How to Plan Ahead for the 2026 Estate Tax Changes

The current federal estate and gift tax exemption is $12.92 million per person and $25.84 million per married couple for 2023. This means that you can transfer this amount of wealth to your heirs or beneficiaries without paying any federal estate or gift tax. However, this generous exemption is set to expire at the end of 2025 and revert to $5 million per person and $10 million per married couple (adjusted for inflation) in 2026. This could result in a significant increase in your estate tax liability if you do not plan ahead.

For more on this –

Fortunately, there are strategies that you can use to take advantage of the current exemption and reduce your future estate tax exposure.

  • Make large gifts soon – One of the simplest ways to use the current exemption is to make outright gifts to your family members or other beneficiaries before 2026. This will remove the gifted assets and their future appreciation from your taxable estate. You can also use trusts to make gifts with more control and protection, such as irrevocable life insurance trusts (ILITs), grantor retained annuity trusts (GRATs), or charitable remainder trusts (CRTs). You should balance the benefits of a large gift with the costs related to your heirs losing the capital gain benefit should they inherit the property at death.
  • Use spousal trusts – If you are married, you can use trusts to benefit your spouse and still preserve the exemption for both of you. For example, you can create a spousal lifetime access trust (SLAT) that allows your spouse to access the trust assets during his or her lifetime, while keeping them out of both of your estates. Alternatively, you can create a spousal preservation access trust (SPAT) that gives your spouse a limited power of appointment over the trust assets, which can be exercised in favor of your children or other beneficiaries.
  • Create a dynasty trust – A dynasty trust is a long-term trust that can last for multiple generations and avoid estate taxes at each transfer. You can use the current exemption to fund a dynasty trust and provide a lasting legacy for your descendants. A dynasty trust can also offer asset protection and flexibility for changing circumstances. Dynasty trusts are ideal for very wealthy families.
  • Review current estate planning – If you have an existing estate plan that was created before the 2017 Tax Cuts and Jobs Act (TCJA), you may want to review and update it to reflect the current law and your goals. For example, you may want to modify your will or trust to avoid funding a credit shelter trust (CST) or a bypass trust that is no longer necessary or optimal under the current exemption. You may also want to revisit your beneficiary designations, powers of attorney, and health care directives.

These are just some of the estate planning opportunities that you can explore before the 2026 estate tax changes. However, every situation is unique and requires careful analysis and guidance from a qualified professional. Therefore, we recommend that you consult with your attorney, CPA, and financial advisor to discuss your specific needs and options.

December 8, 2023

Exciting News – Employee Retention Tax Credit and Supply Chain Disruptions

The ERTC is a lucrative tax credit available for 2020 and 2021.   

Generally the two ways to qualify for the credit were from direct revenue reductions or from partial or total shutdowns caused by a government order affecting your business.

There is little known third way to qualify for the tax credit:

Your business will qualify for ERTC during a calendar quarter in which it experienced a supply chain disruption caused by a government order affecting a domestic supplier that caused the supplier to suspend shipment. The disruption must have affected a “more than nominal portion” of your business, causing a full or partial suspension of business. For purposes of this test, a more than nominal portion of the business must be a portion of the business that represented 10% of the total Company revenues in a calendar quarter when compared to 2019. Another way is that the affected portion of the business represented 10% of the total company labor hours in 2020/2021 calendar quarter as compared to 2019. You will need to document how you know the US supplier was disrupted by the Government order.

Some key take-aways:

  1. You don’t need to show a 10% reduction in hours or revenues. The supply chain disruption needed to have caused a “more than nominal” portion of your business to fully or partially shut down. The portion of your business is “more than nominal” if it meets one of the two 10% tests.
  2. You will need to document how you know the supplier was disrupted by the Government order in the United States, including the period of time covered by the order.
  3. The supplier needed to have suspended shipments or production due to a US Government order.
  4. A foreign supplier may have been affected by a US government shutdown of a US Port, which caused the delay in shipment.

 Here is an article on recent updates to the tax credit.

If you have questions, email the experts at KTLLP.

