Hazmat System (and Training) for “No-Hazmat” Distributors

Some of the companies accredited to the ASA-100 standard have struggled with the AC 00-56B requirement for a hazmat system because they have a “no-hazmat” policy (as a matter of company policy, they neither ship nor receive hazmat). This article addresses how to build a hazmat system that complies with the AC 00-56B requirement, while also meeting the limited needs of the “no-hazmat” company.

The FAA published its “Voluntary Industry Distributor Accreditation Program” in FAA AC 00-56B.  The accreditation program requires that accredited distributors have “[a] system for hazmat control and transport that meets Title 49 of the Code of Federal Regulations (49 CFR) requirements.” This is listed as one of the required quality system elements described in the advisory circular.

Each of the required quality system elements described in the advisory circular must be adequately addressed in the accredited distributor’s quality manual. This means that the accredited distributor’s hazmat control and transport “system” must be described in the quality manual. ASA has implemented this requirement in its own quality standard, ASA-100, and the implementation can be found in sections 1(E)(16) and 15.

If an accredited distributor knows that it does not ship hazmat, then it still has an obligation to meet the requirements for the hazmat control and transport system (including a “system” in the manual).

Even if the accredited distributor does not ship hazmat, there is still a risk of hazmat getting into the business’ system. In the 1990s, the FAA published Handbook Bulletins that explained that certificate holders, like repair stations, could reasonably receive unintended hazmats, based on industry shipping norms. This was later the rationale for requiring that repair stations must provide hazmat training to their personnel (14 C.F.R. 145.53(c)) and that accredited distributors must have hazmat transport and control systems under AC 00-56B.  On a more personal note, I have received many calls and emails, over the years, from ASA members and accredittees who’ve adopted “no-hazmat” policies and then received an unwanted hazmat.  This is a problem that really does occur.

ASA has taken the position that a minimum system must include appropriate training.  ASA also requires the system to be published in the quality manual.  For an accredited distributor that plans to adopt a “no-hazmat” policy, I recommend that the manual include:

  • A statement of the company policy of not receiving and/or shipping hazardous material;
  • Requirements concerning hazardous materials recognition training (to support the company policy); and
  • A process for addressing inadvertently received (or otherwise discovered) hazardous materials.

Of course, the distributor’s record-keeping program should include records of the hazardous materials recognition training.  But what about the details of that training?

When a company knows that it does not ship hazardous materials, then I feel that the training should be focused on preventing such shipments (and preventing such items from entering the system to mitigate the danger of them being pulled from stock for shipment). This means training appropriate personnel in (1) how to recognize hazardous materials, (2) the company policy of not shipping hazardous materials, and (3) what to do if hazardous materials are inadvertently received into, or discovered in, the system.

ASA has provided hazmat recognition training to the ASA community on several occasions. Most recently, we provided a live, online webinar addressing hazmat recognition in an aircraft parts environment (on April 14, 2020). That webinar was recorded and the recording is available to ASA members who need to provide training to their personnel.

When a company maintains a “no-hazmat” policy,” I have recommended that at least five classifications of personnel should receive hazmat identification training:

(1) Quality Personnel who are responsible for drafting, publishing, auditing, and managing the procedures associated with the hazmat system;
(2) Purchasing Personnel, so they will be aware of company limits and forbear from purchasing articles that would contravene those limits;
(3) Sales Personnel, so they will be aware of company limits and forbear from selling articles that would contravene those limits;
(4) Receiving Personnel, so they can recognize hazmats if they are inadvertently received, quarantine them pending appropriate disposition, and notify appropriate decision-makers within the company;
(5) Shipping Personnel, so they can recognize hazmats and forbear from shipping them in violation of company policy and/or regulatory limits.

By training these five classifications of personnel, you help to ensure that the company’s “no-hazmat” policy can be successful.

Congress May Extend the Deadline for Forgivable PPP Loans

Did you miss out on filing for a Paycheck Protection Program (PPP) Loan?  The PPP program provides forgivable loans for small businesses.  The application period ended today, but there is still about 130 million dollars in the account that Congress set aside for the program.  With this money still untapped, The Senate passed a bill this evening (Tuesday) that would extend the application period for another five weeks.

This extension is not yet law!  It still needs to pass through the House and be signed by the President, and there is very little time for that to happen before the Independence Day recess.  Nonetheless, it looks like COngress wants to enact this extension.

Quick Answers

  • The PPP applies to small businesses, and to non-small businesses with less than 500 employees.  Not sure if you are small business?  You must meet a size standard.  Check out this table:
Business Activity NAICS (2017) Size Standard
Aircraft Parts Distribution 423860 500 employees
Aircraft Sales 441228 500 employees
Commercial Aircraft Leasing (dry lease) 532411 $35,000,000 annual revenue
Air Transportation Support Activities, including Repair Stations (but excepting “factory” conversion, overhaul and rebuilding) 488190 $35,000,000 annual revenue

UPDATE: Today, the House voted to extend the Paycheck Protection Program through Aug. 8.  Once signed by the president, this will reopen the application period for any company that did not previously file an application.

