Episode 242

podcast photo thumbnail
1x
-15
+60

00:00

00:00

The most popular relief loan in the US is the Paycheck Protection Program loan or PPP loan. Unfortunately, in a rush to get the funds out to agencies and other businesses, the Small Business Administration and Treasury Department forgot to define how the loan and its forgiveness will work.

There’s a lot of grey area surrounding the PPP, so in this episode of Build a Better Agency, tax advisor Craig Cody joins me to explain what we do know and what we’re still waiting to discover.

Craig is a Certified Public Accountant, Certified Tax Coach™, and business owner who has been following developments since day one. Many of us have applied, many of us have received funding, but not one of us knows all the rules. Craig is here to change that, to the extent that he can.

We’ll talk about the SBA’s forgivability application released on May 15th, other forgivability factors, whether or not the expenses we pay for with PPP funds will be deductible and how to manage our finances to weather whatever rules come down.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

 

Relief Loan | Paycheck Protection Program loan answers for agency owners

What You Will Learn in This Episode:

  • The PPP relief loan, what we can use it for, and what we can’t
  • What we know so far about PPP eligibility for deduction
  • What has changed as a result of the new forgiveness application
  • Where the forgiveness application gives us the clarity that we didn’t have clarity before
  • What we can make of the IRS/Congress tussle over the PPP guidelines
  • Strategies we can use to mitigate our tax liability until the HEROES Act is passed
  • How the alternative payroll covered period benefits agency owners
  • How agencies can use PPP funds on expenses other than payroll
  • How we can reimburse agency employees for working from home expenses
  • How to avoid mistakes with your application

The Golden Nuggets:

“The safe harbor is: if you’ve taken out a loan of less than $2M, the government is not going to come after you to prove you had other financial resources to cover costs.” @CraigC2742 Share on X “The alternative payroll covered period allows agencies to adjust so they can get eight weeks of payroll loaded in.” @CraigC2742 Share on X “Avoiding mistakes with your application comes down to having the calculations, the right information, and understanding what the government wants.” @CraigC2742 Share on X “No amount of PPP money that has been paid out in your organization should not be forgiven if you follow the rules.” @CraigC2742 Share on X “The person who is going to be in deep with the PPP is the person who is going to commit some kind of fraud.” @CraigC2742 Share on X

Ways to contact Craig Cody:

Additional Resources:

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast. Presented by White Label IQ. Tune in every week for insights on how small to mid-size agencies are surviving and thriving in today’s market. We’ll show you how to make more money and keep more of what you make. We want to help you build an agency that is sustainable, scalable, and if you want, down the road, sellable. With 25-plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here from Agency Management Institute. Welcome to another episode of Build a Better Agency. Always glad that you make the time. Grateful and glad that you make the time to join us. I know how busy you are. So whether we are walking your dog, or on a treadmill together, or whatever we may be doing, I am happy to spend this time with you, and thank you for allowing me to do that.

Before I tell you about this week’s episode and guest, I want to remind you that we are well underway in terms of planning for the November 11th and 12th Build a Better Agency Summit. I am so excited for this event. I can’t tell you. I’m disappointed that we had to move it. As you know, it was supposed to be in May. Thanks to COVID, we had to move it to November, but all that does is it just gives me more time to get super excited.

We are bringing you some amazing speakers on topics like building your agency’s assets and values, so you could sell it for more money if you want to do that. We are going to talk about biz dev. We are going to talk about alternate revenue streams for agencies. We are going to talk about how to weave a story through your presentations, especially in your business pitches that makes you look different and compelling compared to everyone else. We are going to talk about imposter syndrome. We are going to talk about the legalities of influencer marketing. We are going to give you the opportunity to sit with subject matter experts that are most pertinent to your business in these small roundtable discussions where it’s you, and a handful of other agency owners, and a subject matter expert around the topic that you care about the most.

