COVID-19: Updates On Loan Forgiveness and Taxes With Amanda Han and Matthew MacFarland #694

This week’s radio show and video guests are Amanda Han and Matthew MacFarland of Keystone CPA. See below for full video and resources.  

Episode Highlights

  • As we enter the second stage, where does a lot of the uncertainty lie with loan forgiveness?
  • How does loan forgiveness work when it comes to what the PPP loan must be used for?
  • What is the Senate working on trying to change with the PPP program?
  • Has California done anything ridiculous on top of the Federal stuff, similar to opportunity zones?
  • How are landlords and property managers being affected?
  • What changes were recently made to the EIDL loan program?
  • What are some good updates they have seen happen?

Episode Notes

Aaron Norris: Hey everybody, it’s Aaron over at the Norris Group, and today we have Amanda Han and Matt MacFarland with Keystone CPA. This is a revisit. We’ve done a lot of different Coronavirus updates over the last month. This one might be a little bit shorter because we’re just sort of on hold waiting for a lot of information. But some interesting things have happened. And I guess we’ll just start with that. Welcome, guys.

Amanda Han: Thank you. Right. An ever-changing climate of coronavirus.

Aaron Norris: Yeah. And I think it’s just been so overwhelming and I’ve chosen not to do many radio shows. I’m just sort of like a wait and see. I’m waiting to see…What’s frustrating at the federal, state and the local levels is everybody’s layering on these risks. And it’s just it’s mind boggling to watch. I don’t take politicians seriously when they try to just be cute and deal with something that sounds really sexy on paper. But then you’re like, what are you doing? Like, that doesn’t make any sense because you’re messing with contract law. I don’t understand how you want that to work. It looks cute on a resumé, but not doable.

I guess let’s start from the federal levels, since we talked several weeks ago. The Payroll Protection Program has come around, so that’s been interesting, and some more business have been funded. I can only imagine round three is coming, but they’ve made some updates. You sent me an e-mail this morning saying there was something that the IRS was looking at. Please share.

Yeah. So, you know, I think when we did the last radio show and a couple of podcasts before, at the time many people were focused on applying for the loan. How do I apply? How do I calculate the loan amount? And so the frenzy of, you know, questions and uncertainty. So now we have the second round of questions and uncertainties, but mostly around the forgiveness portion. How much is forgiven? How do we calculate the loan forgiveness? Just like the first round, there’s a lot of questions and unknowns. Answers to those questions are coming out almost on a daily basis. But that’s where people are at, especially the investors and the businesses that applied or were eligible for PPP loans. Most have applied, and the good news is that we’re hearing more and more people get approved for the loans.

Small businesses, which I think was one of the major changes to round two of the PPP loan funding. The government wanted to make sure small businesses were getting it. So that’s good. We have several clients, investors, business owners who received the money. But now there’s this fear of people are not sure they want to take the money. In fact, I had a couple of clients yesterday and today who said they’re leaning towards just giving the money back because they’re very unsure of how to use this money, what we can use it for, how do we calculate the forgiveable amount? So that’s a lot of where the uncertainty is.

Matthew MacFarland: There’s a lot of situations where people don’t think they’re going to bring their employees back because, you know, maybe at some businesses the employees are making more on unemployment than they would if they were hired back in their job, which obviously just sounds wacky when you think about it. Maybe the unemployment benefits they are receiving are not tied to how much they were making in the job before, so they’re just getting paid a flat rate. So then the people who were taking these loans were saying they can’t hire them back because they don’t want to come back to work.

Aaron Norris: Right. Well, the loan didn’t specify it had to be the same person. It’s more of the number, isn’t it?

