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San Antonio Construction News • OCT 2020
SURETY BONDS Critical Steps for PPP Loan Forgiveness Steven Bankler, Owner Steven Bankler, CPA, Ltd. San Antonio, TX
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f you were lucky enough to secure a Paycheck Protection Program (PPP) loan during the height of the COVID-19 pandemic, you may feel like the hard part is over. But now you need to apply for loan forgiveness or you’ll be on the hook to pay back your loan, with interest. To get 100% of the funds forgiven, you may need to jump through some critical hoops. Loan forgiveness applications are available online for download at the U.S. Small Business Administration (SBA) website at sba.gov. You can then submit your application to your PPP lender. A simplified 3508EZ form is available for small businesses that are a self-employed individual with no employees, a business that did not reduce employee work hours or salaries by more than 25%, or an entity that experienced reductions in business due to health directives related to COVID-19 but did not reduce the salaries or wages of employees more than 25%. As far as PPP loan forgiveness criteria goes, Congress amended the law in June and the SBA also issued rulings that clarified some important points. Some of these details weren’t available or have changed since you received your PPP loan, so be sure to review your terms and assumptions about how and when the money can be spent. Some tips to get started on your path to PPP loan forgiveness are to: 1. Keep the money in a separate account. If you haven’t done so already, move the money you received as part of your PPP loan into a completely separate bank account from your other finances. This will help you maintain the records you’ll need to prove forgiveness eligibility. 2. Double check your payment terms. For any funds that aren’t forgiven, you’ll need to pay back at an interest rate of 1%. If your loan was issued prior to June 5, you have two years to pay it back. Loans issued after June 5 can be repaid within five years. 3. Recalculate how much of the funds you can use if you reduced your workforce. The Small Business Administration points out that forgiveness is based on an employer maintaining or quickly rehiring employees and maintaining salary levels. If your full-time headcount declined, or if salaries and wages decreased, forgiveness may be reduced. 4. Understand your coverage period. The original eight-week coverage period was extended to 24 weeks or through December 31, 2020, whichever date arrives first. These options for using an “alternative payroll covered period” is meant to align with your payroll cycle, if needed. 5. Know the limits. As of early September, a $100,000 cap per compensated employee was in place. These payroll costs can include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay, but only up to that limit.
6. Understand your owner compensation cap. Eligible owner compensation is determined differently for C Corporation, S Corporation, general partner, LLC owners, and sole proprietors. The formulas used are generally based on 2019 compensation, but can be confusing computations. 7. Carefully track how you spent the money. Nonpayroll costs like mortgage interest costs or rent/lease costs and other expenses may be forgivable if they amount to up to 40% of the expenses only. So it’s important to keep track of exactly how the funds are used. 8. Consider your timing so that it doesn’t interfere with tax deductions. Congress has explicitly stated that PPP loan forgiveness would not be treated as income, while the IRS issued a Notice that these funds offset “deductible” business expenses when forgiven in the same year the funds were borrowed. For this reason, you and your tax advisor might consider delaying filing your forgiveness application so that the loan is forgiven in 2021. Keep in mind, also, there may be more than loan forgiveness at stake. The IRS is actively auditing those who received a large amount of PPP funds and have already shown signs of misusing the money. One Texas business owner, for example, was caught using his $1.5 million PPP loan to pay off his personal mortgage. A safe harbor rule is in place to generally protect anyone receiving less than $2 million in PPP loans from an automatic audit, as long as they use the funds responsibly for the business “in good faith.” Outside those parameters, it’s not just a loan payback with 1% interest hanging in the balance. A misuse of the funds could result in heavy penalties and possible criminal prosecution. PPP loan forgiveness is out there, but it requires several hoops to jump through—perhaps even more than receiving the funds in the first place. Don’t delay in finding out what you need to do to receive the full forgiveness you expected. Steven Bankler has more than 43 years of experience in the accounting industry. Steven’s expertise lies in consulting, planning, tax, and asset protection as well as exit strategy services for closely held businesses. He also provides litigation support (both as a testifying expert witness and a consulting expert), business negotiations and estate planning. Visit www.bankler. com for additional tax strategy tips and to learn more about Steven Bankler, CPA, Ltd.
