same contributions for health and retirement

and Owner 2, the 25% owner,

same as what we showed before in the LLC scenario, $18,000

in W-2 wages, health, retirement, a of total $21,000.

So how are they capped? Well in their case,

this is an S Corp.

These shareholders also got K1s, just as partners in a

partnership get K1s, but as the guidance is laid out currently,

K1s do not enter into the equation at all.

Forgiveness is all based on W-2 wages.

So in this example, Owner 1 had W-2 wages in 2019 of $270,000,

and math is much easier, take that $270,000 times two

and a half twelfths and you get $56,250.

That's well above $20,833, so we can claim forgiveness

on the full $20,833 plus, now here these two

shareholders each own well over 2%,

so neither of them will be eligible to claim employer portion

of health.

However, they can claim retirement.

So Owner 1 gets to claim $20,833 plus their $1,000

employer contribution for retirement, but no health.

Owner 2, not quite as much in wage income:

they got $70,000 in wages last year, two and a half twelfths,

so that is $14,583.

So that's their eligible forgiveness amount, two and a half

twelfths, so that W-2, $14,583 plus the company can count,

if in this case, the $1,000 that went to retirement

but nothing for health.

So hopefully those examples help a little bit. This whole

area of owner-employee compensation has changed a good bit

during the course of PPP, but it is a somewhat complex area

and does require some time

to gather tax documents from 2019 and run through

these calculations for all the owners.

Chris Nichols: John, thank you very much. Josh, any tips on documentation

as we close up here?

Josh Harris: I think the biggest thing for folks to remember is a method

that we've been repeating in each of these sessions.

And that this is a documentation heavy process.

So as folks get into this, there's a couple simple things

that we would recommend: one is start building your electronic

documentation package as early as possible, and two, try to name

each of the files in a logical manner.

So for example, if you're pulling together documentation

to support, let's say Line 1 of the 3508 or 3508EZ,

it probably makes sense to name the file Line 1 and then

follow it up with whatever the document type is and the date

of that form.

So those are two simple things that I'd like to highlight

one is just that you know, folks need to be ready to kind

of have that electronic package,

and two, they can save themselves and the Bank and the SBA

a lot of time by using the proper naming convention.

And lastly,

we've created a tool that we're strongly encouraging everyone

to use. And this tool, it gives everyone a place where they

can add together, where they can list all the documents that

they provided, where they can record a description, and the

amount that they're taking from that document. And if they

use that tool, it really should help them build a

nice complete package with numbers that reconcile and it'll

make it easy to document and prove their numbers if ever

required. So those would be the couple highlights that I would recommend.

Chris Nichols: Excellent.

I'll knock out one other question that often comes up,

that's when to file or when should the Borrower file and the answer

is technically they can file anytime between now and the

end of their term which is in two years for most borrowers.

So anytime but practically speaking, the deferral period ends

10 months after the end of the covered period which takes

most borrowers well into 2021 and so we would say, you know,

allow yourself at least three months, four months before that and then go

ahead and file at that point in time.

And so for most of our borrowers is probably right around

the January-February time frame.

So do keep that in mind.

We are suspecting more information out from Congress all

the time.

So do check our website as we'll continue to update that. The

Excel spreadsheet checklist that Josh referred to is on our

website, so be sure to download that. It was also emailed

out to all borrowers and then we have our quick started

guide which is also pretty helpful.

Finally, do check our other videos out.

We have a complete video on documentation and some live webinars.

We covered other aspects of the program, all there for your resource.

Of course, you can hit us up on chat on the website, the bottom

right-hand side through PPP support at cpfininc.com, and

then on the quick start guide,

you'll also find a phone number to call.

Josh, John, anything else to add as we close out?

John Carpenter: Nope.

Thank you very much, Chris.

Chris Nichols: Thank you.

Josh Harris: Yeah, thank you, Chris. We're good to go.

Chris Nichols: To all of our borrowers out there, best of luck and we're standing by to help.

Thank you all.

♫♪♪