TriNet Group, Inc. (TNET) Earnings Call Transcript & Summary

Thank you for joining us today for our webcast on what the new COVID-19 stimulus package means for small- and medium-sized businesses. Before we begin, I'd just like to cover a few housekeeping items. The webinar is being recorded. The replay will be available approximately 1 day after the webcast and can be accessed using the same link that we sent you earlier. [Operator Instructions] Now I'd like to pass it over to Samantha Wellington, TriNet's Senior Vice President, Chief Legal Officer and Secretary; as well as Alex Warren, TriNet's Senior Vice President of Customer Experience.

Thank you, [ Brandon ]. Welcome, Alex. It's nice to be back here with you. We have just a few housekeeping items to get through before we start. This is my standard opening statement. Presentation is for educational purposes only. We provide our clients with a legally compliant HR guidance and best practices, and we do not provide legal tax or accounting advice. With that said, what we're going to look to talk through today is what's happened, what's changed. And there's some other items to consider. We've received a lot of questions in the lead up to this webinar, and we tried to build a lot of those questions into the content that we're providing today as well as having a Q&A section at the end where we're answering some of the more specific questions. So with that, Alex, I think I'll let you kick us off, if that's okay?

Yes. And so hi, everybody. I know that Samantha and I were doing these almost felt like every day for a while there. As we've said throughout this entire event, we're here to help you take control through this process and through these events. And so what we're trying to do today, and our goal today is to talk about what's changed in the new law or with the new law that's come out in the guidance that was released actually last night. It's one of the things that happens every time we do one of these, they seem to pass a whole bunch of stuff and then right before we start to talk about it, things change. During this webinar, we're going to be talking to the existing structures that were put in place last year that we were working through all of our webcasts on, so we're going to assume some knowledge or background knowledge on the topics that we're going to cover. But don't worry, what we've done is, at the end of this, we're going to have a handout that we will provide you, that will have all the various links to the previous webcasts that we've done on this subject or various topics and documents or locations that you can go to, clicking the sites to get you more information. Actually, this morning, we were trying to talk about what we were going to call this, if this was going to be a leave behind or a handout. But since we're not really handing anything to you or leaving anything behind, we hope that by the next webcast we do, we will come up with the name for this thing. But don't worry, this information will be there, and then we'll also give you avenues to contact back to us if we didn't get any of these things answered for you. So Samantha, there are a few items that I think you're going to speak to.

Yes. So just to set the stage for where we're at right now. The point of today's session is really to walk through the Consolidated Appropriations Act. And that is the piece of legislation that was passed just before Christmas, the -- sort of the relief package that folks were waiting for, the one that took a while for the President to sign, if you sort of need context. And the relief package is just that. It's designed to extend relief to help small- and medium-sized businesses navigate the current climate. I don't think it's a stimulus package. It is really better classed as a relief package. And in particular, we're going to be talking about the PPP extension that's heightened the program's focus on the small- and medium-sized businesses that are most in need, that's targeting smaller customers or businesses that have experienced 2020 revenue reductions. And it also establishes a set asides through other small- and medium-sized business funding vehicles like EIDL loans and the MBDA. The tax and lease programs align -- that have sort of been adjusted, do align with the need to keep operating expenses as low as possible in a business that's sort of seeking to get through. It's a little different to sort of stimulus and more better classed, I think, as relief and continuing funding. So where are we? The CAA that I'm going to refer to the Act directed the SBA to issue rules within 10 days to implement the PPP provisions that were in the Act within 10 days of enactment. And as Alex pointed out, as is generally the case with these webinars, 2 interim final rules and a guidance document were published late last night. So we have spent overnight, reading through those for you, and we've built as much of the content from those new guidance documents and interim final rules into this webinar as possible. The 3 things that was issued last night, the guidance document is on accessing capital for minority, underserved, veteran and women-owned business concerns. And then the 2 interim final rules are on the PPP as amended by the Economic Act and then the interim final rule on second draw loan. So that's sort of the second bite of the cherry, if you like, from a PPP perspective. So we'll go into the details of that. So in doing the work that they published last night, the SBA consolidated 23 separate interim final rules into 1 place. The idea making it -- that it would make it easier for borrowers and lenders, which I think we're certainly grateful for as will everyone be on the webinar. The PPP consolidated interim rule is in the form of 37 separate questions. So question and answer. It covers everything from who is eligible, how can -- how much can you borrow, allowable uses and what's required in order to certify. We do believe that the SBA will issue a new application for second draw loans, second draw PPP loans and new forgiveness applications for loans that are under $150,000. That has not been issued yet, but we do anticipate that, that will happen. The SBA has not said yet when it will start taking applications, that borrowers will submit through lenders, but sources who are closely following the rollout do expect that restart to happen next week. The agency, the SBA, said that it would continue setting aside dedicated hours to process and assist the smallest PPP lenders with their loans. You may recall that in the first tranche of the PPP, there was a lot of issues with perhaps the smaller lenders and the smaller businesses are getting processed in time. So I think what I'd say before we launch into the actual details of this, if you've been following along with these webinars over the course of the last 9 months, you -- and you did what we suggested, we've already built the structure and the processes to understand these updates. So there's nothing flashy or terribly exciting about this release package or even the way that the second draw loans are being operated. You could argue that this particular relief package ushers in a new normal, where small- and medium-sized business support is needed to keep the most important sector of the economy going for as long as is necessary. But in an environment where the only constant is change, I think it's probably best to shift into the actual detail, get you caught up on the changes in the CAA and think about how that can actually help your business. So if we think about what's happened, many relief provisions were included in the CAA. And it allocates $900 billion in economic relief. There's a lot to unpack there. But on this slide, we've highlighted the 2 previous webinars that will give you background on the original PPP and the refresh to the PPP. There are a lot more webinars and information papers available at the TriNet Business Resiliency & Preparedness Center. You'll find that via the red ribbon at the top of the trinet.com site. And as Alex pointed out, that's all going to be linked in the handout that we'll make available at the end of this webinar. So as we go through this, and you're thinking to yourself, oh, I'm not quite sure what they're talking about there. Generally speaking, there will be a link in the handout to a previous webinar, a previous blog that refreshes you on what the credits are that we're talking about or how that all works. So with that, I'm going to take us into -- Alex, if you wanted to give us some -- just a high-level overview.