ERTC Team: Sarah Davis: [email protected].

September 9, 2021

Roth 401K and the High-Income Earner—Whacky Thoughts

One of the most common questions posed to me as a tax professional is whether to choose the Roth option for a 401K contribution. As you all know, the Roth contribution is not deductible now, but it is also not taxable in retirement. The regular “traditional” 401K contribution tax treatment is simply opposite of the Roth.

Most of the time, the answer is very simple. You will be mathematically ahead with the regular deductible 401K contributions if you are in a higher tax bracket today than when you are in retirement. If you are married, you reach the 32% bracket at $326,600 of income and the maximum 37% bracket at $622,050 of income. But wait. How in the world will you know the tax bracket when you retire—which could well be 30 years down the road? We all know tax laws constantly change. Also, your retirement income may be entirely unpredictable at this time.

So how do you make this decision?

If you google the “Roth vs. Regular” decision you will find a lot of interesting stuff. What you will not find is my frankly whacky observation of money withdrawn from 401K/IRAs in retirement years. Ha…just to be clear, my clients are not whacky, just my observation.

My whacky observation is that it is highly unlikely that the bulk of your traditional (non-Roth) retirement funds will be taxed in a higher bracket in retirement. Here’s why:

  1. Most retirees (who are the subject of this article) only take the minimum distributions, which now begin at age 72.
  2. Most retirees die with most of their retirement funds fully intact. At that point, the funds might go to a charity which pays no tax on the distributions. Or commonly the funds are paid out to a number of children, who are usually in a low tax bracket.
  3. It often takes a very large amount of wealth to earn over $326,000 in retirement. If your net worth is less than $10,000,000 in retirement, it is unlikely you will be in a higher bracket—especially in your 70s and early 80s before high RMDs might kick in.
  4. In retirement, very wealthy people often invest in tax free municipal bonds, or other tax-advantaged investments —-like higher dividend common stocks or publicly traded partnerships.

In conclusion, a bird in the hand is worth two in the bush. Enjoy your tax savings now and spend it on something fun!  

June 28, 2021

More Covid Grant Money for Restaurants and Related Businesses

Starting at 7 a.m. MST this Friday, April 30, business owners can begin registering for the Restaurant Revitalization Fund (RRF) program, part of the $1.9 trillion aid package Congress passed in February. The applications can be submitted starting at noon on Monday, May 3, through the SBA website This website is very helpful and explains this program.

This is a very generous program. The amount of funding a business may receive is simply the difference between a business’s gross revenue in 2019 and 2020, up to $5 million per location and $10 million total. The grant will be reduced by the aggregate disbursements a business received under both PPP loan programs.

Besides restaurants and bars, eligible entities who have experienced pandemic-related revenue loss include food trucks, caterers, bakeries, brewpubs and breweries, wineries and distilleries, among others. Eligible entities are those that provide a place of business in which patrons assemble for the primary purpose of being served food or drink, and it must have in 2019 at least 33% of its sales as on-site sales to the public.

Grants can only be used on eligible expenses incurred starting on Feb. 15, 2020, and ending on March 11, 2023.

Compared to the PPP, the RRF offers more flexibility in how operators can use the money. Eligible expenses include payroll, employee benefits and paid sick leave; mortgage, rent and utilities; maintenance; outdoor seating construction; supplies, protective equipment and cleaning materials; food and beverage; operational expenses; and principal payments for business debt.

The SBA promises that the application is simple and easy to use. We encourage you to apply online. The website section that is labeled “How to Apply” explains the minimal documents needed.

April 27, 2021

Joe Biden’s Tax Policy — How Might it Affect You

The phones have been ringing off the hook with the same question: How might Joe Biden’s tax policy affect me and/or my business?  The answer depends on the January 5th, 2021 Georgia runoff Senate contests.  If both Democratic candidates are victorious, all three branches of government will be under President-elect Biden’s control, and his tax policy could come to fruition. If Republicans win one seat, it is highly unlikely any of his tax policies will be implemented.  Since I’m very poor at predicting the future, let’s explore the Biden tax platform.  The sources of this information are Joe Biden’s website and the Wall Street Journal.

