Presented by Craig Fechter, CPA, MS Tax

Slide Note

The Paycheck Protection Program (PPP) provides forgivable loans to small businesses impacted by COVID-19. Under the CARES Act, businesses with fewer than 500 employees can access these funds, which are calculated based on average salary and employee benefits. Forgiveness terms have been relaxed under recent legislation. Sole proprietors, partnerships, and small practices can apply based on their net income. Understanding the specific provisions is crucial for maximizing benefits while ensuring compliance.

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Presented by Craig Fechter, CPA, MS Tax

6 645 p.m. the PPP 645 - 7p.m. exclusive time for questions

I wont get into all the different legislation that has been passed but, who would have thought there would essentially be a massive small business grant? The way I view this is something resembling a rebate of income taxes paid. This was available to small businesses with less than 500 employees. There are a number of provisions regarding related companies that I will not get into as we are here discussing small dental practices.

The paycheck protection program was first instituted as a response to the COVID crisis and was passed under Section 1102 of the CARES act in March of this year. The loan is a forgivable loan under certain circumstances (to be discussed later) under relatively liberal terms (the terms of forgiveness have been relaxed under new legislation passed subsequent to the original legislation).

The original loan is based on 2.5 months of average employee salary plus 2.5 months of various employee benefits (retirement, group health coverage, state and local taxes paid, etc.). There are limitations of up to $100,000 of cash compensation per employee. Note that federal employer taxes are NOT included. For sole proprietors with NO employees, they can apply for the loan based on 2.5 times their 2019 net income as reported on their schedule C (up to a maximum annualized amount of $100,000, or a total of $20,833).

If you are in a partnership, you can apply for the loan based on your SELF EMPLOYMENT income as reported on line 14 of schedule K- 1 multiplied by 92.35% (a (again, up to a total of $100k annualized, or $20,833). If you are a sole proprietor or partnership and have not yet filed, you may consider electing longer depreciation lives on new assets in 2019 even though you may pay more in income taxes as a result.

Schedule C loan example: Original numbers 125,000 $ Applied Limiitations 100,000 $ Schedule C net income Total payroll 200,000 200,000 Employee health insurance 25,000 25,000 Employee retirement 10,000 10,000 Total eligible costs 335,000 Divided by 12 27,917 A PPP loan multiple 2.5 B Total PPP loan 69,791.67 $ A*B Note - schedule C net income is limited to 100k

S corporation loan example: Original numbers 135,000 $ Applied Limitations 100,000 $ Owner payroll Total payroll 350,000 325,000 (one employee was paid $125,000) Employee health insurance 25,000 25,000 Owner health insurance 10,000 - Employee retirement 10,000 10,000 Total eligible costs 460,000 Divided by 12 38,333 A PPP loan multiple 2.5 B Total PPP loan 95,833.33 $ A*B Notes - 1. Owner compensation maxed out at 100k 2. Employee cash compensation maxed out at 100k (per employee) 3. Owner health insurance in S corp is already included in compensation

You must certify in good faith that there is a need for the loan and that it will be used to retain employees and maintain salaries. Author s editorial comments need is relative there is not one dental practice owned by a local practitioner who has access to capital markets. Given that most dental practices were shut down in March except for emergencies, it s my opinion the average dental practitioner has nothing to worry about.

Authors continued editorial comments there was nothing in the original legislation that references other sources of funds or savings the business may have accumulated. Only a good faith certification that the loan was necessary. I would suggest that the SBA/FBI/FEDS would be much better off asking the Los Angeles Lakers, Kanye West, Robert De Niro or Pearl Jam, about why they got PPP loans.

Loan funds can be USED for: Payroll costs includes employee health insurance, retirement costs, etc. (for brevity s sake I m not listing everything out). The aforementioned limitations for payroll also apply here. Eligible NON-PAYROLL costs include Interest on mortgage obligations on real or personal property, rental on real or personal property, or utility bills These agreements must have been in place BEFORE 2/15/2020 to be eligible. At least 60% of the costs MUST be used for payroll (this was 75% previously).

The CARES act and subsequent legislation does not have any specific tracking requirements or requirements for a separate bank account. Editorializing the CARES act and subsequent revisions are totally silent about PREVIOUS funds you may have saved and/or CURRENT funds that you are earning. X If you are at 60% capacity and are making enough to pay your employees otherwise, what happens to the money that you make? Any legislation I ve seen on the matter is silent.

Ive spent probably 30-40% of my time since March on PPP issues. I had a dream last week that only 7% of the people who applied for forgiveness were going to get it. I actually woke up feeling betrayed. It was a cruel joke my mind played on me.

I cant possibly cover every provision and attempt to make my time so for brevity s sake I ll condense what I can. The rules have changed several times and I wouldn t doubt if the rules were to change again.

Loan forgiveness is based on use of funding in the Covered Period or Alternative Covered period . These periods are either 4 weeks or you can elect 8 weeks (if you obtained funds before June 5, 2020) following the receipt of PPP funds.

At least 60% of the potential amount forgiven has to be used for payroll costs. The remainder can be for the non-payroll costs previously specified. The 60% number was previously 75%, but was changed by legislation passed on June 5, 2020.

Similar to the previous notes about payroll, forgivable cash compensation is limited to $100,000 per employee. For owners the $100,000 limit applies to total compensation. Owners are limited for forgiveness based on 2019 compensation (i.e, cannot increase owner compensation). For sole proprietors filing a schedule C, the max compensation over an 8 week period is $15,385 while over a 24 week period the maximum compensation is $20,833. The amounts are the same for self-employment income (times 92.35%) from partnerships.

