Opinions Please - Workers Comp costs & PPP forgiveness

[BulldogTom]

This is a real scenario, and a real taxpayer, but the numbers are made up.

I think it is obvious that WC costs are legitimate Payroll costs for PPP forgiveness.   TP business renews their WC policy every year.   They have the option of paying the full year policy at renewal, or financing the policy by making a down payment of 20% and paying the remainder over 8 months.  In their books, they post the full year policy amount as a debit to Pre-Paid insurance and record a credit  to Insurance Payable if they finance or cash if they pay in full.  In prior years, the decision to fully pay or finance has been driven by cash flow considerations, so there is a history of exercising both options.   Each payroll, they calculate the actual amount of WC expense and post to the income statement by debiting WC expense and crediting Pre-Paid Insurance.  So they do know the actual amount of WC expense they are incurring each payroll.

Taxpayer receives a PPP loan and the renewal of the policy lands in the 8 week period.

Please comment on the scenarios below.  For simplicity, lets say the policy costs $52,000 per year (1K per week).

1.  TP pays 20% ($10,400) and makes 2 more payments ($10,400) in the 8 week measurement period, can they deduct the amount paid on the policy ($20,800) or the amount of WC calculated during payroll processing ($8,000).

2.  TP decides to pay the entire policy cost from their PPP funds, do they get to use that amount ($52,000) or the payroll amount of expense was calculated on the payroll for 8 weeks ($8,000)?

I know this should be asked of a banker, but I don't think they know either.

Tom
Modesto, CA

 

[Medlin Software, Dennis]

Like I used to say in a former avocation, "it ain't nuttin' 'till I call it".  Until the SBA finally comes out with the actual forgiveness rules/application, all anyone can do is guess.  This was supposed to happen about a week ago, but the current "word" is May 15.  Being late puts all PPP recipients in limbo, especially the ones who were able to secure a PPP early, since they have little time to adjust.  Those who are funding now are in a bit better shape for forgiveness adjustments.  This is a serious game we are playing, and the rules will not be decided until after the game is over for some...

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The current information is "incurred and paid".

There is some talk of how to interpret this, but until the SBA rules, it is just talk.  For now, I would take the known issue of pre or post paying items (don't) as being accurate, and stick with items you can show were "billed" or "paid" during the magic 8 weeks.  (Even the magic 8 weeks has some possibility of being altered.)

I would also be ready to only show the items which were incurred and paid as a backup, the ultra safe with today's information.

Anything which is outside of the norm, say did not follow a similar pattern the last year, be ready to give a good business reason, not just because it can be forgiven.  (This, opening an SEP so employer can stuff SEP deposits for nearly free is unlikely to fly unless it was planned and documented before March.)

So Tom, at present, I would say the 8k, the incurred and paid is safe to pay and believe will be forgiven.  (I would do the math, maybe the payroll is higher during the 8 weeks, which makes the averaging over the year not as favorable.)  If the regular method, as can be shown from last year, is to make the $10.4k payments during the 8 weeks, I would personally do it, and try for that, since it is the normal course of business (with the idea "incurred and paid" will be softened).

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I am "over" the idea of what gets paid with what funds.  The audit is not going to want to see what account money went into and out of, they are going to look at the funds loaned, and the allowable expenses proved.  This ties in with going about normal business, and asking for forgiveness based on your normal costs.  As long as you have enough allowed expenses to cover the forgiveness ask (and eventually the rest you do not return), you will be good.

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A similar issue (figuring out what applies) will come up with 941 forms.  One of the items allowed to be added for credit is qualified health plan expenses "allocable" for FFCRA PTO wages.  I have not found (or really looked yet) for a definitive explanation.  The draft 941 instructions have no explanation.  I am first guessing is is the qualified health plan costs calculated on an hourly basis, for the same number of hours paid for FFCRA PTO.  This is not "incurred and paid" from what is known so far, only "allocable"... offering hope that there will be some sort of reasonable definition for this and PPP.  (There I go, hoping for reasonableness from government...)

