Breaking News: Senate Passes House PPP Update

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The U.S. Senate passed the House version of Paycheck Protection Program (PPP).  The President is expected to sign the legislation.

Here are the changes to the PPP:

  • Increases the time period for usage from 8 weeks to 24 weeks;
  • Reduces the amount to be spent on payroll from 75% to 60%. However, if a business does not use at least 60% of the funds on payroll, none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale;
  • Allows recipients of PPP loans to also defer their payroll taxes;
  • Allows small businesses full loan forgiveness without regard to rehiring all full-time employees lost due to the pandemic, as long as the business can demonstrate an inability to operate at the same level it did prior to February 15, 2020;
  • Increases the time period to apply for a loan from June 30, 2020 to Dec 31, 2020; and
  • Increases the repayment timeframe from 2 years to 5 years with interest unchanged at 1%.

Forgiveness is a detail-oriented process to present to the lender, and will require a business to demonstrate how the money was spent via underlying supporting source documentation, such as payroll tax returns or registers, as well as invoices. Nothing in the proposed legislation changes this aspect of forgiveness.

There continues to be many unanswered questions, we encourage each of you to review your process and documentation. If you require assistance, please call us at (973) 301-2300, we’re here to help.

PPP Update: Here We Go Again

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The more things change…Well, the more they change. 

Late last week, the House passed revisions to the Paycheck Protection Program (PPP) and if passed by the Senate (looks as though that will happen), will be signed by the President.  Once passed, it will change my prior comments on forgiveness. Barring changes by the Senate, here is the proposal by the House:

  • Increase the time period for usage from 8 weeks to 24 weeks;
  • Reduce the amount to be spent on payroll from 75% to 60%;
  • Allow recipients of PPP loans to also defer their payroll taxes;
  • Allow small businesses full loan forgiveness without regard to rehiring all full-time employees lost due to the pandemic, as long as the business can demonstrate an inability to operate at the same level it did prior to February 15, 2020;
  • Increase the time period to apply for a loan from June 30, 2020 to December 31, 2020; and
  • Increase the repayment timeframe from 2 years to 5 years

What’s forgivable?
Eligible payroll costs
Eligible payroll costs include salaries, wages, bonus, commissions, etc. as well as others previously defined in the Interim Final Rules. However, the most recent guidance states for owner-employees, self-employed individuals and general partners the amounts paid to this group are capped at the lesser of 1) $15,385 ( the equivalent of 8 weeks of $100,000 annual salary) per individual; or 2) the 8 week equivalent of their applicable 2019 compensation. For owner-employees, it includes retirement plan and medical insurance payments to arrive at the $15,385.  For self-employed and general partners these are excluded in arriving at the $15,385.

Observations:  For owner-employees (typically those employed by corporations) the total is capped at $15,385, whereas for non-owner employees the amount included for forgiveness can be greater as it includes employer retirement plan contributions and employer-paid medical insurance in addition to the salary.

There is no defined percentage at this time as to who qualifies as an owner-employee.  More importantly, how will the Small Business Association (SBA) and Treasury apply owner-employee definition for employed family members? In other words, similar to the overall limit of $15,385 for owner-employees, self-employed individuals and general partners owning multiple businesses, will SBA and Treasury limit overall compensation for a family group under attribution rules? I expect there will be further guidance on both points.

Other covered costs
Costs such as mortgage, rent and utility obligations are eligible for forgiveness so long as they were in place or incurred before 2/15/20.  What’s clearer is mortgage and rent obligations include both real and personal property. Unlike payroll, these costs must be incurred or paid during the 8 week covered period of the loan.
The proportion of other covered costs eligible for forgiveness remains at 25% of the forgivable costs.

Timing for forgiveness
The forgiveness application defines two options for calculating covered payroll costs:

  • Covered Period: “…The eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date.
  • Alternative Payroll Covered Period: “Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.”

The application states how payroll and non-payroll costs paid and incurred during the applicable period may be forgiven. For example, amounts eligible for forgiveness may include pay earned during a pay period, but paid after, or utilities and rent incurred prior to the 8-week period.  However, be sure not to count it twice.  In other words, if the cost is counted as incurred and subsequently paid it counts as an eligible expense once.

Forgiveness is a detail-oriented process to present to your lender, and will require a business to demonstrate how the money was spent via underlying supporting source documentation, such as payroll tax returns or registers, as well as invoices.  The more logical the underlying support the easier the process will go and the more likely all of your eligible costs will be forgiven. Although there continues to be many unanswered questions, we encourage each of you to review your process and documentation.  If you require assistance, please contact us — we’re here to help.