Joe Biden’s website touts that he will not raise income taxes on anyone making less than $400,000.  For everyone else, your tax bill would likely increase.

First let’s explore proposed tax cuts:

  • An expanded child tax credit to $3,000 per child and $3,600 for kids under 6.
  • A new tax credit for first time homebuyer’s up to $15,000.
  • A new tax credit to ensure that no family spends more than 8.5% of their income on health insurance.
  • Provide tax savings for low-income taxpayer contributions to retirement plans by awarding a tax benefit at the highest income tax rates.

For corporations, he proposes to raise the current tax rate from 21% to 28%.  This rate increase would affect all C-Corporations, but mostly affects large publicly-traded companies

Proposed tax increases affecting individuals:

  • The top tax rate would increase from 37% to 39.6%.
  • He proposes to reinstate the phase-out of itemized deductions for high income individuals.
  • If your W2 wage is over $400,000, he has proposed to impose the 12.4% payroll tax on the excess.  Presently, this tax ends when your wage exceeds $137,700.  He has proposed to re-instate the individual ACA insurance mandate. This would bring back the penalty for individuals that choose to not have health insurance.
  • The maximum long-term capital gains rate is presently 23.8%.   Under Biden, if your taxable income is over $1 million, your rate will be 39.6%. 
  • The Biden campaign has discussed imposing a capital gains tax at your death. Honestly, this is the most creative and albeit, bizarre proposal.  For example, at the death of a second spouse, the unrealized gain on all assets would be subject to capital gains tax.  The plan would exclude the first $100,000 of gain and a larger exemption for personal residences.  Effectively this is an estate tax on the middle class and an additional estate tax on the wealthy. 

Proposed tax increase affecting small businesses:

  • For several years, there has been a 20% deduction for small business income (Section 199A QBI deduction).  This is effectively a tax credit of up to 7.4% relating to business income.  President-elect Biden has proposed to repeal this benefit, even for taxpayers making less than $400,000 per year.

Proposed estate increases:

  • Presently a married couple enjoys a $23.4 million exemption before the 40% estate tax hits their wealth.   Under present law, on January 1, 2026 this exemption sunsets to one-half of that amount.   The Biden campaign wasn’t entirely clear on his intentions with respect to this tax.  Apparently, based on my research, Biden intends to accelerate this sunset provision.   However, the Wall Street Journal reports that he may wish to revert the exemption to 2009 law at $3.5 million.   
  • Since 1913, the tax code has allowed heirs to “step-up” the basis in assets if inherited after death. This allows refreshing of basis to wash away capital gains for the next generation.  In South Dakota, this benefit is of particular importance to farmers and ranchers who see their land increase in value due to inflation.  The Biden platform eliminates this tax benefit.

For me, the Georgia Senate races are more interesting than the November election.   Keep watching the KTLLP website for updates and reach out to your Ketel Thorstenson, LLP advisor if you have concerns or questions.

January 7, 2021

PPP Forgiveness Now Made Easy

By Paul Thorstenson, CPA/ABV, CVA

SBA has revised its PPP application to accommodate the new 24 week rules. But more important, they have issued a new EZ form.  Great news….as it is certainly very simple!

With the 24 week extension, It will be very difficult for any small business NOT to have its loan entirely forgiven.  Undoubtedly, this fact is the genesis of this very simple form.

Remember the forgiveness calculation first requires you to sum all allowable costs in the 24 week period, and then multiply that sum times the FTE quotient.  Because the loan amount was calculated at 2.5X monthly payroll, a business that has not “missed a beat” after receiving its loan should spend roughly 220% of its loan amount on allowable expenses during the covered period.  Better yet:  Even a business that  has reduced its headcount by 50% during the covered period, might still achieve total forgiveness.    