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Since the banker is going to follow the SBA check list (when it eventually comes out), plus the bank may add some things via their legal department, plus the individual banker may ask some things based on their own skills and knowledge, documentation is critical.  What used to be common sense is critical, if it feels like PPP stuffing, it is PPP stuffing uless you can prove to a someone who did not get a PPP it was not.

My current actual advice is to conduct business as was done last year, and not to stuff.  There are exceptions, such as if it makes sense to pay a retention bonus to get laid off employees off the dole.  If you receive a bill in your 8 weeks, pay it, even if you normally wait until the due date.  Be prepared for a literal "incurred and paid" interpretation, just in case, and account for all costs during your 8 weeks, and try to pay those costs within the 8 weeks.  (Even though I do not think it will really come to that.)

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Interesting also I saw something that the SBA is saying there is money left, keep applying.  If that is true, then we may have hit the spot where all who want to apply, and can fill out the app properly, have or will be funded.  This is great, as there is also a fair amount of talk about those who can scrape by feeling bad about applying, for the fear of blocking someone on worse shape.  I feel different, if eligible, then it is a disservice to your business, employees, and customers not to apply, even if your needs are less critical then your neighbors.  The first rule is survival.  No different than trying to negotiate your rent, and accept your "earned" savings, even if your neighbor does not have the same skill.

[Lee B]

Tom, it is not obvious and the online webinar sponsored by the OSCPA that I attended late last week did not mention WC as being a qualifying expense.

In addition a reading of the actual language of the bill does not even hint of WC being included.

 Does a prepayment of 12 months of WC insurance premiums really meet the definition of incurred ?

 

[Lion EA]

I also have attended more than one webinar that stated that WC is NOT a payroll cost for PPP.

We won't know for sure until about 15 May. However, it will be that client's bank that interprets SBA's final definition of forgiveness for your client, so have your client work with his banker.

No matter what, the incurred AND paid seems to be final. And 8/52 of annual seems to be a ratio applied to a lot of expenses.

[JohnH]

In my state WC is not a state or local tax and it isn't an employee benefit.  It is an insurance plan which simply follows special state guidelines.  Not that much different than auto insurance or General Liability insurance. So as much as I'd like to see it included in the forgiveness category, I don't see how based on the info we have now.

[Medlin Software, Dennis]

Just remember and remind endlessly, all is speculation until the SBA rules, and until you see your lender's add on rules.  So normal business is best, with some planning for week 8 being reasonable, if it does not hurt normal business.  The actual bank employee doing the review is also an unknown factor.  For instance, if the examiner has no accounting or payroll experience, or has a large amount, they may be tougher/easier than someone with a modest understanding.

Just like FFCRA, PPP was intended (and will be put on reelection post cards and sound bites) to cover all costs of having the employees.  Neither may work out perfectly that way, but so far, that is how the DOL and SBA have been interpreting the law.

Consider how the national WC group is/has making/made regulation so the FFCRA PTO wages, unlike normal sick or PTO pay, to be excluded from WC calculations.  As John points out, some states do not fund WC the same way (WA is another example), so there will be variances.

It I were a webinar maker, I would say normal course of business, if you can afford it, pay outstanding items during week 8, have an off cycle paycheck run on your last magic date, etc.  In other words, try to spend as much as you can afford not considering forgiveness, which might be eligible, during your 8 weeks.  The intent of the law implies certain things (incurred, paid), but it is how the policy makers interpret "and" is what we are all waiting for.  Based on the FFCRA rulings, it could be reasonable the actual costs 8/52 could be included.  It is also possible paid costs, which are not easily seen as pre or post payments, can be included.  (And as being "in addition to" not "also".)

And as already shared, even the 8 weeks is up for alteration...

[Medlin Software, Dennis]

Here is one example the IRS came up with to calculate qualified health plan expenses for FFCRA PTO.  Hopefully the SBA does something similar for eligible incurred items.