Don’t Be Behind the Curve: Understand Today’s Construction Climate to Ensure Your Surety Program Can Withstand the Shifts in Construction Jeremy Pendergast, Surety Producer TSIB Inc. Austin, TX
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n these unprecedented economic times, the ability for Contractors to have a Surety Bond program that both meets their need to bid work and sustain their overall capacity to build a backlog is paramount to successfully navigate this changing environment. Anyone who has worked with a Surety in the past understands that information and communication is King when it comes to maintaining a solid relationship between Contractor and Surety. This has never been truer than right now. Surety Companies are extremely cognizant of timely reporting of financial statements, job progress reports and the overall composition of their Contractor’s balance sheets. Recently during a conversation with a Surety Underwriter I was told, “Now is the time to be careful, dig in and understand what our Contractors’ plans are… not to do things on the come and take unnecessary risks.” There is no time like the present when it comes to taking the steps necessary to secure the ability to bond work and ensure that you have the support of your Surety. Below is an overview of trends from past economic cycles and the steps to take to successfully anticipate these changes and thrive. Subcontractor Requirement to Provide Bonds For a number of established subcontractors, bond requirements are often waived due to long standing relationships with GC’s or Owners, history of performance, and/or the ability to provide a proven track record. In times of economic uncertainty, GC’s and Owners become leery of subcontractor failure, and we begin to see Performance and Payment bond requirements on contracts that otherwise would have been waived. This is not necessarily due to the existing relationship having any doubts about a Firm’s ability. Rather, it may be the result of Construction Financing Lenders adding these requirements, GC’s tightening up their risk management strategies, or the General Contractor’s Surety becoming more stringent on their requirements to bond back subcontractors. Requiring bonds is a logical way for these entities to mitigate risk and feel more comfortable with the undertaking. We have already started to see this unfold in the marketplace and the likelihood of these scenarios continuing to play out make it important to start preparing your company now. Don’t let a requirement create “a fire drill”, which could put your Firm in a position where you are left getting bonds from a secondary market with less desirable requirements and rates, or simply being disqualified from participation on a bid. Increased Competition on Bid Lists Historically when we see signs of economic uncertainty or recessions areas such as residential and private construction project starts begin to diminish. As a result, an influx of Contractors, who would otherwise work in those sectors, begin to invade the Public Works space. Put simply, you can expect to see bid list double and triple. Although these contractors may have the technical know-how to build a
job, often times there are struggles with the office administration, paperwork, wage requirements, reporting, and delivery method on a public works project. As this starts to happen, we begin to see bid results that have not been estimated properly which result in the low bidders driving down profits for all involved. During these times we typically see an inverse correlation between the number of bidders on a project and the size of the project; meaning the larger the project, the fewer the bidders. With this in mind, those who have existing Surety relationships should begin to work with their surety broker to position themselves for bids that may be larger than their standard bonding capacities in an effort to separate themselves from the pack. Larger Contract Values in Public Works Projects for larger dollar amounts is another trend seen during economic down turns. This is an attempt by Project Owners to keep unqualified contractors from being able to easily bid on their work. In the past, we have seen this approach across different trades, whether it be adding extra scope to increase contract values, combining multiple sites under one contract or pre-qualifying potential bidders based on past completed projects of a minimum dollar amount. With this in mind, having the capacity to bond work of a greater size and scope should generally limit competition in bids and be an overall competitive advantage. Most indicators show the ability to bond work will be vital to the success for most construction companies. Take steps now with your surety broker and other trusted advisors (CPA, insurance agent, banker, and attorney) to ensure you capitalize your balance sheet, retain earnings within the company, secure lines of credit, cut overhead, and discuss your plans, both short and long term. It is important to make sure that everyone is on the same page so that you can navigate these times smoothly. You deserve it, your employees deserve it and your customers deserve it! Jeremy Pendergast has been a Surety Producer since 2006. In his current role at Turner Surety & Insurance Brokerage, Inc., he oversees new client acquisition and managing a book of existing Surety business in Texas that ranges from first time bond users to Firms with annual revenues in excess of 100 Million. He can be reached to discuss any Surety related questions at: Turner Surety & Insurance Brokerage, Inc. 12600 Hill Country Blvd, Suite R-275 Austin, Texas 78738 Phone: Office 512.329.2614 Cell 512.808.9601 Email: JPendergast@TSIBINC.com Website: TSIBINC.com