And I will, just very quickly, when these changes happen, which we were used to before, we had a mechanism for at least TriNet customers to remember to continue to go back to the microsite that we've built because we were constantly posting more information for -- at least for the time being, start to get back into that motion to see what this is, how this is. We'll produce those small vignette videos we were doing to sort of clarify anything that pops up or any changes that Samantha just talked about, so that we're continuing to feed information as we do it. And then, of course, it will all be linked in the next document. Those of you that aren't TriNet customers currently, that also gets posted out on the main website as well. So we're about to talk about FFCRA, and in particular, this is going to be about paid sick leave and extended family leave. Just to set everybody in the right course, this was -- there were 2 basic ideas here. You were provided up to 80 hours -- you could provide up to 80 hours, a paid sick leave for health care for an individual affected by COVID or an additional up to 10 weeks for someone or caring for someone that has been affected by COVID or you had daycare issues or the schools themselves have been shut down. So there were some parameters built around that, and those parameters essentially allowed individuals to provide qualified leave to those individuals that was reimbursed. If you jump to the next slide, I think that really sort of speaks to -- essentially, it was originally mandated that the FFCRA and the portion around leave was ending on December 31. The Congress have -- has extended the tax credits now until March 31, 2021, which means that employers may voluntarily choose -- this part's important, may voluntarily choose to continue to provide FFCRA leave to their employees and still receive the tax credits for the corresponding FFCRA payments for any leave taken up to March 31. So employers that voluntarily extend the FFCRA may continue to comply with all FFCRA requirements. Now we've already put a vignette about this, but just remember that the extension does not give more hours. If the employee has already exhausted the hours that they have used for this leave, that won't -- they don't refill or add any hours to it. So it's only the hours that are left in that period of time with those 80 hours that we're speaking to.

Yes. And then there were also -- I was going to go into state and local laws, if that's okay?

Yes, please.

So there's a number of state and local laws passed in recent months that do require the payment of sick leave to employees for a variety of COVID-19-related reasons. Some of those state and local laws expired at the end of the year. Some of them are tied to the expiration of the FFCRA, and some do not expire at all. I do think that we could see state and local lawmakers extend the paid sick leave requirements in the future, and we're continuing to monitor developments on that front. Obviously, as Alex said, if we need to, we'll send out a vignette or a blog, certainly keeping folks updated. But I think the real important tie in here is that the first 10 days of FFCRA weren't required to be paid under the original FFCRA that was passed last year. So the first 10 days of leave taken on the FFCRA weren't required to be paid leave. However, when you interact that federal provision with the various different local state provisions, there are some locations where you did need to pay the first 10 days because it overlapped with the leave that was taken at a state level. One of the things -- so that's why the changing at the state and local level is also really important, if you're one of these people -- one of these employees who want to extend the -- your use of the FFCRA. I think the other thing that's really important, given the number of folks who are still working from home and the number of businesses who have shifted to remote world, employers who have folks working from home and who might have allowed folks to move around the country during lockdown, do need to be aware that the state and local laws that apply are going to be those that apply in the location where the employee is working, not where you're headquartered or where they used to work. And that could mean that employees who weren't previously entitled under local or state laws are now entitled to sick leave. It's one of those complexities that comes with being a multistate business that a number of employees and businesses are really trying to grapple with now, with the volume of remote work is. So I do think that employees that chose not to -- choose not to continue FFCRA leave or weren't covered in the first place, just do always be checking the applicable state and local leave laws to ensure that they are covering mandated and eligible employees appropriately. And I think the other thing to keep in mind here is that we've included at least the renewals of the local and state -- significant local and state laws in the handout as well as those that have been extended. So you'll find a list of both in the handout when you receive it. So if you -- I do think that the real important takeaway there is that if you would choose to extend FFCRA to your staff, just rethink or reassess any provisions that you are applying last year around paying the first 10 days of leave or not if you were doing that based on local requirements because they likely have changed. So with that, Alex, I might take us into the retention credit.