For example:                    

Loan Amount    $100,000
Allowable expenditures in Covered Period $200,000   A
Times  FTE Quotient 50%  B
Forgivable Loan Amount  $100,000 A* B

I estimate that roughly half of all small businesses will be able to use the EZ form.  If you meet any of these requirements, you can use the EZ form:

  1. Self Employed and have no employees; OR:
  2. Did not reduce wages by more than 25% AND did not reduce the number of hours of employees from January 1, 2020 to end of 24 week period.  You don’t have to count any employee reduction from the inability to rehire qualified replacement workers, or if an employee refused to work;  OR:
  3. You were unable to operate your business between February 15, 2020 and the end of the covered period at the same level of activity due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the CDC, or OSHA relating to the maintenance of sanitation, social distancing, or ANY other work or customer safety requirement relating to COVID-19.

The third item will obviously apply to a vast array of businesses.  Some obvious businesses come to mind including: restaurants, bars, casinos, personal grooming businesses, medical offices, dentists, etc.  

But what about a business, which has reduced headcounts PRIMARILY because of lack of customers, like a hotel?  These borrowers are probably stuck with the long form.


The new rules/forms clarifies that the maximum compensation allowed for any owner (including employee owners) is capped at 2019 compensation (not to exceed $100,000) times 2.5/12.  The 2.5X was how the loan amount was calculated to begin with, which translates to certain total forgiveness for any sole proprietor.


If you missed out on EIDL loans and the $10,000 advance/grant the first time around, you now can apply.  Remember, the $10,000 advance/grant has to effectively be paid back if you also have a PPP loan.  Here is the link to the application.

Remember, the EIDL loans are not forgivable.  Here is what you need to know:

At KTLLP we have a team assisting with the preparation and review of PPP loan applications. If you have met the requirements as of the 8 week period, we can work with you to prepare the applications as soon as your 56 day period expires.  Email [email protected] to enlist our assistance.  

June 17, 2020

PPP Extension

Paul Thorstenson, CPA/ABV , CVA

You may want to throw away your current applications for PPP loan forgiveness.   The Senate passed the Paycheck Protection Program Flexibility Act last evening, and the President is expected to sign it into law today.

Key Provisions:

  • Covered period is expanded to 24 weeks from 8.
  • Only required to spend  at least 60% on payroll costs vs. 75%.
  • If you don’t spend at least 60% of the loan on payroll, there is no forgiveness at all.
  • Unforgiven amounts will now be amortized over five years rather than two.
  • Forgiven amounts remain taxable.
  • Borrowers can elect to keep the current 8 week covered period.
  • Now have until December 31 to reach full-employment levels in relation to February 15 to meet FTE safe harbor.
  • The proportional reduction in the forgiveness relating to FTE reductions will no longer take into account any person for whom the borrower:
    • A) Was unable to rehire any former employee; or
    • B) Was unable to hire similarly qualified employees for unfilled positions before December 31.
  • The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which had been prohibited under the CARES Act.

More unanswered questions

  • Will the SBA will be issuing regulations explaining this law?
  • Will a new application form be forthcoming?
  • We assume that any employee, including owners, will be able to count $46,153 of payroll per person.  ($100,000/52*24), but this has not been clarified.

Planning Take-Aways:

  1.  It now will be virtually impossible not to spend the full amount of your loan on forgivable items.
  2. Meeting the 60% payroll test is a mere formality for a business that has re-opened.
  3. The most important planning item is to re-hire by December 31, 2020, to February 15, 2020   FTE levels in order to meet the FTE safe harbor, so that 100% of the amount spent is forgiven.
  4.  If you have achieved 100% forgiveness in the 8 week period, you should elect to use that and apply for forgiveness.
  5. If you have not achieved 100% forgiveness in the 8 week period, you should calculate forgiveness using the better of the 8 week period or the 24 week period.
  6. It is possible that the 8 week period provides for a larger forgiveness  amount if the FTE safe harbor is not met and the average FTE’s in the 8 weeks is larger than the average FTEs in the 24 weeks.

At KT we have a team assisting with the preparation and review of PPP loan applications.  If you have met the requirements as of the 8 week period, we can work with you to prepare the applications as soon as your 56 day period expires.  Email [email protected] to enlist our assistance.   