We have 16 different topics for you to choose from. You’re going to get to do one of those each day of the conference. So the content is going to be off-the-charts awesome. The networking is going to be amazing, and with the celebration, the celebration that we have survived COVID, that our agencies are strong, and we are gearing up for a killer 2021. All of that is going to be front and center, and I can’t wait to be with you. I can’t wait to celebrate with you. I can’t wait to have a Scotch and throw darts with you. It’s all going to be amazing and tickets are on sale now. So head over to agencymanagementinstitute.com. Click on the “Build a Better Agency Summit” navigation button and read more about the speakers, the roundtable presenters, and grab your ticket while we still have some left. Okay?

All right. So that sounds awesome, and celebratory, and cheerful. Today’s topic, maybe not so much. We are going to talk about taxes, and we are going to specifically talk about the PPP loan, and the new application for forgivability, and what that told us about what we can and cannot do. We’re going to talk about how to use those funds in a way that they’re forgivable based on what we know and what we think we know, and then we’re also going to talk about this whole IRS congress tussle about whether or not the expenses that we pay for with PPP funds will be tax-deductible or not.

So to talk about all of those things, I have asked my personal tax strategies and friend, Craig Cody, to come on the show and talk us through all of the nuances of all of these things. So Craig has been a practicing tax strategist and CPA for about 20 years. He knows his stuff backwards and forwards. He’s living this stuff day in and day out. I asked him to come and translate it, so that we can understand it as well. I know he looks at it, understands it, but it’s gobbledygook I think to a lot of us. So he’s going to do some translation for us. So let’s jump in, and I’ve got a million questions for Craig. So I want to get right to it. So let’s do it.

Craig, welcome back to the podcast. Boy, do I have a lot of stuff to ask you. Holy buckets.

Craig Cody:

Lots of questions.

Drew McLellan:

Yeah. So let me frame up the big things I want to cover, and then we’ll dig into the minutia of it because there’s a ton of minutia. One of the things that we were talking about before we hit the record button is you and I after this interview are going to look at our calendars and find a time where we can do a webinar probably just for AMI members, where we can do a webinar where we walk people through the forgiveness application, so you can help them see where all the trouble spots are, and we’ll talk about some of that today as well.

So let me just back up. So first and foremost, I just want to take a brief second to celebrate that the scary letter that everybody got from their bank, which basically said, “If you took this money and you had any other money that you could have used or maybe you shouldn’t have taken the money, we’re going to come after you, and we’re going to confiscate your children and your puppies.” The newest version of the edict out of the… the FAQs out of the Treasury and the SBA really clarified that and said there’s now a safe harbor for most of you. So explain what that safe harbor is, so everybody can breathe a little easier.

Craig Cody:

So basically, the safe harbor is if you’ve taken out a loan of less than $2 million, the government is not going to come after you to prove that you had no other resources to get money from. So for most people, they’re okay.

Drew McLellan:

So basically, if you said to the bank when you filled out your application, “I need this money,” that’s going to be all the proof that they’re going to require that you actually needed the money?

Craig Cody:

Exactly.

Drew McLellan:

Yeah.

Craig Cody:

You’re going to self-certify, and the safe harbor says, “We deem you to have needed this money if you’ve taken less than $2 million.”

Drew McLellan:

Yeah, and probably not a bad idea for us somehow to still document why we thought we needed the money. So either because of things that happened, like clients hitting the pause button, or going away entirely, or just the uncertainty of what was coming over the next couple of months, not a bad idea to have that documented just in case. But now, we should all be able to breathe a little easier, correct?

Craig Cody:

Exactly. It’s always good to document stuff.

Drew McLellan:

Yeah, yeah, but you’re a CPA. You think that’s true about everything, right? Okay. So the two big topics I want to talk about that I think are meaty enough that you and I could talk for hours is, number one, a little bit about the forgiveness application and where it gives us clarity where we didn’t have clarity before. So I want to talk about that, and number two, there’s still this looming IRS issue. So several weeks ago, the IRS issued a document that said, “Oh, by the way, if you’ve got PPP funds and you paid for salaries and expenses like utilities and rent with those PPP funds, good on you, but those expenses are no longer deductible on your income tax, which means that you’re going to have a higher taxable income at the end of the year than you would have.”