Yes. And so at retention credits, just do a quick reminder again, it was under the CARES Act designed to encourage businesses to keep employees on payroll. If you remember, almost all of the mechanism in motion we were going through, all of this was designed to keep employment up. And so it was a refundable tax credit against certain employment taxes as was originally set up to be equal to 50% of the qualified wages, an eligible employer pace to employees after March 12, 2020, and before January 1, 2020. Eligible employers were able to get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. And if the employer's employment tax deposits are not sufficient to cover the credit, the employer may get an advanced payment from the IRS. So that's the baseline as to what this credit was. So let's talk about the changes. One, it's been extended through June 30, 2021. The amount of the credit of the wages is raised from 50% to 70%, which increases the per employee limitations on applicable wages from $10,000 in a total year to $10,000 per calendar quarter. In combination with the increased credit percentage, this would increase the maximum credit per employee from $5,000 to $7,000 per quarter up to $14,000 for the first 2 quarters in 2021. I think that's an important distinction here. And then the reduction in gross receipts eligible -- or eligibility qualification has been changed from 50% year-over-year to 20% year-over-year, meaning that now your significant decline in gross receipts begin on the first day of the first quarter of 2020 for which an employer's gross receipts are less than 20% rather than 50% of the gross receipts for the same calendar quarter in 2019.

And so then if we talk about credit aggregate, so the total credit aggregate is now $14,000 per employee, right? So that's 70% times $10,000 times 2 quarters. And that total of $14,000 is available for 2021, even if the employer has already maxed out the credit of $5,000 in 2020 for a particular employee. And even though the total credit is $14,000, it can only be taken 70% at a time on wages paid in a quarter. So to give an example out of that, if your employee is only paid $8,000 per quarter, then the employer, you, might only receive a total credit of $11,200 for that employee, not the full $14,000. So that's $8,000 times 70%, which is $5,600, and that's $5,600 in credits per quarter. And previously, employers with more than 100 FTEs could only count the wages of employees who were not working to determine their credit. However, the other really big important change that has happened here is that the FTE count has been expanded to 500, meaning that the definition of a small employer for the purposes of this legislation, of this provision has changed from account of 100 FTE to 500 FTE. Now the reason why that's important, if you sit between that 100 and 500 bucket, is that it allows any employers with more employees to take the credit by allowing them to use all of the wages their -- of their employees, whether they were working or not. The reduction in gross receipt eligibility qualification also means that more employers will be eligible for the credit than was the case previously. So PPP borrowers -- this is sort of the last piece, I think, that's quite important. PPP borrowers may be eligible for the credit, to the extent that qualifying wagers are not paid using forgiven PPP loan proceeds. Now for those of the -- you who remember the beginning of the PPP loan process, you remember there was sort of an either/or element going on that was then adjusted. And the way that this is best expressed, I think, is that wages that are forgiven under the PPP or in respect to the PPP loan are disqualified from eligibility for credit. But if you've got other wages that aren't forgiven under the PPP, you are still able to access this credit. I think that's important. So then, Alex, if there was nothing else you wanted to talk about in respect of retention credits, I think we should get into the PPP update.

Yes. And I think the only piece I would jump on what you just said there was this idea before, there used to be -- if you remember, when the first rules passed, it was always either/or. And so -- well, first of all, it was like you had to pick one versus the other. And then as it extended, then it was like, well, no, maybe you could use one for a period of time and then the other. And so this is a little bit of a change. Most of the framework that's been built has defined now it's either/or, or you're choosing to play within the framework. And that's -- that is critical to put that sort of thought process back. We've gotten into a habit of being used to this. This is the new norm. We understand how to travel through this sort of process of each one of these pieces of legislation. But remember, one, we've already said change is a normal constant. It's happening all the time. But more importantly, this idea of thinking either/or is going to become critical later on as each one of these new changes go forward. So PPP is one of the best ones that sort of changes every day almost.

So I -- so let's get into PPP. So in the information that was released last night, one of the important things, I think, that was said was that the SBA said that it would be a priority to minority-owned businesses that have struggled to obtain aid. So in that guidance, the guidelines that we issued in respect of minority, veteran and women employees included the idea that amongst the steps that the SBA will take is to accept PPP loan applications only from certain lenders that focus on underserved and minority businesses and borrowers in distressed areas for at least the first 2 days of the program. So what that means is those particular types of lenders, who are processing applications in those particular types of applications, would have first bite of the cherry, if you like, for the first 2 days of the program. So if you're a business that you think you might fall into that category, we have a link to the guidelines in the handout. But absolutely, you should be looking at whether or not that's a category that you should be making yourself -- making your lender aware of and ensure that they understand that you fit in there. I think there are a couple of other set asides in the program that I think are worth talking about, and then we'll get into some mechanics of the program. So lenders, there's the $15 billion set aside for loan -- PPP loans, both initial and second draw, that are issued by community and financial -- by community financial institutions. So that's, again, addressing that initial concern in the first round around community banks, minority depository institutions not having appropriate access or easy enough access to funding. And then $15 billion for PPP loans issued by small depository institutions. I think the other thing that's important in respect of borrowing, so that's someone who's actually borrowing under the PPP program, is $35 billion set aside for first-time borrowers and $15 billion of that is for smaller first-time borrowers with 10 or fewer employees. And then $25 billion for second draw PPP loans for smaller borrowers with 10 or fewer employees. And now that can all be adjusted after 25 days. So once the program starts, those set aside limits and amounts can be set aside by the SBA or adjusted after the first 25 days as they sort of monitor how it's all going. I think the other thing, there are a number of money set aside for various different programs as well, the EIDL Advanced program, the Microloan program. And one of the really important things, I think, to mention is that there was $50 million set aside for PPP auditing and fraud mitigation purposes. Those who are following on the PPP story from the beginning, you'll remember the stories about the various folks who allegedly utilized their PPP loan to buy Rolexes and cars and whatnot and a significant amount of funding has been set aside to ensure that appropriate audit is going on in respect of these loans. And the SBA will be held to account by Congress so that there's enough noise around that to ensure that, that will happen.

