by Art Wiederman, CPA, Partner
June 5, 2020
On Wednesday, the U.S. Senate unanimously passed H.R. 7010 known as the Paycheck Protection Flexibility Act. This law, signed by the President today, will provide dentists who are just now opening their practices more time to use the money that they borrowed and make forgiveness more likely.
Here are the major provisions of the legislation:
YOU HAVE MORE TIME TO SPEND THE MONEY
The number of weeks you have to spend the money (known as the covered period) has increased from 8 weeks to 24 weeks. Most dentists received their PPP money in late April or May, but their offices were open only for emergency appointments. As dentists were following the letter and spirit of the law by putting team members back on full payroll whether they were working or not (what was then required to obtain full forgiveness) and taking them off of unemployment (where they may have been earning more), the loan funds were being used when offices were closed. Now dentists can bring back their team members as the demand for dental services ramps up, paying them with PPP loan funds.
THE AMOUNT YOU NEED TO SPEND ON PAYROLL IS LESS
The percent of loan proceeds that is required to be used for payroll costs has been reduced from 75% to 60%. This was done mostly for the restaurant, hospitality, and travel industries. There is good news and some maybe not so good news with this provision:
- Good news: Unless you do not open your dental office for a while or you do not bring back a smaller team than you had prior to the pandemic, you will meet the 60% rule.
- Loan applications were based on 2.5 times average monthly payroll costs. For example, if you have a dental practice grossing $1 million a year with payroll costs of $400,000, including $100,000 for the owner (maximum permitted), you applied for a loan that was 2.5 times this amount (plus some for retirement, health insurance and state payroll taxes). If your loan was based on the $400,000 in payroll costs, $50,000 in pension contribution and $30,000 in health insurance and state payroll taxes for a total of $480,000 / 12 = $40,000 per month x 2.5 gave you a PPP loan of $100,000.
- Suppose you received your PPP loan on May 1. Now you have 24 weeks from May 1 to use the funds, or October 16. If you did not open your office until June 1 and began to pay them on that date, this would give you about 4.5 months to spend the money. If you monthly payroll is $40,000 that means in the remaining 4 ½ months you will spend $180,000. This is 180% of your loan and well in excess of the 60% requirement.
- Not so good news: if you are anywhere below 60% for payroll you get ZERO forgiveness.
YOU HAVE MORE TIME TO HIRE YOUR WORKERS BACK
Small business leaders told Congress and the Treasury that there was no way that they would have enough business to hire back workers by June 30 as was hoped when all of this started. Under the CARES Act, you had to have working for you the same number of full-time equivalent employees (FTEs) on June 30 that you had working in your dental office on February 15. This act gives you until December 31 to hire everyone back. We still have to keep track of FTEs, but wait – we might be able to get around this…
NEW RULES ABOUT HAVING TO MEET THE FTE TEST
Under the act, if you are unable to hire back your employees who were working for you on February 15 and you cannot find suitable replacements by December 31, OR if your dental practice is unable to return to the “same level of business activity” that you had on February 15 in order to comply with guidelines issued*, you can ignore the FTE requirement.
(*Entities such as HHS, CDC, and OSHA issued guidelines effective March 1, 2020 through December 31, 2020 related to maintenance of standards for “sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19”.)
It will be very interesting to see how the Treasury and the SBA define “unable to return to the same level of business activity”. Does that mean that you have to justify why you had eight team members on February 15 but because of COVID-19 you now only need six for your “level of business activity”? Or is this going to mean that the Treasury and SBA will come up with some objective mathematical standard that says you could ignore the FTE rule if your revenues from March 1-December 31 annualized is less than some percentage of what revenues were in 2019? I cannot wait to see what the definition of returning to the “same level of business activity” means. We shall see.
It does appear that you might be able to avoid the FTE rule because of this. This is a big change.
IF YOU DO NOT RECEIVE 100% FORGIVENESS, YOU HAVE MORE TIME TO PAY BACK THE LOAN
For loans taken out after the date of enactment (i.e., new loans), the repayment of the amount not forgiven increased from 2 years to 5 years. If you received your loan prior to the date of enactment, you should ask your bank to amend the promissory note from two to five years. The Act does not specify whether the bank is obligated to do this-we will need to wait for more guidance.
YOU HAVE A WHILE TO FILE FOR FORGIVENESS
The act gives you up to 10 months after your covered period is completed to file. Be sure to calendar this date – you do not want to forget. If you do not file at the end of ten months, you’ll be required to pay back the entire loan. Remember, the bank will not contact you – it is up to you to apply for forgiveness.
YOU CAN STAY WITH AN EIGHT WEEK COVERED PERIOD IF YOU’D LIKE
The act says that if you spent all of your money in the eight-week period and meet all of the forgiveness rules, you can file for forgiveness early and be done. I see very little upside to doing this and lots of downside. If you file early, it is unlikely the banks will be ready. I’d wait and see how this all goes.
YOU CAN DEFER PAYROLL TAXES IF YOU LIKE
Under the CARES Act, you had the ability to defer the payment of the employer portion of the Social Security taxes through the end of 2020 and then pay those funds 50% at the end of 2021 and 50% at the end of 2022. However, you could not defer payroll taxes if you received a PPP loan. This requirement has been removed, so dentists who want to defer the payment of these taxes for one to two years may now do so.
- While at the beginning of this process many small business people had as their number one priority making sure they received 100% forgiveness of this loan. Congress thought this would be an eight-week problem followed by everyone going back to work. Obviously, it did not quite work out that way. Now, your number one priority should be to use this money in a fashion that is best for your business and your personal circumstance. This allows you time to bring back your team to meet your patient flow.
- If you have been following the letter of the law and have been paying your dental team regardless of whether your office was open, you will probably already have blown past using 60% of the funds and can now relax and use the funds as you need to. The American Dental Association has asked Congress to give those dentists a tax credit for following the law as intended, even though their business was closed and there was very little guidance on the rules.
- We have a tax issue: Currently the expenses you are paying with this PPP money are not tax deductible (per IRS Notice 2020-32) if your loan is forgiven. For example, you receive a loan for $100,000. You use all of this money for payroll, so the $100,000 is going to be forgiven. However, we will not know the amount until well into 2021 with the new laws. How do we file your 2020 tax returns? With a second stimulus bill likely, we think it is very possible that Congress could make these expenses deductible before the end of the year or the IRS could reverse their ruling. This will make tax planning more difficult for CPAs. Can’t wait!
- Will the $15,385 maximum for owner/dentists triple with the tripling of the covered period? We’re not sure, but this is possibly a moot point.
We are hopeful that the SBA will issue the necessary guidance SOON to allow us to advise further and address all of your questions. Until then, you can take a short break from all of this and focus on bringing your practice back as quickly as possible.
One thing you can be sure of…the HMWC Dental Services Team partners Don Watson, Pam Chamberlain and I, along with division manager Sam William, will do everything we can to help you meet your goals with this money and help you obtain the maximum loan forgiveness possible.
Finally, we have created a six-month cash flow planning spreadsheet. This Excel document is simple and provides a sample practice. It is available on our website and instructions will accompany it soon. We want you to plan what your next six months look like to secure enough financing (whether that is an EIDL loan, line of credit, personal savings, cash value of life insurance, etc.) to keep you going. We are confident that dentistry will do well as the economy reopens, but we want you to be prepared.