Amanda Han: Yeah, exactly. The issue being, especially for California between federal and state on unemployment, people are getting $800 to over a thousand dollars per week. And so for many employees, that’s not even what they were getting paid before coronavirus. So there is a reluctancy to go back, and so that was one of the questions. Thankfully, Treasury came out this week and had said, OK. So if you’re an employer, your employees have left, assuming you can’t just hire someone else to replace them, then what you need to do is make an offer to them. So it has to be a documented offer where you’re offering them at least the same rate and number of hours as before the coronavirus hit. And if they turn the offer down, it must be in writing. Like documentation that the offer was made and documentation that they turned it down. So if as an employer, if you’re able to get that from these ex employees, then the fact that you didn’t end up getting them back in terms of headcount doesn’t hurt you. So that is a little bit of a relief. But yes, you’re right, Aaron. Alternatively, you can hire other people. If Matt was my employee and he didn’t want to come back to work, which very well could be because I’m a slave driver, I can hire Aaron.

So I could hire someone else instead. We have a client who’s in the DJ business. So a question is, Where am I going to find these other people who work in the BPJ? I think another confusing point would be, specific to this situation, I have clients who tell me, Well, so I could hire these people back. But I don’t have anything for them to do. I don’t have any job. I don’t have projects. So I can’t even hire them back because they have nothing to do. So it’s a really important distinction that the PPP program is for you to pay payroll irrespective of whether they’re actually physically working or not. So the understanding is that even if these people are not actually working as a DJ or working in the office every day, that you’re still keeping them on payroll. So just because you don’t actually have work for them, that’s not a problem. You can still pay them for it.

Aaron Norris: Wow. That’s awfully nice. OK.

Amanda Han: So if Matt doesn’t want to work for me and Aaron does, my offer is I will pay you what I was paying Matt. And you don’t even have to come into work if my business was not able to be open, because in quarantine you just get free money.

Matthew MacFarland: Amanda, you can correct me if I’m wrong, but the whole forgiveness calculation and reduction in payroll is measured at the whole, right? So they’re not looking at individual by individual where maybe one person stopped working for you and that person reduced your wages by 50 percent. Just overall as a business, you’re looking at the number of employees and how much of your payroll changed and if it did or not.

Aaron Norris: So say one of your executives left and got another job. You could technically maybe replace them with two worker bees to do some different things. It accomplishes the same thing. The numbers are actually increased, but your payroll stays the same. So I think you’re being creative. And then the forgiveness part. I think the original was 75 percent had to go to payroll and the rest 25 percent could go to expenses. Correct?

Amanda Han: Yeah, right. So there was a little confusion about that. But yeah, currently as it stands, so if you get a PPP loan, you use 75 percent for payroll, the other 25 percent for other eligible expenses, then potentially 100 percent of that long could be forgiven. But if payroll is less than 75 percent, then there’s a reduction calculation in terms of how much could be forgiven. And that’s why there is a key to you really want to try and spend at least 75 percent of that to be on payroll expenses. But, you know, practically speaking, what we’re seeing a lot is some people don’t want to come back to work and are on unemployment already. As a business owner, you still have expenses like rent and overhead and software and just general expenses. A couple members of the Senate are trying to put together a bill to reduce that percentage to about 50 percent. They are saying instead of 75 percent having to go to payroll, can we reduce it so that 50 percent goes to payroll and the other 50 percent goes to these eligible business operation expenses, then the forgiveness part won’t be increased. So we’re in a waiting pattern to see if that gets passed or not at this point. Hopefully, it will pass. I think it gives business owners a little bit more flexibility because the payroll part is sometimes difficult to get employees to come back or even hire new people when a lot of people are preferring to go on unemployment.

Aaron Norris: Yeah. They just want to stay at home because they may be scared. I get it. It’s so complicated. You have to really make sure that you’re keeping track of exactly how you’re spending the money. I definitely am concerned. I mean, they’re clearly changing the rules to be more flexible. But could they come back and say, “Yeah, you know what? We’ve just decided it’s not going to be forgivable.” Like, “We’re just going to convert that to an actual loan.”

Matthew MacFarland: And they can do whatever they want.

Aaron Norris: Yeah, it is a little concerning, and when does that forgiveness happen?