So before we jump to this next slide, I do think this speaks to a conversation that you and I had during PeopleForce. And for those of you that didn't get an opportunity to go to PeopleForce, which is the PPP is not the be-all and end-all of your opportunity to be successful through this time. That -- we spoke extensively about you need to be looking out there for other available or access to liquidity in other places. And we talked about creating a mechanism to think about how to set aside your day and setting aside each day for a certain thing. It's Monday, you're going to spend it on federal. Tuesday, you're going to spend it on small business, and so on and so forth. That framework should get you into the habit of looking at various other places. Is the Chamber of Commerce offering a series of loans out there? And what does it look like and will that benefit me? The idea that there are minority business set asides, veteran, disabled veterans or -- set asides, women-owned business set asides, we need -- we want you to think about, is there something else out there that you can be looking for? I remember how much stress went into the amounts of money that were set aside in the first and the second distribution initial of the PPP when it started, and it was shut down so quickly because they were out of money. And the stress it caused businesses that say, "This was my only access." What we've learned over time is there is access in many different ways to get to money to help you stay afloat. Your local community can be doing something, so make sure you take the time to see that. We put some links in the handout. It looks like we've ended up with handout, I promise we'll come up with a different name. That we're going to have links to places you can go, to click on, to search around to see what's there and start getting it in a habit -- not just around this legislation because this legislation has been bearing down on us, talked about for 6 straight months, what's going to happen, where is it going to be and then they pass it, and it feels pretty vanilla right now. And there's probably more to come, but there's also lots of other access out there that you need to be thinking about as businesses. So they -- at a high level, it's attempting -- we've already said it's attempting to address the criticism that it was too difficult or not geared to small businesses, provides $284 billion for PPP first and second time loans, it extends the PPP through 3/31/'21. Remember, December 31 was the cut-off initially. It allows certain small businesses to apply for a second loan, if certain criteria are met. We're going to talk about this. It expands allowable forgivable expenses. Again, this is something we should be and we will go into. And then it repeals the CARES Act provision that PPP borrowers had to deduct their EIDL Advance from their PPP loan forgiveness amount. This is actually a pretty big piece because it came up -- we were asked many, many times about what was going to happen, have sort of left there for legislators to decide. So we are now deeper into this.

Yes. I actually think before we get into the overview here, I do think that, that repeal of the deduction of an EIDL Advance, for those of you who are fast enough to get an EIDL Advance, you did have that challenge of deducting that advance from the loan forgiveness amount, and that's being repealed. And I think that's actually a really important change for those businesses that got on the EIDL loans really quickly. So let's remember, the PPP is designed to provide short-term cash flow assistance to qualifying businesses. The loans are made by lenders that are certified by the SBA and guaranteed by the federal government. So you access them through your bank or through a certified lender.

Okay. And as we've already said, they've extended it through 3/31/'21 to $284 billion for first and second time. Eligibility is the same, but now includes a certain 501(c)(6) nonprofit and designated marketing organizations that do not receive more than 15% of their revenues from lobbying and other such local newspapers. It was stated that within 17 days of the enactment, the SBA would issue guidance that would allow borrowers who returned all or part of the PPP loan to reapply for a maximum amount applicable, so long as the borrower had not received forgiveness. Borrowers whose loan calculation has increased due to changes in the interim role may work with lenders to modify the loan amount if the loan had already been dispersed. So as we've just said, they released some information last night. So look, I'm going to read some of these interim rules, I think it's important because they are -- they do make some changes so -- and Samantha mentioned them at the beginning. So a new interim rule. The borrower can use 2019, 2020 or the trailing 12 months to calculate the average monthly payroll for first loans. This is going to give you more flexibility. If you remember, you had a set of -- you had to pick, 2019, the sets of dates. Okay. It's going to be 2019 or '20. What this is giving you is the additional ability to think through how you're going to apply for these loans because now you have -- you can use 2019, 2020 or the trailing 12 months, so that you can take the time to decide exactly what is the average amount of payroll. We talked about this a little bit today to sort of say, when the loans first came out of when this happened, everybody was just scrambling for money. Some people would contact us and say, "I think I took too much money, I don't know," or "What are these periods? My business isn't the same." Now you have some options to think about. Where you are today, what's the closest date range to choose -- or is it 2019? Do you look more like 2020? Or do you look more like the last 12 months? I think that interim role, again, is more borrower-friendly so that you have an opportunity to pick who you are today and the closest way to move forward with that. I think the second part is...