Managing Business Expenses: What You’re Not Doing Can Cost You

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Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort — especially given the current economic climate — business costs are often very ripe for a quick trimming. Here are some possibilities to consider to help maintain profitability:

Supplies and other purchases
In any business, there are relatively few items that represent a large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by ensuring you always bid out significant purchases or by more actively seeking less expensive alternatives. For many companies, inventory carrying costs are a huge expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and similar services
The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage, and look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you’re not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash management
To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts. On the receiving side, deposit receipts daily, and always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed expenses
One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives

Feel free to give us a call at (973) 301-2300 to learn more ways to control your spending.

PPP Update: Loan Forgiveness Application Released

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On May 15, 2020, the Small Business Administration (SBA) and the U.S. Treasury Department published a Loan Forgiveness Application for the CARES Act Paycheck Protection Program (PPP). As with other aspects of the PPP, it raises more questions while answering others.

Similar to the PPP loan process, we see additional guidance being released once the public has had an opportunity to digest the highlights below and communicate questions to the SBA.  When this additional guidance will be issued is uncertain, as the first forgiveness applications will not be due for another 2-3 weeks based on receipt of funds on or about April 10, 2020.

Here are some highlights of key topics arising from the text of the Loan Forgiveness Application and its related Instructions (together, the “Application”):

  • Borrowers with a biweekly or more frequent payroll schedule may use an alternative eight-week covered period (the “Alternative Payroll Covered Period”) that begins on the first day of the borrower’s first payroll period following its loan disbursement date.
  • Full time equivalent (FTE) employees are determined based on a 40-hour work week, with an option to treat all employees who work fewer than 40 hours in a week as one-half (1/2) of an FTE.
  • Prepayments of business mortgage interest during the covered period are expressly NOT forgivable. Prepayments of other qualified costs (e.g., employee bonuses) are not addressed, although it appears owner bonuses to absorb a PPP shortfall are not allowed.
  • Qualified non-payroll costs incurred during the covered period that are paid on or before the next billing date (even if paid after the covered period) are forgivable. Payments during the covered period of qualified non-payroll costs that were incurred prior to the covered period (e.g., deferred rent) may also be forgivable, but additional guidance is needed to clarify this point.
  • Reductions in headcount do not include employees who refuse a written offer to come back to work, quit or were fired for cause.
  • Reductions in salary or wages are calculated by comparing the employees’ respective average pay rates during the applicable covered period to their respective average pay rates during the applicable reference period.
  • Borrowers will be required to provide proof to support payroll and non-payroll expenses paid during the eight-week period following the disbursement of PPP funds. The documentation can take of the form of bank statements, payroll records, federal and state payroll forms, payment receipts and/or cancelled checks, lease agreements and statements and utility invoices, as well as health insurance and pension contribution statements.
  • Certification of the borrower’s authorized representative is required, attesting to the accuracy of the information included in the application.
  • The borrower also needs to separately maintain, but not include with the application, proof that no amount of the PPP was used to pay salaries in excess of $100,000 annualized cap.

We strongly recommend reviewing the forgiveness application to understand all the requirements and to ensure you can produce the information when the time arises. As always, we’re here to help, so please reach out to any member of the Magone team.

Stay tuned — it’s going to get interesting.

Buying vs. Leasing: Getting the Best Deal on your Business Equipment

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To lease or not to lease? This is an issue many business owners often face. If your firm is weighing the pros and cons of leasing versus buying, here are some things to keep in mind.

Cost
Evaluating costs is more complicated than comparing the price of leasing a piece of equipment versus its purchase price. Consider the following:

  • How soon will the equipment need to be upgraded or replaced? Highly technical or specialized equipment becomes obsolete quickly and may be a good candidate for leasing.
  • How will you arrange for service and repair? Leasing arrangements often include maintenance of the equipment. If you’re thinking of buying, research the equipment’s repair history as well as the cost and availability of reliable service.
  • How long will you need the equipment? If your use will be short-term, then leasing may be the better option.

Cash
If you’ve been leasing your equipment, then your costs have been predictable. Purchasing equipment can substantially alter your cash flow and affect your business’ finances:

  • Can you save money by buying or leasing equipment? If — and when — cash savings will be realized is an important factor for you to weigh.
  • Do you have the cash available to purchase the equipment? If you use cash for a down payment, you may have less cash for operating and other business expenses.
  • How will financing your equipment purchases affect your ability to get credit for other things? If you anticipate having future credit needs, you may want to avoid adding equipment loans to your current debt load.

If you’re weighing leasing versus buying, give us a call at (973) 301-2300. We can help you look at how the various options will play out.

Traveling for Business and Pleasure: What’s Deductible?

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Business owners who travel out of town on business may choose to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, may also be deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip. For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

With smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.