Matthew MacFarland: The other thing, too, is that there’s now recently been talk that came out about people getting money from the government. The plan was that money was gonna be tax-free. They give you a $50,000 PPP loan and it’s forgiven. It’s not taxable income to you. Great. But then the question a lot of people have is, “What about the expenses I’m using this money for, those deductibles?” As it currently stands, they’re saying, No, it’s not, which, you know, in theory makes sense because you’re using somebody else’s money to pay for it. I get it. But if you actually run through the math and you do it the way they’re currently writing it, then the money you get ends up actually being taxable if you do the math calculation. Something is not adding up, obviously, and so I know the Senate is talking about trying to change that. The AICPA is also putting in some push to get that change so you can deduct the expenses because otherwise you end up paying taxes on the money you get. 

Aaron Norris: The good news is we have all year to figure it out. Right?

Amanda Han: Well, yes and no, right? We have clients that are thinking, “Maybe I’ll just give the PPP loan back and go on unemployment or go back on unemployment myself as a business owner.” The uncertainty is “Let’s say I took out twenty thousand of a loan and I’ve paid it to myself, I paid it to the employees. And that’s all great.” But what I’ve given up is unemployment in the interim in employment income. And so what happens if I don’t even know until later this year whether the loan is forgiven? If it’s not forgiven, then I pay my employees maybe to stay home and do nothing. And I’m still on the hook to pay back the government money, albeit one percent interest. But that’s still my money. So it’s really more specific real-world issues that we are seeing as we talk to different clients who, you know, on the face of it it’s like, Wow, congratulations, you’ve gotten the loan.” But now they have this headache of, Oh my gosh, well, how am I gonna spend it? Am I going to get it forgiven? Right. I don’t want to spend money that’s actually not mine. The last thing we want to do during a recession or COVID-19 uncertainty is to get into more debt than we otherwise would have.

Aaron Norris: As you understand it, if you get this loan and you use it as specified by the rules, so let’s just say 75 percent has to go to payroll, if you’re able to document that, is that your understanding that the loan in its entirety can be forgiven if you use it correctly?

Amanda Han: Yes, definitely. Yeah, that’s the intention. They could add additional stipulations later on. We don’t expect that to happen, but they certainly could. If you add one sentence to the code or the regulations or any Treasury release statements, that could change the forgiveness calculation or the ability to get the loan forgiveness to a whole new different level. We’ve seen that with respect to the EIDL Loan. So when it first came out, $10,000 grant tax-free money for anyone who applied. We were supposed to get it within three business days. And then one day they just said, Oh, actually, that ten thousand is limited to $1,000 per employee. So that really changed the whole program, at least for our landlord clients who don’t have people on payroll. One sentence can make all the difference.

Aaron Norris: Would it have been better for them to do the other program? Because you’re not supposed to do both. You’re supposed to choose. Correct?

Aaron Norris: No, you can certainly have the PPP as well as the EIDL loan. That’s a common misconception. So you can certainly apply for both and obtain both loans. The restriction is that you can’t double-dip on the loan. So if I got the $10,000 grant, I can’t also use that to pay for my payroll that I got the PPP loan for. So you can have both, you just can’t double-dip on the same expense. A lot of our clients, ourselves included, we’ve applied for the EIDL loan as a landlord. Back in the day when it first came out, there was no stipulation of having W-2. So they made that change to say only available for W-2. But in the last couple of weeks, maybe last two weeks or so, we’ve had many clients who’ve told us they received the EIDL loan, although they’ve never had any employees. So that’s some good news. They changed the law, but it looks like the system didn’t catch up. Some of those older applications still got funded even though the landlords didn’t have any employees.

Aaron Norris: It was pretty crazy how quickly the money ran out the first time. I got a lot of feedback as far as if you were with a smaller community bank and you had a depositary relationship, you were much more likely to get in line to at least get through the second round. But, if you’re a really small business and you don’t have a good bookkeeper and the kind of backup information that they’re going to ask for, you might not really be prepared for being able to process the loan. So I think there is going to be around three. And unfortunately, I think the people that will be covered mostly in the round three are probably going to be the really small businesses. I think minority-owned businesses. I see the effort at the federal level to really address the really small businesses with very few employees just because they’re not like Ruth’s Chris ready to step in or an NBA team. I mean, it’s been pretty funny to watch to people that are like, “Just kidding. We’ll give it back.” I don’t know.