I think it best allows you to -- I apologize, Alex. But I do think that it best allows you to focus on -- if now we're all sort of attuned to forgiveness, right? I think to Alex's point, when the first loans were being released, folks were sort of just jumping on and then no one quite knew how forgiveness is going to work. And to be clear, there may well be sort of revised forgiveness rules that come out in respect of the second-tier loans. So we're sort of operating on what we know thus far. But I do think that if you've got an eye for forgiveness, if your eye is to I want to maximize the amount of forgiveness possible, these provisions really give you a way to think about how to best ensure that you're using the right period as a compare and as a period that sort of helps inform the amount of loan that's appropriate for your business.

Yes. And I, again, sort of to add on that, I think for -- what we thought about it is we weren't quite sure from the business perspective, we weren't quite sure what we were going to be, this gives us a better opportunity. We've been acting in this space as a business operating, understanding how our businesses are operating now. Over the last 10, 12 months, but it's much easier now to have more flexibility to fix these periods. The other interim rule is that if the borrower returned all of the PPP loan, they may reapply. And if the borrower return part of the PPP loan, then they reapply for the difference up to the previous amount approved. If the borrower did not accept the full amount, may request up to the amount previously approved. So in other words, we did have a group of individuals that didn't use all the money. They just didn't, and there weren't that many, but who -- were they -- who they were, they returned the dollars. They may now go back and reapply, either for all of it or part of it for the amount that they originally approved.

The differential being there -- I apologize Alex, the differential being there, so that would be a reapplication for a first loan. So you'd be under the rules that apply to the first loan as opposed to under the rules that are applied to a second draw loan. Because remember that the access to second draw loan is more restricted to the access that was set out for first draw loan, so that's why that's an important point. People who may be listening, thinking, why on earth would I bother doing that if I could just go get another loan? And the answer is you might actually want to be eligible for a second loan, so you might want to think -- if that's the case, you might want to think about whether or not you could access that first loan.

That's right. And some of the changes we're going to talk about in a couple of slides may actually have you think about going back because of eligible expenses may have changed or broadening that may give you the ability to go back. I just want to set the rules here, so everybody understands that if you remember when the loans first came out, June 5, 2020, or previously from that point, you had the ability to choose between an 8- and a 24-week period, that will be the same for first and second loans. You will have the ability to choose between an 8- and a 24-week period for the full FTE count. So we can go back and actually give a vignette to that. But if you click back, you'll see how that 8- and 24-week period was determined and how you would think about going through the 8- and 24-week period, and that has more to do with forgiveness than anything. Loans made under the PPP before or -- before on or after the enactment of this Act may be eligible to utilize expanded forgiveness expenses except for borrowers who have already had their loans forgiveness -- or forgiven. So this is this ability to go back and increase the loan amount, and we'll explain what those additional items are. And then tax deductions are allowed on expenses paid with forgiven -- right. So this is tax deductions are allowed on expenses paid with the forgiven PPP loan. So in response to the bill, the IRS issued guidance yesterday, reversing its original position that prohibited businesses with PPP loans to double dip by paying expenses with forgivable loan money and then writing off those expenses. New guidance allows for deductions for the payment of eligible expenses when such payments would result or expected to result in, in the forgiveness of a loan or a covered loan under the Paychecks Protection Program.

Right. So this is -- this was a lot -- we had a lot of conversations about this in the context of previous webinars. There's a lot of conversation about this because I think businesses who had taken PPP loans, and certainly, the way that some members of Congress were talking about sort of the provisions in the press, were indicating that businesses felt that they should be able to claim deductions, their regular deductions for the wages, rent, utilities and other expenses. That will be covered by the loans. The IRS has -- at the time had said, "No, the intent of the lawmakers is not enough. I actually need you to write that into the law because that's not our regular approach." So in the CAA, they did clarify that business owners should be eligible for those deductions. This is generally, I think, seen as a bit of a victory, I guess, for small businesses. It certainly is answering a question that's been out there for a period of time. What that means is that you can now use tax-free money, essentially, to generate more tax breaks. And that's something that's generally prohibited under the tax code. That's why the IRS's fierce answer was, "No, that doesn't work, I need a specific rule from Congress, a specific law from Congress." So when Congress made the change, they said allowing the deductions was necessary to keep small businesses afloat amid the waves of restrictions and weakening consumer spending. So that all makes sense. However, in practice, what it means is that some businesses could end up paying a negative tax rate on their PPP money, meaning that the tax benefits actually outweigh the amount of the loan for business owners who are paying the top tax rate, it generally means that they could save as much as $37, I think, on their taxes for every $100 of tax for a PPP money. It's an issue that's been in limbo for a while. Many businesses did expect to be able to claim the deduction. The one caution I would suggest that everyone listening apply here is that you may find that the delay in clarity has created some problems for you or some things or issues you'll have to work through in terms of how to apply it in your business. And that's because other tax breaks, like if you take R&D tax credits or the 20% pass-through deduction, do interact with expense write-offs, meaning that if businesses who are trying to determine whether they can still qualify for other tax benefits that they usually claim. If I say that another way, in drafting the new provisions, Congress didn't necessarily consider and the IRS didn't necessarily consider or tell us how this deduction might reduce or eliminate the benefit of ordinary corporate business deductions. And what that means is just that the benefit of deduction might not be as great as we might hope when we first hear about that change. I do think the other things that are important to note about the CAA provisions in this context are that the CAA repeals the CARES Act provision that PPP borrowers had to deduct their EIDL Advance. I said that once before, Alex said it once before. If you have an EIDL loan, this is a really important provision. And it also provides that a business who was not -- that was not in operation on February 15 is not eligible for an initial loan or a second draw loan. So if you're a brand-new business, this is not for you. If you set up your business after the declaration of the pandemic, you're not eligible for either an initial loan or a second draw loan. So with that, I shall take us through to the changes to expenses. I think this is important. This is the big categories that have been added here.