Then, quickly, several people from congress came out and said, “Oh, no. That is not what we meant. We didn’t mean that at all. In fact, we want it to be tax deductible.” As of the recording of this, which is May 20th, the House has passed the Heroes Act, and inside the Heroes Act is the language that says, that basically says the IRS was wrong, and yes, it will be tax-deductible. So it still got to go to the Senate, still got to get signed. So we’re not out of the woods yet.

Craig Cody:

We’re a long way from that happening.

Drew McLellan:

Yeah.

Craig Cody:

The good thing as far as that goes is we basically have until the end of the year or later for them to make… pass that bill, and I think priority-wise, there’s a lot of other things going on that are going to affect us that Congress is going to be more involved with. So just to take it a step further, if your revenues were down and you actually had to use all this money to pay the salaries and rent, and stuff like that, you’ll be no worse off with a tax liability. If you, say, had a $100,000 loan and your revenue stayed the same, so conceivably, you have an extra $100,000 in the bank, now what they’re saying is, “You’re going to have $100,000 worth of taxable income, and you’re going to pay us tax on that. So from that hundred we gave you, we want 30 back.”

Drew McLellan:

Right. So later in the conversation, I want to talk about… Since we’re going into June not knowing whether or not the IRS or Congress is going to win that battle, I just want to talk about some strategies of how we can mitigate our tax liability anyway, which by the way, we should all be doing every year, but to try… if we are on the hook for that extra money that we can try and reduce the amount of money that we have to pay in taxes. So will you just tell folks a little bit about your background? Why am I talking to you of all people, right? So in the intro, I made it clear that you and I have known each other for years and that you are my tax advisor and strategist, but just tell people about your background and how you got to be a CPA and you know this stuff.

Craig Cody:

Sure, sure. So this is a passion of mine. I’m a CPA. I have a CPA firm. Before this, I was a New York City police lieutenant. So I’ve actually been doing this now for 20 years. So I’m a little bit long in the tooth here, but I’m passionate about tax planning. So our firm, we focus on working with our clients to help them keep more what they’re making, and we do that through proactive tax planning. So it’s all about keeping more of what you’re making.

Drew McLellan:

So I suspect for a lot of cops, CPA is a natural second career probably. It’s probably the natural path, right?

Craig Cody:

Of the 35,000 in New York City, I don’t know anyone that has gone on to become a CPA. Plenty of attorneys.

Drew McLellan:

Yeah. That is an interesting twist, for sure. Okay. So let’s get to the PPP application. So the forgivability application came out about a week ago and answered a lot of questions that people had about how to use the money in a way that would allow them to get the loan forgiven. So what clarity from your perspective comes out of this particular application?

Craig Cody:

So here are some good things that I see. Let’s talk about the covered period or the eight weeks that you have to spend this money that is supposed to be forgiven, and that eight weeks starts on the day the money hits your bank. All right?

Drew McLellan:

Yeah.

Craig Cody:

So they’ve come out with the covered period and the alternative payroll covered period. So the covered period is the day you received the money for eight weeks. During that time, you are allowed to pay payroll expenses, rent, interests, utilities. If it’s paid during that period, basically, they are deeming it as paid during the covered period. So it’s going to count as a forgivable expense. Let’s just say rent is typically paid on April 1st, you were funded on April 5th, and you paid rent on April 7th, that rent is kept. So that’s a great thing.

Drew McLellan:

Right.

Craig Cody:

The other thing they have is they have the alternative payroll covered period, which means if you were funded on April 1st and your typical payroll day is April 5th, for payroll only, you can choose to have your payroll covered period start on the date of that payroll or two weeks after that, which is the next period.

Drew McLellan:

So if you paid on the… If you typically pay at the 15th and the end of the month, and you got the money on the 20th, you could choose to start the eight weeks on, let’s say, April 30th.

Craig Cody:

Right.

Drew McLellan:

Yeah.

Craig Cody:

So if the next pay… So just to clarify that. If you get funded on the first, your payroll period is on the fifth, your eight weeks can start on the fifth, so there’s no mix-up about who’s paid and what’s paid. So it’s just an option.

Drew McLellan:

So for many people, that allows them to put in a lot more pay cycle?

Craig Cody:

What we thought we were going to have to do is have an off payroll cycle, which would have been a disaster.

Drew McLellan:

Right. But now, what it does is it allows you to adjust so that you can get eight weeks of payroll loaded in.