But can you blame them? It’s like, “Hey, free money from the government.” Who’s going to say, No, I don’t want that.

I don’t know who would say no to that. You have to do it and just be careful and use it wisely. At this point, I’m just really interested to see how the states end up rolling out. I’ve had to travel, unfortunately, to Florida. I’m going to have to again this weekend, and it’s been really strange to travel. There’s like nothing open in the airports. The airplanes are close to empty. When I was flying back from Florida last time, I had to stay in Dallas. Two of the planes broke down back to back. So I was in Dallas for five hours. And finally, the third plane worked. So I was able to get back to California. But even still, combined planes, because two broke, you know, the plane still wasn’t full. It’s really strange to watch.

Matthew MacFarland: So not only are you worried about getting a virus while you’re on the plane that can kill you, you are actually worried about the plane crashing because apparently they don’t work anymore. Maintenance people aren’t working.

Aaron Norris: Maintenance people decided to go on unemployment because they’re getting their pandemic unemployment. So if you’re maxing out at – what is it – $450 a week or $900 a week?

Amanda Han: Well, I think the federal government is $600 a week plus the state. The amount from the state can vary. The highest I’ve heard in over a thousand a week. So probably for someone who was on a little bit higher payroll or previously was. But, yeah, I mean, that’s a real problem in terms of just people getting paid more for not working. There’s really not a whole lot of incentive to return.

Aaron Norris: And our poor nonprofits. If they have employees that are on the minimum wage and they’re looking at, “Wait a second. I can go on unemployment and get this extra bump and not have to do anything. Sign me up.” So it’s scary being part of a nonprofit, watching how busy they’re getting with such increased demand. I mean, it’s a scary time for people.

California. Have they done anything ridiculous on top of federal stuff, sort of like they do with opportunity zones that make it more complex? What are you seeing?

Matthew MacFarland: On the tax side, not so much. They’ve conformed to the federal in terms of extending all the deadlines and the payment deadlines and things like that. That was quite honestly a shock to me, but that’s what they did. It makes life easier for people living in California.

Aaron Norris: OK. Well, that is good. There are different buckets of money that are slowly formed. I’m on the chair of 211 of Riverside County. We’re a subsidiary agency of United Way out here, and I think they’re about to get a contract for $1.9 million for small business. So that’s money. They’ve also put together a fund. They had a few big donors step up. So people in need could get, in Riverside County, just grants for like five hundred dollars. So if you really aren’t tied into the local level, you might not know what you’re missing. So if you’re a landlord and you live in San Diego and you’ve got a house in Riverside, you better do some homework. You might not know if your tenant’s not being able to make rent. You might get to be really creative and really make their day. I’ve been surprised. Our loan business hasn’t been impacted a great deal. And we have a lot of rental loans. Maybe that’s because of some of the inventory. We’re not interested in funding.

But I’ve been surprised. I thought we were going to have more loans ask for forbearance, and we barely have a glitch, which has been nice, especially going into May. I mean, we’re clearly not through May. Some things could still happen, but I’m excited to see us slowly start to open. I’m just going to be interested to see the spread if it really picks up. You know, all that kind of stuff before. I just haven’t been very motivated to do any more radio shows because I’m just really sort of wait and see at this point. We’ve got local politicians trying to add on rent control. You know, you can’t raise rent for the next couple of months. Why? It just adds such an unnecessary layer on top of what the state is trying to do. It’s just a really difficult time to be a landlord right now and wage through this mess, especially if you own in a lot of different places. It’s just really hard. Property managers are definitely earning their money.

Amanda Han: The other upgrade on the loan side is, you know, before we talked a lot about how the EIDL loan was still a great option for landlords that don’t have employees, whether or not you got the grant. For landlords, it was just “Get the loan.” You might need it for cushion or to help with cash flow issues. As of early this week, late last week, the EIDL loan program was updated as well. So all of a sudden on the SBA website, there is an indication that the EIDL loan now is available only for agricultural businesses. And so even that took the landlord out of the playing field. Even just with the loan part. We didn’t have forgiveness. Ok, fine, we had a loan. But then again, one little thing was added, so now they’re saying this is only for agricultural businesses. We’re hopeful maybe that will be reversed, that hopefully in the near future they will be taken down and they will allow other non-farming businesses to also go back to taking advantage of that. Things are changing all the time, and there’s not as much publicity about that tweak with the EIDL only being for agriculture. But, you know, that’s a major change in the whole program itself. 