Yes. And so just sort of level set here, if you remember, when you were taking a loan, you had a set of expenses, either payroll costs or nonpayroll costs. And there was a percentage, and that percentage hasn't changed, 60% on payroll costs, 40% on nonpayroll costs. And so they have now expanded in both categories. So I think it's critical. We're going to talk through that -- the basic categories have now had additions on the payroll side. And then the one specifically on the nonpayroll costs are also important in there.

So essentially, borrowers can now include group life, disability, vision and dental costs as payroll costs. And then as nonpayroll costs, borrowers can include covered operations expenditures. This is a payment for any business software or cloud computing service that facilitates your business operations, product or service delivery, the processing payment or tracking of payroll expenses, your human resources function, sales billing functions or accounting or tracking of your supply inventory, records or expenses. So that's a lot, right? If you think about the way the business is run today and the way the businesses certainly have been running in a remote environment, those business software, cloud, computing, software services and any services that facilitate that sort of business operations, that's an important point. And it's possibly a large amount of money for some in terms of what new nonpayroll costs could be included. The other thing is that there's an inclusion for covered property damage costs. And that's costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020, provided that those costs were not covered by insurance or any sort of other compensation. And then there are also covered supplier costs, which are expenditures to a supplier pursuant to a contract, in effect prior to taking out a loan that are essential to the borrower's operations at the time that the expenditure is made. And then the other big thing that was clarified was COVID worker protection expenditure. And what that means is that PPPs -- the PPP loan can be helped -- it can be used to cover any sort of additional indoor/outdoor or combined spaces, sneeze guards, the big plexiglass that you were -- that we're seeing some folks put in between cubicles in the office, air pressure ventilation, your HVAC reservicing that you might have done, respirators, PPE that you're providing to your employees, all of those things become COVID nonpayroll expenditure for the purposes of your loan. So it also allows -- this is an important thing, I think, allows loans that were made under the PPP to be eligible and to utilize that expanded forgivable expense definition. Unless you've already had the loan forgiven. If your first loan has already been forgiven, you're done. But if you're still in the process of working through your loan or if you're in the process of balancing your ratios, that 60-40 ratio in terms of payroll and nonpayroll expenses, you can use these new expenses as nonpayroll expenses. I think that's an important thing to keep in mind. As you jump to try and do that, remember the ratio. So if your aim is maximum forgiveness, always keep in mind that ratio because as you add in new expenses, you'll throw your ratio off. And so then, Alex, I think one of the important questions for TriNet clients on the line is obviously going to be in respect of our own reports and whether or not the reports or access through the TriNet system have been updated to reflect the new payroll costs that are now included in loan forgiveness.

So as we speak, they are being updated to reflect this. We're working on them right now. The goal should be that, hopefully, by the end of this or very soon after this, it will reflect these adjustments for the payroll cost side.

Right. And I'd like to think that it's not enough to have not known that answer -- asked that question without knowing the answer.

Yes. That may have been like left in there to trick you. Yes. So...

All right. Very good. So let's get into forgiveness. And specifically, forgiveness for loans under $150,000.

Okay. So last night, the SBA and the Treasury said, the lenders must confirm dollar amounts and percentages of borrowers' revenue reductions and a good faith review for a second draw PPP loans greater than $150,000. And that borrowers must submit documentation that may include tax forms or bank statements. However, for loans less than $150,000 or $150,000 or less, the SBA and the Treasury will not require the documentation to be submitted with the application, but only later when the borrower applies for loan forgiveness. So that's -- that is very important. Essentially, what they're saying is, for these smaller loans, loans $150,000, much of the documentation that's required will not be required here until you're getting into the forgiveness process. And we'll talk about that documentation, we actually have a quick segment on there, and that will also be in the handout. So the SBA is creating a new forgiveness application form for this $150,000 or less loan. We do not have a sense of what this will entail but we do know that borrowers forgiveness will not be subject to deduction for reduction in salaries or headcount. It will be available to new borrowers and prior borrowers who have not already received forgiveness. The borrower will need to provide the number of employees the borrower was able to retain because of the loan, the borrower will have to provide estimated total amount of spend on payroll costs in total and the total loan amount, and the borrower will have to attach that the borrower adequately provided the required certifications to require the loan or obtain the loan.