Again several different types of payroll costs are includible in the calculation: Employer paid health insurance Employer paid retirement State employment taxes paid For S corporation owner employees, health insurance and retirement benefits are included in compensation subject to the $100,000 limit on compensation. For an S corporation owner/employee, you include a max of 2.5 months of the prior year retirement contribution.

Whether or not you qualify for full forgiveness will depend on a variety of factors. Those factors include greater than 25% reductions in employee pay or any reductions in full-time equivalent employees over the covered period compared with specified periods of time before COVID. There are several safe harbors, however, that allow you to still obtain forgiveness even if you reduced your employee workload to compensate for less work.

You will be able to file for forgiveness on either form 3508EZ or form 3508. You will want to use form 3508 EZ if possible due to the fact that it will be easier .

Form 3508 EZ you can google it and easily find this form There are extensive inst.

You may use the 3508 EZ if you can certify at least one of three options: Option 1 - The borrower is self-employed individual (files a schedule C) who had no employees and did not include any employee salaries in the loan calculation.

Option 2 the borrower did not reduce annual salary or hourly wages of any employee (who earns less than 100k on an annualized basis) by more than 25% during covered period compared to period between 1/1/2020 and 3/31/2020. AND borrower did not reduce the number of FTE employees or average paid hours of employees between 1/1/2020 and the end of the Covered Period. You are allowed to ignore reductions in FTEs if employee quit, if the employee voluntarily requested a reduction of hours, or they refused an offer of re-employment. Most dentists will NOT qualify under this option

Option 3 The borrower did not reduce annualized salary or hourly wages by more than 25% during covered period AND (this is huge for dental offices) the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established by Secretary of HHS, Director of CDC etc. This option is huge and will be applicable to any dental office experiencing a reduction of work.

Whether or not the 8 week or 24 week periods are used will depend on the maximum amounts that may be forgiven. Option 3 on form 3508 EZ is likely the one that most dental offices will qualify under if you did reduce employees. The SBA has provided no examples of what type of proof that you have a business reduction will be necessary editorializing showing them an appointment ledger or month by month income statement would likely suffice.

Form 3508 is used where you cannot make any of the above certifications. That is to say, if you cut employee salaries by more than 25% (and did not restore them) and/or you cut staffing yet recovered to your business levels pre-2/15/2020, you will use this form.

I will not get too much into these calculations due to the relative complexity, but you have to compare reductions in FTE employees and/or salaries for the covered period to before the covered period. In the end, there are still safe harbors you can attest to that render the calculations a moot point.

Safe harbor 1 - the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established by Secretary of HHS, Director of CDC etc.

Safe harbor 2 - You can ignore the FTE equivalent reductions if you restore FTEs as of the earlier of 12/31/2020,or the date the forgiveness application was submitted. It is unclear what would happen if you upped FTEs for one or two payroll periods to submit the application and qualify for forgiveness. I would suggest that underlying tax concepts such as substance over form would rule here.

Safe harbor 3 - You can ignore the employee pay reductions if you restore employee pay as of the earlier of 12/31/2020 or the date the forgiveness application was submitted. It is unclear what would happen if you upped pay for one or two payroll periods to submit the application and qualify for forgiveness. I would suggest that underyling tax concepts such as substance over form would rule here.

Example 1- sole proprietor with no employees Sole proprietor payroll is not a consideration. Sole proprietor will have to simply fill out form 3508EZ and submit to their lender and they ll be able to claim the full $20,833 as forgivable.

Example 2- sole proprietor with 3 employees Covered Period Expenses 20,833 $ Original numbers 125,000 $ Applied Limiitations 100,000 $ Schedule C net income Total payroll 200,000 200,000 50,000 Note 1 Employee health insurance 25,000 25,000 2,885 Employee retirement 10,000 10,000 2,000 Non-payroll costs (rent/utilities) 10,500 Total eligible costs 335,000 86,217.62 Divided by 12 27,917 PPP loan multiple 2.5 Total PPP loan 69,791.67 $ % payroll costs 88% Note 2 Maximum forgivable loan 69,791.67 $ Note 3 Note - schedule C net income is limited to 100k Note 1- this is the payroll over 24 weeks - even though annualized payroll is less and FTEs have been dropped, we can still qualify for forgiveness if business is down due to shutdowns Note 2 -at least 60% of the funds must be used for payroll costs Note 3 - forgiveness must not exceed the original PPP amount

Note that EVEN THOUGH payroll was down through furloughing employees, due to the certification on form 3508 EZ, doctor is able to obtain FULL FORGIVENESS.

Example 3- S corp owner with 3 employees Covered Period Expenses 20,833 $ Original numbers 135,000 $ Applied Limiitations 100,000 $ Owner payroll Total payroll 350,000 325,000 95,000 Note 1 Employee health insurance 25,000 25,000 9,000 Owner health insurance 10,000 - - Employee retirement 10,000 10,000 3,500 Non-payroll costs 15,000 Total eligible costs 460,000 143,333.00 Divided by 12 38,333 PPP loan multiple 2.5 Total PPP loan 95,833.33 $ % payroll costs 87% Note 2 Maximum forgivable loan 95,833.33 $ Note 3 Note - S corp owner net income is limited to 100k Note 1- this is the payroll over 24 weeks - even though annualized payroll is less and FTEs have been dropped, we can still qualify for forgiveness if business is down due to shutdowns Note 2 -at least 60% of the funds must be used for payroll costs Note 3 - forgiveness must not exceed the original PPP amount

Key forgiveness take-aways Be sure you can document reduction of business activity due to shut-down. Be sure to maintain payroll records. Be sure to not reduce employee compensation by more than 25% (hourly or salary compensation) when they do work. Make sure that salaries and other forgivable costs paid over the 24 week period is greater than the PPP loan amount (and again, remember that payroll must be greater than 60% of the total PPP funds expended)