Aaron Norris: Yeah. And I think there’s just more coming down the pipeline. There are going to be some businesses that will be hiring. If you’re in the loan industry in the loss mitigation department, and you’ve gone from zero to eight thousand in a hot minute. Grocery delivery. It’s going to be interesting to see the switch because I listen to a lot of different things, and they’re talking about a lot of jobs in the service sector that aren’t going to come back, although they might very slowly. In California, when you’re talking about anything that has an audience involved, so entertainment, sports venues, they’re going to be the last to open. And at that point, they’re really talking about having to have some kind of anti-viral or a vaccine for that to make any kind of sense. And not just because everybody just wants to get back to life. But there’s also the liability portion that you have to think about. If I own a sports arena and I allow people in and somebody gets sick, am I going to get sued? You have people signing waivers as they’re entering a theater or a sports arena. I mean, we’re in California. You got to think about those kinds of things.

My gym trainer said, “We’re just scared of liability.” I’m like, “Have us sign a waiver.” We know that we might get it from lifting weights with you, and we’ll just take the risk. Like, I just need to get out of the house. I’ve got to do something. Anyway, I’m trying to think of anything else to bug you guys about any other updates you can think of that might be good.

Matthew MacFarland: I don’t remember what dates they came out versus when we talked last, but they made those changes to the net operating losses. I don’t know if we talked about that last time or not, but on the federal level, if you had any net operating loss under ’18 or ’19 return or even going forward, if you have one on your ’20 return, instead of making people carry those losses forward, they’re now allowing people to carry those losses backwards up to five years and apply those losses against your years when you had income and conceptually get a refund of taxes you paid in previous years. That was a nice change from the CARES Act.

So that applies to 2018, ’19 and ’20. So obviously, in 2018 most people filed. I think the thing for people to know on that is if you filed ’18 and hadn’t in a while, obviously you carried it afford originally, but you go back and look with your adviser and say, “Hey, I want to carry that back to 2013.” There’s a quick way to do that, and it’s on a form 1045. People need to file that by June 30th. The benefit of that is you get your money sooner than if you go through the normal amended return process, which is a 1040X. You can still do the 1040X, it would just take longer for people to get their money back; whereas with the 1045, the IRS is supposed to give you your money within 90 days of filing.

Aaron Norris: Do you have any clients that are getting creative talking to you about Rothification?

Matthew MacFarland: The conversations come up a lot. Obviously, it makes sense. You know, markets are down right now. We’re just talking to clients about consumption that makes sense. But obviously in the big picture, for Roth IRA conversions to make sense, you would be getting a higher tax bracket at retirement age than you are right now, assuming that’s the case. And then, do you have money outside your retirement account to pay the tax if there is going to be tax out of pocket? That’s another assumption that needs to be there based on what we know.

When you do a Roth conversion, you don’t have to convert your entire IRA. You can pick and choose how much you want to convert. So you can convert X amount this year, X amount next year. And we see people doing that to stay in the same tax bracket. So they’re managing their brackets a little bit. So that’s some of the conversations we’re having around Roths.

Aaron Norris: Well, especially if you haven’t done your taxes yet and it’s been extended. Does it mean that I can also contribute for 2019 to my IRA if I wanted to?