Right. So keep in mind that if you fall into one of these -- if what you're looking for is $150,000 and you fall into these sort of reduced requirements, please remember that you do have to still maintain those records. So even if no one asks to see them, you do need to have them because if you are audited, you're not going to be able to recreate them later. So that's records related to employment for [ 4 years ], other records for 3 years. Larger loans must retain documentation for 6 years. So that's important. You do need to do this right. The SBA administrator within 45 days has to submit a report to the Senate and House Small Business Committee, detailing their review and forgiveness audit plan to mitigate the risk of fraud. Remember, they got given $50 million in this act to ensure that they do it right. And so there is going to be a fair amount of focus on that in terms of the SBA. So just even if you don't have to provide it to anyone, make sure you've got it, make sure it's in your files. All right.

And I'm sure that those of you that have sat -- those of you that have been in any of the webinars that Samantha and I are on, we always have extensive conversations about documentation. And I guarantee you, there's a slide later on about that, that she's going to speak to. So let's talk about the second draw loans. Okay. So the Act is allowing certain employers to obtain a second loan, the max amount of $2 million, $10 million was the max for the first-time loans. And you can only get one second draw loan. To be eligible -- so let's go through the eligibility. 300 or less employees. It was 500. Businesses that were eligible under the first round of PPP loans may apply for a second draw loan if the business does not have more than 300 employees per location. You have used or will use your first PPP loan details on the first, second draw interplay. Okay. So specifically, the borrower must have spent the full amount of the first draw PPP loan on eligible expenses under the PPP rules to be eligible for a second PPP loan or draw loan. That -- I think this is important because we get a lot of questions around this that I have to use the full amount of my loan. And I think -- Samantha, I can't remember, you were -- we actually were talking about this. This was the confusion. Do I have to spend it all? Or what does that mean?

Yes. So this doesn't mean that you need to have your first loan fully forgiven, right? Some of you spent all of your first loan on payroll expenses. But because you had to reduce your staff, so that your FTE reduction quotient ended up at, let's say, 0.85, it resulted in a first loan that was not fully forgiven. But it was entirely spent on eligible expenses. So you would still be eligible for a second draw loan. So be sure to distinguish between how you spent the money, whether it was all spent on eligible expenses versus whether it was all entirely forgiven. It doesn't have to be all entirely forgiven, but it did have to be all spent on eligible expenses.

And it has to demonstrate at least a 25% reduction in gross receipts in the first, second, third quarter of 2020 relative to the same quarter in 2019. Applications submitted on 1/1/'21 or after can use gross receipts from the fourth quarter of 2020.

Right. And we've got a lot of questions on this previous webinar, particularly on what is the gross receipt, how should I be thinking about gross receipt, how the gross receipts relate to gross revenue. There are a number of -- it's certainly in the lead up to the passing of the legislation and certainly in the press, gross receipts have sort of been used interchangeably with gross revenue. In the rules that were issued last night, the SBA did clarify what counts towards gross receipt. It had been left vague in the law. It's probably why there was a lot of conversation about it going on in the press. For those of us who follow these things, the answer is that gross receipts will include all revenue in whatever form received or accrued in accordance with your accounting method. So whatever you currently do is the accounting method you use, from whatever source, including the sale of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances. The calculation will not include any initial PPP loans that was forgiven in 2020 and contained a couple of other exceptions such as proceeds from transactions between business affiliates and things like that. The SBA and Treasury did say last night that they will allow businesses seeking the second loans to cite annual revenue reductions of 25% or greater in 2020 compared to 2019, if they submit copies of their annual tax form showing the decline. That's important in practice for some of our smaller companies, who might not have quarterly revenue information readily available, but it's not necessarily going to give you the best possible answer. So if you do that compare and you don't qualify, it might be worth you doing the quarterly analysis because it is still available to you.

So then the other items are, the max amount of the loan is 2.5x average monthly payroll cost in the 12 months before the loan application or 2019, but in no case can it be more than $2 million. However, businesses in NAICS Code 72, accommodations and food services, can receive up to 3.5x monthly average payroll costs. Seasonal employers may calculate max loan amounts based upon a 12-week period beginning on February 15, 2019, through February 15, 2020. So there's the seasonality piece that they are making sure they account for. And note, nonprofits in veteran loans may use gross receipts as defined under Section 6033 of the IRC to calculate. And I believe this was the same definition using your tax return or when you file your tax return.