Craig Cody:

Correct.

Drew McLellan:

Yeah.

Craig Cody:

That’s called the alternative payroll covered period.

Drew McLellan:

Okay. So I know there was a lot of question about the 75% of the PPP loan. The forgivable part of the PPP loan had to be spent on loaded payroll. So it’s salaries and benefits.

Craig Cody:

Correct.

Drew McLellan:

What was the clarity around that?

Craig Cody:

There’s not a whole lot of clarity on what counts as far as pension contributions and stuff like that. What is clear is it is an eight-week period. So if you are somebody making more than $100,000, it’s not one month. Okay? It’s eight weeks. So you’re losing a little bit. So what we thought was going to be about $16,500 that the owner who was in excess of $100,000 can count towards the covered payroll now is really $15,385. So that’s one thing. Also, that’s a little bit of a ding there. The other thing is that’s really important is for the owner’s compensation. If in 2019, your total wages were say $48,000, that’s the annualized cap for your wages for the covered period. So you just have to make sure that if you didn’t max out last year, that you count only the amount up to what your wages were last year.

Drew McLellan:

Okay. So for example, if I was making $50,000… If at the end of 2019, my W-2 income was $50,000, and when COVID came, I gave myself a raise to $75,000, I’m really only going to be able to count the $50,000?

Craig Cody:

The annualized portion of that $50,000, and it’s based on weeks, not months.

Drew McLellan:

Okay, okay.

Craig Cody:

So when we calculated how much we can get, it was based on the monthly number, but this is now eight weeks, not a full two months.

Drew McLellan:

Okay. What other clarity did you get by looking at the application that answered some of the questions we had?

Craig Cody:

When we talk about full-time equivalent employees and the 75%, the easiest thing to do is… They came out with a safe harbor. So basically, what that means is if you didn’t bring all your people back, or they came back at a low wage, or for whatever reason it is, that was going to… If they came back at, let’s say, less than 75% of their regular wage.

Drew McLellan:

Okay.

Craig Cody:

That was going to cause the amount the amount that gets forgiven to be less than a dollar for dollar for that 75%.

Drew McLellan:

Okay.

Craig Cody:

Now, what they did is they came out with a safe harbor, and they said, “Even if you were below 75%, if on June 30th, that pay period that you have somebody in place that was basically annualized what your previous number was, then you’ve met the safe harbor.” So to put it real glaringly, you brought Johnny back at 50% of his salary during that eight weeks. That last pay period in June, you brought him back to his normal salary. You’ve met the safe harbor for Johnny.

Drew McLellan:

Oh, interesting. Okay.

Craig Cody:

So that’s a really interesting [talk 00:17:39].

Drew McLellan:

Yeah, yeah.

Craig Cody:

So what that really means is nobody should have anything that they’ve actually paid out not forgiven. So if you didn’t spend it, that won’t be forgiven.

Drew McLellan:

Right.

Craig Cody:

But if you’ve actually paid somebody, it should be forgiven if you followed the rules.

Drew McLellan:

Okay. So for a lot of the listeners, I think the position they’re in right now is that they got 2.5 times their… that monthly payroll nut, and some of them are saying, “You know what? I am going to have excess money that I want to use in some ways so that it’s forgivable. Can I make an additional contribution into our 401(k) or SIMPLE IRA? Can I bonus myself and the team? Can I do something else with the money so I don’t either have to take a loan or give it back?” So what do we know that we can do, and then what do we think we can do?

Craig Cody:

So we know that we can make… Let’s just say that 850 seconds of a profit-sharing contribution. We know we can make that employer match for the payroll cycle. So we know that’s definitely going to count. There’s nothing that says we can’t bonus an employee. All right? I think you just have to be very careful if you give somebody a bonus and you’re expecting some kind of quid pro quo. You definitely want to be careful, but I’ve seen a lot of message board activity where people is saying, “Well, can I do this, or can I do that?” You don’t want to get involved in something like that.

Drew McLellan:

Can I pay them, and then I don’t pay them next month kind of a thing? Is that what you’re talking about?

Craig Cody:

Exactly, exactly.

