As businesses begin to reopen and hopefully life gets back to normal, we have entered that cerebral zone where we absorb all the changes that have occurred along with their financial impact. This is the beginning of the financial healing process, the “recovery.” As we enter this chapter, we are focused on the refinements of the changes and how best to move forward. The speed of new programs has slowed as Congress debates the best path forward. We will take this time to regroup, focus on better understanding the changing landscape and develop strategies to move forward. Hopefully, the need for this weekly update will diminish in the coming weeks as we focus on recovery and reconstruction. We will continue to monitor important developments and communicate relevant information.
Last week was the first step in the recovery process and here are the most important things you should know.
1. Is your PPP Loan Necessary to Support Current Operations?
Most of last week was spent focusing on the vague language andcontinuing interest on the eligibility requirements of Paycheck Protection Program (PPP) loans. The Treasury has expressed its intent to target all PPP loans in excess of $2 million as well as other loans it considers appropriate. Unfortunately, the rules are extremely vague and do not provide a clear answer to the eligibility of operating businesses. We have published a detailed overview of these rules along with our interpretation and actions that should be taken.
The basis of these rulesis that you acted in good faith and that at the time you made the loan application (or April 23rd if later) and the loan was necessary to support ongoing operations. It is critical that you document your determination so that future events do not distort your determination at the time the loan application was made. Here is what you should document:
- Prepare an anecdotal overview of all the factors affecting your business
- Outline the current economic impacts on your business including sales, expected increase expenses, remote work force, etc.
- Outline your current debt structure along with available lines of credit and investors
- Prepare liquidity ratios for your current and historical business. These are financial ratios such as current ratio, quick ratio, operating cash flow ratio and cash conversion cycle.
- Prepare high level financial models of the business over the next 2 years.
- Outline any other factors or probable risk that your business can experience.
Strategy & Advise If you are unable to make the determination or need assistance, please contact us and your lawyer to help make a reasonable determination. However, if you find that you cannot satisfy this requirement then you can return the funds by May 14, 2020 (FAQ #43) to avoid punitive actions.
The Treasury will certainly focus on abuses of these loans. We believe every business, regardless of size, should take the steps outlined above and be prepared to demonstrate why the loan was “necessary to support ongoing operations.”
2. Impact on PPP Loan if Employee Refuses to Return
On May 3, 2020, Treasury added Question 40 to its Frequently Asked Questions (“FAQs”).
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
This rule makes it clear for laid off workers that the word employee is specific to the individual. Consequently, any employee who refuses to return to work is dropped from the calculation of loan forgiveness, provided we document the events and refusal.
Our interpretation of the CARES Act and the interim final rules up to this point has been that the word “employee” was meant in its generic sense. This is the first sign that it might have a different meaning or differentiate between laid-off and terminated workers. Unfortunately, Treasury has yet to provide clear and complete guidance regarding loan forgiveness. We will continue to monitor these developments and provide information once it becomes available.
3. Last Chance to Get Stimulus Payment Direct Deposited
On May 8, 2020, the IRS announced that taxpayers have until noon on May 13, 2020 to provide direct deposit information through the Get My Payment function of their website.
After noon on May 13, 2020 the IRS will begin preparing millions of files to send paper checks. These checks should start arriving through late May and into June. The IRS warns all taxpayers to be on the lookout for scams related to these Economic Impact Payments. Since all service centers of the IRS are currently closed, any contact representing to be from the IRS should be viewed as suspicious.
4. What to do if you Received a Stimulus Payment in Error
The Internal Revenue Service has posted information on how people who weren’t supposed to receive their economic impact payments should return the money. These rules generally apply to taxpayers that were deceased before the payment was received, are incarcerated or are non-resident aliens in 2020. If the payment was a paper check:
- Write “Void” in the endorsement section on the back of the check.
- Mail the voided Treasury check immediately to the appropriate IRS location listed below.
- Do not staple, bend, or paper clip the check.
- Include a note stating the reason for returning the check.
If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:
- Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below.
- Write on the check/money order made payable to “U.S. Treasury” and write 2020EIP, and the taxpayer identification number (social security number, or individual taxpayer identification number) of the recipient of the check.
- Include a brief explanation of the reason for returning the EIP.
In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team, and community.
We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.
We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.
Thank you for your continued support and stay safe!