Right. Right. Which then brings us to a documentation because your forgiveness application needs to stay with you. As we've been saying all along, documentation is key. And the PPP forgiveness applications that we've seen so far do qualify that. There are payroll and nonpayroll reporting requirements that needs to be submitted with their forgiveness application package. And even if you don't have to submit it, the archiving requirement, which means the requirements that you'll have to produce in the event of audit, all remain consistent. So generally speaking, the documentation that has to be submitted with the application is payroll information, FTE information and nonpayroll information, all of the things that went into eligible expenses. And then the documentation that you must retain yourself, is all of the worksheets or the working document that went into your calculation in order to ensure that you are either eligible to own them in the first place or that you're eligible for forgiveness. So I think it's important to remember that all of the documents in respect of the loan itself must be retained by the borrowers for 6 years after date is forgiven or repaid in full. And that's going to include all of the documentation submitted with your loan application, certification on necessity of the loan, all of those things. I will say, in one of the previous webinars, we did receive a comment back that sort of was like, why are we focusing on documentation, I can deal with that later. The answer is the documentation that you'll need later is coming into existence now, and you need to ensure that you have it because recreating it later is going to be incredibly challenging for you. So I realize this sounds like a very boring lawyer telling you to do something that's very boring. It's really important, and it really will help you get ahead of it. So with that, let's get into some of the Q&A that we received ahead of time.

Alex, I'm going to send you the first question, which is that if we added offices in order to spread out our staff, will those expenses be eligible for forgiveness?

Yes. And as part of the new covered workers protections is included in -- or expenses associated with adapted investments to comply with official regulations, specifically covered workers protection expenditures, includes personal protective equipment and adaptive investments to help a loan recipient comply with the Federal Health and Safety Guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. I bet you can tell I didn't get -- I didn't memorize that answer. Okay. So...

I'm really disappointed because I gave everyone on the answer earlier on.

Yes, I know. That one was -- that was not a [ close ] question. Okay. Question 2. Do you have any specifics around the new venue clause?

We do. We have some. There is definitely more to come. This is one of those additions that's going to need a little more clarification from the SBA. The high point for now that it authorizes $15 billion for the SBA to make grants to eligible live venue operators or promoters. That would include theater producers, life performing arts organizations, museum operators, motion picture theater operators or talent representatives. And then there's a set aside of $2 billion for eligible entities that employ not more than 50 employees and any amount from that set aside remaining after 60 days from the date of implementation shall become available to all eligible applicants. So that's what we know so far. We do expect there to be some updates. The SBA was -- didn't necessarily provide NAICS Code-specific guidance in the most recent set of guidance that came out last night. It's more holistic programmatic guidance. So I do think we'll see more on that in not too long. All right. That brings us to, can the retention credit program update be applied retroactively to 2020?

No. How do I get these simple yes-or-no questions? I don't think anybody trusts me answering any questions here. So the answer is no. The new retention credit program updates are only forward-looking. And so then the last one is, will the FTE reduction quotient reference periods be the same for the second draw loans?

And so the answer there is to be determined. We are still waiting for the SBA to publish specific details on this. I do think, though, this question brings up a really good perspective, which is think about your current staffing relative to the reference period staffing to understand and get ahead in order to know where you stand with respect to your FTE reduction portion. Said another way, if you're currently staffed at 20 employees and that's what you know you're going to need to get yourself through to March, for example, but in a reference period last year or -- yes, in last year, you were at 50 or 70 employees, that might not be the best reference period to be thinking about. So just think about the relative nature of the reference period and think about how you can best utilize the broader available categories to maximize your opportunity for forgiveness, if indeed that's what you're looking to do. So with that, we are at the end of time. We were after a number of questions about vaccines. We will ensure to get that added to the handout so that we can give you just some basic information about vaccines and how those rules work. I think we're also looking to publish something on trinet.com. Obviously, this webinar was about the relief package, but we did get a number of questions comment about vaccines. And can I require my employees to get vaccines all those sort of things. We did prepare a bit of material on it. We're out of time. So we'll ensure it goes into the handout. And we'll also ensure that it gets linked up into trinet.com in the COVID Business Resiliency Center. So with that, I think, Alex, that takes us to our reminders and takeaway which is you.

Okay. So first of all, please visit the client resource site. This site is going to be updated. We're going to get back into this motion for a little while of updating it, putting out vignettes. Some of this information about vaccines, we may be able to put together very quick vignettes to just sort of video to say, hey, this is what we know, make sure you're reading the COVID-19 newsletter that we send you weekly. Keep up to date with the blogs and the webinars, these webinars like this. And then, of course, [email protected]. Send me e-mails about anything, quite frankly, any questions you have, anything we need us to address. And the questions we've received, we're going to make sure we go through, we try to answer as many of them as possible or at least put it into themes. But if there are specific questions that you feel that we didn't get answered, send an e-mail, [email protected]. It's my e-mail. They -- it will be attached to a group of individuals that track it as well as myself. We'll open up cases and get that information back to you individually. And as always, don't hesitate to contact me if you need anything from our customers or for potential customers as well, please don't hesitate to e-mail me. We'll do our best to answer the questions as best we can.

Thank you, Alex. And with that, I'm going to turn it back over to you, [ Brandon ], to take us out.

Yes. Thank you. And thanks for joining us today. If you have a moment, please stay online after we conclude. We want to ask you just 3 questions about how we did and what topics we should cover for the future webcast. And also as a reminder, we'll send out a follow-up e-mail with the recording of this webcast in case you want to review anything that they've covered in the past hour. So thank you, and stay safe.