June 4, 2020


On May 16, the SBA issued an 11 page PPP loan forgiveness application form, which you will need to provide to your bank at the end of the 8 week covered period.  We encourage you to study this carefully and begin filling out the necessary information.

The form provides some clarity but also adds even more confusion:

Clarity Received:

  • There is no need to have a payroll run on the 56th day of the covered period.  You can include the last days of your payroll period that fall in the covered period, even if paid after the 56th day.
  • If you pay bi-weekly or more frequently, you can elect to use an alternative 8 week period to match your pay periods to the 56 days.  This is only for payroll.  See page 1.
  • Other bills, such as utilities, which are incurred in the 56 day period, but are paid after the period, can be included if paid on the next regular billing cycle.
  • There are two alternative and simple definitions of FTEs on page 7.
  • No owner can give himself or herself a raise during the 8 week covered period, when compared to 2019.  See first representation on page 4.
  • There are no prohibitions against hiring family members or giving any employee (except an owner) a raise during the covered period.  However, further guidance could be coming.
  • The 75% rule is not “all or nothing.”   This is great news.  A simple example:  The loan amount is $100,000 and only $70,000 is spent on payroll.   That simply means that allowable non-payroll items are limited to $23,333.  The 70,000 is then 75% of the total of $93,333.

Some Confusion Remains:

  • It still appears that any employer retirement plan contribution paid on behalf of employees, if paid in the 56 day covered period, can be counted as payroll.  For instance, this would apply to any payment related to 2019 or even the entire year of 2020.  
  • However, it appears that employer retirement contributions paid on behalf of self-employed individuals, and general partners are not allowed. We hope this oversight is corrected.
  • How do we handle rents that are paid in advance?  For instance if your covered period ends on June 30, and your July rent is paid in June, is such payment an allowed expense?   I think it is (see page 2).
  • Step 4 of the FTE Reduction Safe Harbor (page 9) says to use FTE as of June 30.  This is not correct and is clarified both in the law and on page 8.  A business must meet the FTE no later than June 30th however any pay period prior to June 30th is sufficient for step 4 of the safe harbor test.

New Mass Confusion

Previous rules had indicated a self-employed person’s forgiveness was going to be equal to the line 31 and 34 of their Schedule C or Schedule F, respectively.  The instructions to line 9 (page 5) now indicate that any self-employed individual or general partner must actually pay themselves during the covered period, and the amount allowed is the lesser of the amount paid or 8/52 of the amount of self-employment income reported on their 2019 tax return. 

Despite that a proprietor or general partner draw is merely a return of capital and not compensation, it is now CRITICAL that such persons actually receive drawings equal to the 2019 equivalent amounts.

After reviewing this information, and the application, please reach out to your Ketel Thorstenson, LLP professional with any questions or concerns.

May 18, 2020

PPP Loans: Maximize Your Loan Forgiveness

PLEASE NOTE: much of the information in this article is now outdated due to new rules. See the most recent article at

Many of you have obtained the Paycheck Protection Program (PPP) loans. This means your eight week clock is underway. Allowable expenditures during this “covered period” may lead to your loan being forgiven. You should have opened a separate PPP bank account, and received or downloaded our PPP guide from our website at Now your job is to make sure you qualify for the maximum amount of loan forgiveness allowed under the laws and regulations. This body of law is very fluid, so check the SBA website often for changes. As this article was written on April 24, 2020 it is possible this advice is outdated by the time of your reading.

Also, on our website is a new PPP Loan Forgiveness EXCEL Calculator which will help you better understand the forgiveness process.

Maximize Expenditures in the Covered Period

As you know, the monies you spend on allowable expenditures during the 8-week period (which commences on the date you first received PPP funds in your bank account) are eligible for forgiveness. I can’t encourage you enough to budget for these expenditures. The MOST important goal is to ensure 75% of what you spend (not of the loan amount) is for allowable payroll costs. What happens if you spend only 73% on payroll and 27% on other allowable costs? We think the regulations will eventually clarify that the 2% is not forgivable. While unlikely perhaps, we FEAR that if you fail the 75% requirement, future regulations may state none of the loan is forgivable. We don’t know for sure.