Matthew MacFarland: Yeah, you can. So basically, people still have time up until July 15th to make a contribution to their traditional or Roth IRA for 2019. So they extended that deadline. Talking about a conversion now, you have to think about what your 2020 taxable income is gonna look like because the one caveat is that a couple years ago, they changed the rule that said you used to be able to do a conversion and you have some time to undo it if you just determined that the numbers didn’t work out the way I wanted them to. Now if you do a conversion, there’s no undo button anymore. You do a conversion, you’re stuck with it. So a lot of times you tell clients, Let’s wait till November, December to pull the trigger because then you have a full year’s worth of information to work off of. The con of waiting until the end of the year is that with market values down, now might be a better time to convert. Instead of something that was worth $40,000 three months ago that’s worth $20 or whatever or could be worth $40 six months from now, it would be better to convert a $20 versus $40.

Aaron Norris: Well, now is just a good time to have a really good CPA on your side strategizing because you’re stuck at home, and what else are you doing, right?

Matthew MacFarland: If you’re not thinking about cash 24 hours a day, there’s something wrong with you.

Aaron Norris: Do you guys have a lot of your clients? I mean, you guys clearly specialize in the real estate investor crowd. You have a lot of clients reaching out to you having those conversations?

Amanda Han: Well, not on the Rothification specifically. It’s difficult to do these conversions of real estate within a self-directed account. It’s going to be generally like converting a whole property versus not converting it. But yeah, we have a lot of clients contacting us about the new depreciation rules, filing amended returns for carryback. Obviously, all the loan things with respect to PPP and EIDL loans. So, there’s a lot of questions surrounding those. And we always encourage our clients too. It doesn’t have to be a very long extended conversation, but at least shoot us a quick email so we know what’s going on. And then we can jump on it based on the transaction or the activity that people have going on. But you’re right. A lot of people are at home thinking about taxes, thinking about finances, and this is a good time to do it because otherwise when you’re busy with working and investing, taxes are generally not at the top of people’s minds like it is in today’s environment.

Aaron Norris: Well, what’s the overall sense that you’re getting from your clients? Are people really stressed, really struggling, really scared? Any temperature?

Amanda Han: You know, we have a couple of clients who have a lot of real estate that are maybe C Class real estate that have loans on the properties. I think those are the ones that are feeling the most pressure because they have to service the debt bill and yield a much lower income from the rental coming in. So we have a couple of those. A lot of our clients have properties with little debt or properties that are in better areas with the tenant profiles of higher incomes.

It’s kind of all over the place depending on the investor, but certainly the ones that are more stressed right now are more multi-family apartments or just more C-Class properties where a large percentage of the tenants are not paying.

Aaron Norris: Yeah, I definitely have some investors. We don’t have loans, but where entire apartment buildings have had conversations and all the tenants have agreed just to boycott rent. It makes me think of Mike Cantu. He has a saying he doesn’t like owning. I think he was the one who said he doesn’t like owning properties where the only thing separating the tenants is a wall or something. So yeah, in masses it makes people get together and make bad choices. And it’s California, and it’s just, I wish we could all see it as “if you can, you should” across the board. But what are you gonna do? I am very interested to find out as this progresses to see what happens with migration trends. I have talked to investors that are thinking even more so about leaving. They’re done with California, not just because of Coronavirus or rethinking their urban experience, but how the state has responded has them worried. And they just don’t want that kind of risk in their life and they want life to be boring.

Amanda Han: I’m glad you bring that up because you’re right. I do have a couple of clients who brought that up to us as recently as yesterday. They said they were selling properties and did not want to 1031 exchange right now, and if they do, they’re not going to be in California.

Aaron Norris: Yeah. And I’m really glad I got rid of some of the stuff that I did because I know I would have a problem with some of my tenants. And right now I have not. So I feel pretty lucky. But just a weird time out there. Thank you for taking the time. I didn’t think we’re gonna be on the phone for half an hour, but thank you for giving a little bit of an update. And I know we’ll be back before the end of summer trying to figure out how all this stuff is playing out. So be safe, you guys. Thanks for letting me bug you today.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go and click the Hard Money tab.



Aaron Norris will be presenting his latest talk Innovative Real Estate Marketing With NorcalREIA on Wednesday, June 10.

Bruce and Aaron Norris will be presenting Keep-Sell-Create in Sacramento on Saturday, June 20.

The Norris Group presents its award-winning black-tie event I Survived Real Estate 2020 on Friday, September 18.


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