The Current Status of PPP Loans and Forgiveness on Your Dealership

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The Current Status of PPP Loans and Forgiveness on Your Dealership

by David Wiggins Managing Tax Principal, CLA

Current Program Overview T he Paycheck Protection Program and its forgiveness provided incredible protection to many dealers and will likely be responsible for allowing dealerships to survive this year without devastating effects. As I talk with my dealer clients, I realize that many of them, like me, are growing very weary trying to keep up with the ever-changing rules and forms that have to be completed for this program.

My hope in this article is to focus on the current state of the PPP program forgiveness, and how it will play out for most of you. I will try to keep you from having to review all the bits and pieces of information that have come out and provide you with a summary of the current guidance for this program and how forgiveness will likely work out for most of you.

As you likely know, in June the PPP Flexibility Act was signed into law. This program:

Changed the covered period from 8 to 24 weeks,

Changed the 75% payroll requirement to 60%

Changed any PPP loans not forgiven from 2 years to 5 year, and

Allowed businesses to not pay employer FICA up through 12/31/20, and pay 50% of amounts not paid in 2020, as of 12/31/21 and 12/31/22.

These changes were significant and should likely allow almost everyone, having received PPP loans, to have the entire amount forgiven.

The 8-week covered period can still be used for people that qualify to have their entire loan forgiven by just using 8 weeks payroll and “other costs”. “Other costs” are rent payments, mortgage interest on real or personal property and utilities. Many businesses likely will not qualify for full forgiveness based solely on 8 weeks of payroll and “other expenses” unless they had worked to not lay off anyone and still incurred significant “other expenses”.

If you don’t qualify based on the 8-week period, you will benefit and likely get full forgiveness of the loan amounts

if you instead use the 24-week covered period. For most borrowers this will allow them to include expenses that occur from May 2020 through some time in October 2020.

While most borrowers want to get forgiveness and forget amount any further compliance with this program, they will want to wait until they get full forgiveness using up to a 24-week period. It is also likely PPP borrowers will want to wait to apply for forgiveness until late this year or next year. Waiting may be the better way to go as it may allow you to defer paying any income tax on amounts forgiven until 2021 (get a one year deferral of paying this tax), or could allow you to avoid having to pay tax on the forgiven amounts at all. This is due to the fact that many members of Congress have indicated they do want businesses to deduct expenses covered by PPP. Based on current IRS guidance this is not currently how the program works. By waiting, you may give Congress time to act and therefore change laws to allow your business to avoid ever paying any tax on expenses paid by PPP loans.

Forgiveness will likely take between 4 and 15 months from the end of the Covered Period. This is because the forgiveness application can be submitted anytime up to 10 months after the Covered Period ends. The lender then has 2 months to review the borrower’s forgiveness application and then the SBA has another 3 months to approve the lenders submission and notify the borrower how much of its loan is forgiven.

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By using the 24-week period, you will also allow your covered PPP expenses (payroll and other expenses) to greatly exceed your PPP loan amounts. Based on current guidance this will likely make the Full Time Equivalent (FTE) and Salary Reduction calculations irrelevant. The current Forgiveness Applications allow a borrower to add all qualified expenses for the covered period and then reduce the total expenses by the FTE ratio or Salary Reduction amount. This is a big deal since a 24-week period will result in qualified expenses that significantly exceed the PPP loan amount. Thus, any reductions resulting from FTE or salary reductions will reduce the total PPP expense amount, but these will likely still exceed the total PPP loan amount therefore still allowing total forgiveness.

For example, if we assume a dealer has received a $300,000 PPP loan amount. His qualified expenses for the 8-week and 24-week period are $200,000 and $580,000, respectively. By using the 24-week period, even if a dealership’s FTE reduction is 25% and salary reduction is $20,000, the dealership still winds up getting its loan completely forgiven, as shown below:

Total 24-week forgiveness . . . . . . . . . . . . . . $580,000 Less: Salary reduction . . . . . . . . . . . . . . . . . . $20,000 Net after salary reduction . . . . . . . . . . . . . . $560,000 Less: FTE ratio reduction (25%) . . . . . . . . $140,000 Net Potential Forgiveness . . . . . . . . . . . . . . $320,000 Total PPP Loan Amount . . . . . . . . . . . . . . . $300,000 Total forgiven (Lesser of A or B) . . . . . . $300,000

As you can see, by using the 24-week period, the entire loan is still forgiven even though the borrower had reductions in salary and FTEs. This also allows for greater reduction than using the 8-week period forgiveness of $200,000.

Recent PPP Guidance Just Released

In normal fashion with this program, as we were preparing this article, the SBA has just released further guidance which has surprised many people. The newest guidance provides that, with regard to self-charged rents as part of “other expenses”, only rents equal to the mortgage interest paid on the self-rented property can be included.

For example, if a dealership pays rent to a related property company of $20,000 per month, but the interest deducted by the property company is $11,000 for the month, only the $11,000 interest expense amount can be deducted as “rent”. If rent is paid to an unrelated company, then the entire rent payment may be included as part of “other expenses”. As mentioned above, due to the calculations for the 24-week period, this will still likely result in full forgiveness based on the excess of expenses allowed for a 24-week covered period.

Unanswered Questions

Although we have received quite a bit of guidance, there are still a number of unanswered questions that affect dealership forgiveness. The key items still not answered that are relevant for dealerships are: 1) Can interest expense paid on floor plan, lines of credit or other debt be included in “other expenses”? 2) Can Related Finance Company qualify for PPP loans and forgiveness? 3) Can gasoline or other transportation costs qualify for forgiveness as part of “other expenses”? 4) If a salesperson or other commission-based person receives less compensation for the covered period, but has the same pay plan as the look back periods, do I have to consider this a salary reduction? 5) Does the covered period have to stop when total payroll expenses exceed the PPP loan amount as some banks have indicated? 6) Does monthly trash disposal or

DMS maintenance cost qualify for treatment as “other expense”?

To Summarize — Final Thoughts

Many PPP borrowers will find it beneficial to utilize the longer forgiveness period of up to 24 weeks. In general, based on current forgiveness applications, most borrowers will get most if not all PPP loan amounts forgiven.

Many dealerships will want to plan their timing of forgiveness applications based on their expected tax situation for 2019 or 2020. Loss carrybacks and tax effects should be planned for between the two years.

The SBA has released an Easy Form and Long Form to apply for forgiveness. Most borrowers will prefer to use the easy form if possible. There are strong rumors that it is likely for borrowers having received PPP loans of less than $150,000 that a simpler forgiveness form may be issued requiring borrowers to just sign that they have complied with provisions of the PPP program.

Many borrowers will want to enlist services of their accountant or other financial professional to review their applications prior to submission to their bank to determine its accuracy and compliance with the rules to avoid future problems from the lender or SBA.

At this time, there are a number of provisions being discussed in Congress that could likely result in a smaller 2nd round of PPP. General discussions seem to indicate it would likely only be available to those

businesses with less than 300 employees for which revenues are down 25 to 50 percent in the first 6 months compared to prior years or periods. We will be closely following such bills to update you as they develop.

Dave Wiggins is the managing tax princi

pal of CLAs dealership industry team. He has over 25 years of experience working with tax and consulting needs of dealers across the country. Dave can be reached at

David.Wiggins@CLAConnect.com or

314-960-9502.

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