The law uses precise language:  Forgiveness relates to allowable “costs incurred and payments made during the covered period.” What does that mean? It is possible you can include either “costs incurred” OR “payments made” during the covered period. It could also mean that BOTH tests must be made.  

As I’m sure you know, the word “incurred” is equivalent to an accrual basis of accounting. The date an expenditure is incurred is the date to which an expenditure relates. For instance, the electricity consumed by your business in the first week in May is considered to be a cost incurred in the first week in May, despite that the bill might be paid in June.

Let me give you a PPP specific example: Your 8-week (56 day) forgiveness period (the covered period) begins on May 1st. On May 9th you pay employees for a 2-week pay period that ended on May 7th.  As such, 7 days of payroll were incurred prior to the covered period, but all of it was paid in the covered period. How much will be counted towards forgiveness? Seven days of payroll or the entire amount paid? No one knows. Future regulations need to clarify. An allowable expenditure can be incurred anytime from February 15th to June 30th.  As such, the worst case scenario is the first 7 days of that payroll might constitute a non-forgivable portion of the loan.

Planning Point (1)

The most important take away is you don’t want to be “caught with your pants down” paying any expenditure incurred in the covered period with a check dated after the 56th day.  In addition to payroll, on the 56th day, make sure you pay all other costs incurred, such as accrued interest not yet due, utilities, health insurance, pro-rated rents, etc.  If you can pay any employer matching or employer pension contribution relating to a period prior to the 56th day, you should attempt to get that paid. The 56th day is an important day to pay everything you can!!

Planning Point (2)

Certain utility expenses were excluded from the definition of utilities in the law, for example, garbage and sewer service.  My advice is to track those utilities and maybe they will correct the oversight in forthcoming regulations.  Also, the law gave an example of gasoline for a business vehicle that qualifies as a transportation utility expense.  What about diesel fuel for machinery? Track it, as it probably will qualify.

Planning Point (3)

As of today, the regulations are silent as to any restrictions on whom you bring onto your payrolls in the 8-week covered period and how much you pay them (limited only to a $100,000 per year equivalent maximum.)  Also, when you re-hire, no requirement exists for the workers to actually do any work. I expect forthcoming regulations to prevent employers from hiring family members during the covered period. But who knows?  For unrelated employees, it seems the spirit of the law is not violated if you pay them more during the covered period than you had prior to the crisis. But again, we don’t know this answer right now.   


Once you have spent your allowable funds and determined the amount which can be forgiven, you are then subject to two separate tests. Only one is really an obstacle. Your forgiveness is reduced proportionally if the average FTEs in the 8-week period (numerator) are less than the FTEs in two optional base periods (denominator). Therefore, you must make sure you increase the numerator and decrease the denominator.

Loan Forgiveness Reduction Test #1 = FTE Reduction

Planning Point (4)
You should pick the base period which has the lowest FTEs. The law states you measure the average FTEs for each pay period during the calendar month within the base period.  I’m speculating the regulations will clarify that an FTE is 30 hours per week, and to determine the FTEs, you will add up hours worked in a pay period and divide by 30.  The two base periods are (1) February 15, 2019 through June 30, 2019, or (2) January 1, 2020 through February 29, 2020.  For most businesses in the Black Hills of South Dakota, the obvious low ebb for employees will be the two winter months.

Planning Point (5)

Increasing the numerator is more fun for sure. If you don’t have normal duties for people, you may find it advantageous to hire people to do odd, yet productive jobs, like cleaning and painting.  Another thought is to maximize the hours. For instance, if you re-hire a tipped employee who had been working 20 hours a week making $20 an hour, bring them back on making $10 an hour at 40 hours a week. But, in this example since you reduced the wage by more than 75%, you will need to pay attention to Planning Point (7).