[BulldogTom]

1 hour ago, JohnH said:

In my state WC is not a state or local tax and it isn't an employee benefit.  It is an insurance plan which simply follows special state guidelines.  Not that much different than auto insurance or General Liability insurance. So as much as I'd like to see it included in the forgiveness category, I don't see how based on the info we have now.

In CA, you are required to carry WC on every employee.   It is a state mandate as strictly enforced as PR tax.  Part of the reason CA passed AB 5 to classify independent contractors (uber, lyft, other gig workers) as employees.   They want them WC protected while working.

Tom
Modesto, CA

[Lee B]

It's a state mandate in Oregon & Washington too, but I don't see how the mandate makes it a "qualifying" expense.

[BulldogTom]

Damn, we need some clarity on these things.   I appreciate all your comments.   I don't know how a company is supposed to spend 75% of the PPP funds and then not know what is qualifying to get forgiveness.   

Tom
Modesto, CA

[Medlin Software, Dennis]

1 minute ago, BulldogTom said:

Damn, we need some clarity on these things.   I appreciate all your comments.   I don't know how a company is supposed to spend 75% of the PPP funds and then not know what is qualifying to get forgiveness.   

Tom
Modesto, CA

The 75% relates to the max forgiven, the max to be forgiven (currently) has to include at least 75% payroll type expenses.  The loan itself, can be "offset" (so it is not fraudulent) on any allowable item, payroll, rent, any of the items on the application.

Must separate the loan from the forgiveness.  Should be no issue for an ongoing concern to eventually have enough allowed expenses to properly cover the loan amount within 2 years.  The loan was only 2.5 months (in most cases) of allowable expenses.

Forgiveness is an entirely different animal, with unknown rules at present.  That is where the business as usual spending is the only viable option.  On the side, practice calculating and planning for maximization, and if it can be afforded even if not forgiven, maximize to your comfort level during week 8.

I feel for those who were funded early, and maybe their magic window closes before the rules are published, but some are fighting for some allowance in setting the magic window.

[ILLMAS]

Same for IL, required but not considered a benefit.

[Lee B]

When you add in the additional hurdles of  FTE calculations and an employee by employee review of "Did any employee have more than a 25 % decrease in wages?",

it will be the rare employer that gets 100 % of their PPP loan forgiven. The way the law was written strongly favors employers that pay weekly or biweekly

with no employee turnover and little or no decrease in hours worked or rates of pay.

[Medlin Software, Dennis]

If one looked at it as not getting the loan amount 100% forgiven, but 8 weeks of allowable expenses forgiven, then one should be VERY happy.  Makes sense actually, as the PTB seems to have wanted to get enough out to cover the 8 weeks, with no shortage.  The extra amount is trivial in interest cost, and can be paid back once the forgiven amount is known.  1% annual on just over 2 months is all it will cost...

We do not know what the forgiveness rules will be.  I am hoping for a reasonable combination of incurred and paid, but even a literal "and" is still a great bene.  Anyone who expected 100 forgiveness was not hip to the likely rules, or figured they could stuff expenses.  It may even be that those who ask for much over 70% of their loan amount to be forgiven will raise red flags.  I saw some wonk's calculation stating that flat expenses will result in something like 70 to 75% forgiveness (of the total) to be asked.  (Too tired to do the math or look for it again.)

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I have a gut feeling the intent of forgiveness is mainly paid (cash basis), since there is supposed to be enough actual money out to match for forgiveness ask.  I think the "incurred" ties more in with the no prepayment shenanigans.  It could also be tied to something legitimately prepaid being allowed to 8/52 "in".  Examples are some sort of annual bill paid during the 8 weeks might have to be calculated 8/52.  Maybe someone pays health care quarterly for example, and the payment was just before loan funded, and 8/52 would be nice to have for this.

I am getting asked all sorts of crazy (to me) scenarios, the latest was if I though an unpaid payroll from January could be paid during the 8 weeks and forgiven.