Drew McLellan:

Okay. Yeah. Okay. So obviously, we’re not going to do anything shady like that, but could I make a discretionary contribution to everyone’s 401(k)?

Craig Cody:

So as of right now, the way I look at it, if it’s for 850 seconds, I don’t see that being an issue for that.

Drew McLellan:

What if it’s not? For example, what if I normally make a discretionary contribution at the end of the year? Can I make it in early June to take advantage of the PPP funds?

Craig Cody:

That’s an unknown.

Drew McLellan:

Okay.

Craig Cody:

That’s an unknown. So if you were planning on doing it and it’s going to put you over what you were going to spend, yes. If you’re going to give the money back and you were planning on doing it, yeah, there’s no downside to it, but we’re just not sure how they are going to calculate that because there’s no guidance.

Drew McLellan:

But is there guidance around the bonusing? So let’s say I end up with… and I just wanted easy math here. Let’s say I have 10 employees and I end up with $20,000 left over in my PPP funds. Can I put the $20,000 into the 401(k) to divide it amongst the 10 employees, or can I write a check through payroll for $2,000 for each employee? Do we have any guidelines on either of those?

Craig Cody:

We have no guidelines on either of those, and we have to remember the bank is the one that’s going to be approving these applications. So if it was going to the SBA and they were approving it, I would say you have a much better chance, but knowing… and every bank is going to operate differently. Unless there’s guidance, every bank is going to operate differently. So if you do that, you just need to be careful. Now, if you’re paying somebody, if you’re increasing their wage, and you’re not calling it a bonus, I don’t see there being a problem with that. I would be very careful of what I classify as a bonus because when the banker looks at it, and nothing against bankers, but that might be something that says, “Well, this doesn’t…” It doesn’t say you could do that. Just the same way various banks computed that one month’s worth of salary very differently.

Drew McLellan:

So is this a conversation I should be having with my banker like, “Hey, I’d like to use some of the PPP funds to do a discretionary 401(k) deposit or give my people a bonus?” Is that a conversation I should be having with them before I do it to see if they’re going to approve it?

Craig Cody:

I would definitely have that conversation, and it would be great if you get an answer because they always refer back to the SBA.

Drew McLellan:

Right. So you think they won’t answer?

Craig Cody:

I don’t think they’re going to give you a clear answer on that.

Drew McLellan:

But they’re going to have to eventually because they have to decide.

Craig Cody:

Right, but at that point…

Drew McLellan:

Right. Yeah, it’s too late, right?

Craig Cody:

You, spammy. We’re over four weeks into this whole deal already and…

Drew McLellan:

I know. I know.

Craig Cody:

There’s no guidance. I mean, it’s been over two weeks since the inspector general released a scathing report on the SBA and the guidance on this. So I would just say be very careful with that kind of stuff that you wouldn’t normally do and that if it doesn’t get forgiven, it creates an issue.

Drew McLellan:

Right, because you can’t take the money back out of their 401(k), right?

Craig Cody:

You can’t take it back.

Drew McLellan:

You can’t ask people to give their bonus back.

Craig Cody:

Right.

Drew McLellan:

Yeah.

Craig Cody:

I mean, we know a lot of people out there that are… because people are coming in or whatever they want to call it, hazard pay. They’re giving them an extra rate during this period.

Drew McLellan:

Right.

Craig Cody:

Stuff like that.

Drew McLellan:

In the utilities category, certainly, phone, and internet, and all of that is included in the utilities category. Can and should we be cutting ourselves as agency owners and our employees some sort of a check to reimburse them for the personal expense? Everyone is working from home. So we’re all on our home internet. We’re all on our cellphones. Is that way to get to use the money and get money to your team that would be approved, do you think?

Craig Cody:

Once again, that’s another bank issue. So I would just be very careful, and if you do have that, make sure you have a written accountability plan that says you can do that and why you can do it. Also, it says basically covered utility payment, payment for services that were began before February 15, 2020. So if you were doing this prior to February 15, 2020, reimbursing people for that type of stuff, I think there’s no issue because then you could repeal and say, “I’ve been doing this. This is what we’ve encountered.” But if it’s something that you haven’t, I think th