Planning Point (6)

If you rehire laid off workers, you can eliminate the FTE fractional forgiveness reduction calculation altogether. This can be used if you have laid off workers from February 15th through April 26th. It is a simple test, and it is an “all or none” deal. You measure the FTEs on the date of February 15th, and if you rehire laid off workers at any time prior to June 30th, such that your FTE count equals or exceeds the February 15th count, then you pass the test, and no FTE reduction is calculated.  Please note the rehired workers can be different people.  At least that’s how I read the law at this time.  Again, additional regulations will explain this better.

Loan Forgiveness Reduction Test #2 = Wage Reductions

Planning Point (7)

Avoiding this reduction in your loan forgiveness is simple. But first, it is important to remember this reduction is applied on a specific employee by employee basis.  During the 8-week covered period, do not pay anyone less than 75% of the wage rate they were earning in the first calendar quarter of 2020.  Also, for workers for whom you’ve laid off due to this crisis, you can avoid the test altogether.  All you need to do is re-hire all of them any time prior to June 30, 2020, and pay them at least one paycheck at a pay rate equal to the pay rate they were earning on February 15, 2020.


Again, watch for new regulations on the SBA website.  And PLAN, PLAN, PLAN!


April 24, 2020

For Immediate Release—How to Avoid Wearing Orange (Paycheck Protection Program PPP Rules)

Late yesterday (April 2), the SBA issued  an Interim Final Rule for the Paycheck Protection Program.  If you are applying for this program, this is mandatory reading.  There is little information that is new in this guidance. But some information is frankly shocking, and also frustrating is that many questions remain unanswered.–IFRN%20FINAL.pdf

  • Restrictions on the use of the funds.  The rule is clear if you KNOWINGLY misuse the funds, the government may hold you liable for fraud.  Also, a false statement in the application is punishable with up to 5 years in prison and  up to a $250,000 fine.   If you weren’t taking the details of this program seriously you should now.   At first blush, that doesn’t seem unusual.   What is stunning is how the phrase “misuse of funds”  may be defined.
  • What is a misuse of funds?   There is no definition in the rule.   QA letter (r) of the rule states that the money can only be used to pay wages, make interest payments (not principal) , lease payments and utility payments.    The rules also states that:

    “PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in Section 7(a) of the Small Business ACT (15 USC 636(a)).  After a quick skim of that body of complex law it appears that any reasonable business expense may be allowable.  But I’m not sure.  Consult your banker and legal counsel. 
  • QA letter (r) vi states that at LEAST 75% of the loan proceeds SHALL be used for payroll costs.   On the loan application you are asked to certify that not more than 25% of the loan proceeds SHALL  be used for non-payroll costs.   The word SHALL should scare you.  Perhaps that could constitute a misuse of funds.   
  •  Recommendation—Avoid Commingling
    I am recommending  you open two new bank accounts, and deposit 75% of PPP funds in one account for payroll, and 25% for everything else.     Do not commingle the funds.  Use the two accounts merely to transfer funds in a precise amount to your regular bank account prior to making an allowable expenditure.   Be very diligent to pay only the allowable expenditures with those specific funds.    For example, for a mortgage payment, you would only transfer the interest component from the PPP account.    The interest component should be paid with the PPP bank account, and the principal should be paid with non-PPP funds.   Also, while you don’t need to spend 75% of the proceeds on payroll during the 8 week measuring period, you do need to spend 75% of the money on payroll eventually, even if you have to repay some or all of the loan.

Other Revelations and Open Questions:

  •  QA letter (r) states that you can spend funds on interest payments for “any other debt obligations” incurred before February 15, 2020.  The actual codified law stated the only eligible interest payments were for secured mortgage and equipment loans.
  • To determine the loan amount, you look at historical wages.  The rule (page 8) states that you start with historical wages “from the last 12 months.”   The application still states that you use calendar 2019’s wages.   Your banker will have to speculate that the “last 12 months” means calendar 2019.
  • There still is zero guidance as to how to treat income earned by a partner in a partnership.    Can that be treated as wages?    Simple question.  Stunning that there is no answer.
  • QA Letter (i) The interest rate on the loans is one percent per annum.   The maturity date is 2 years.  No payments are due for 6 months.

Stay tuned.  We will update our website with clarifications as we receive updates.

April 3, 2020