EASA Moving to Digital Certificates

EASA is going digital!

As the entire world seeks to move to digital communications in order to reduce unnecessary use of paper, the European Union Aviation Safety Agency (EASA) is once again in a leadership role.  EASA has committed to move all of its paper certificates and approvals to a digital format.

EASA will begin this process with a stage one effort that is limited to certain product approvals.  In stage one, EASA will issue some product approvals and will gather data about the program. They will use this data to improve their processes before entering stage two. In stage two, EASA will begin issuing all other product and organization approvals in digital format.

The first stage of this program take effect tomorrow (June 22). Stage 1 of this transition is explained here, in this EASA table:

Stage 1
  • EASA will issue some product approvals only as PDFs and will no longer systematically print and dispatch wet signed versions.
  • The applicant receives a high resolution, printable version of the certificate with the look and feel of the paper version.
  • EASA publishes selected approval data on its website to allow third parties to verify the data if necessary.
    The list of approvals included in stage 1 can be consulted here: https://www.easa.europa.eu/document-library/approvals
  • The initial scope is limited to some product approvals. The remaining product and organisation approvals will follow in stage 2, taking into consideration feedback from this first stage.
  • The long-term goal remains a fully digital approval process.
  • As a transition measure, until the end of August 2020, EASA will provide a printed version of the approval free of charge upon request.
  • You should address any queries relating to this initiative to applicant.services@easa.europa.eu

The primary purpose of this effort is to streamline procedures and reduce cost.  As a security measure, data can be cross checked against valid approvals on the EASA website.

As an example, if you are asking a dual-certificated repair station to perform maintenance, the repair station will no longer get a paper certificate (in stage two).  Instead, the repair station will get a digital certificate that can be verified on the EASA website.

Steps to Perfection: Security in a Time of Insolvency

Last week we had a brief overview of some bankruptcy issues and talked about the some of the risks presented by bankruptcy filings in these uncertain times. Today we are going to expand on ways to mitigate some of those risks when we aren’t in a position to demand and receive cash in exchange for goods.

The most important step to take to ensure you are protected against the risks of an insolvent customer is to attach and perfect a security interest in the goods sold to the customer. A security interest in the goods you sold on credit helps you to get paid first (before unsecured creditors, shareholders, and others, who often get nothing) in the event your customer enters bankruptcy.

Many companies are good at attaching a security interest to goods sold on credit by including terms that state the buyer grants the seller a security interest in the goods sold to secure the purchase price. If your sales agreements do not include such a provision you should work with a lawyer to make sure that they do.

An attached security interest on its own, however, has little effect in truly securing you as the seller (and more importantly, as creditor). In order to be effective, a security interest must be perfected. A perfected security interest gives notice to the world that you have a security interest in the particular goods so that others who may attempt to attach a security interest later know that they are behind you in priority.

Let’s drill down a bit deeper on the ideas of “attachment” and “perfection.”

Attachment

The Uniform Commercial Code (UCC) provides that “[a] security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral . . . .” (UCC § 9-203). The debtor in this case is your customer. The UCC goes on to explain what it means for a security interest to become “enforceable.” (We have limited the text to be relevant for our purposes, because some very specific things, like descriptions of timber to be cut, simply don’t apply!)

Under the UCC, “a security interest is enforceable against the debtor and third parties with respect to the collateral only if:”

(1) value has been given

In this case, the goods sold in exchange for the promise to pay the purchase price in the future—for instance on net 30 terms—is value given.

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party

Here, the debtor (your customer) gains the rights in the collateral and power to transfer rights when they receive the goods.

And finally, (3) one of the following conditions is met (only one is applicable for the purposes of this discussion):

(A) the debtor has authenticated a security agreement that provides a description of the collateral

A security agreement is any agreement that provides a security interest, for instance our sales agreement (with appropriate terms, as mentioned above). To authenticate the agreement, the debtor (customer) merely needs to sign it (or otherwise accept the record through electronic sound, symbol, or process). The security agreement must also provide a reasonably detailed description of the collateral. The part number, nomenclature, and quantity that appears on our documentation is an example of a reasonably detailed description.

Although verbose, the process of attaching a security interest is relatively straight forward and many or most of you may be doing it now. You should review the terms and conditions that appear on your quotes, confirmations, invoices, and other sales documents to be sure. If there are questions, remember to consult your attorney.

Perfection

Merely attaching a security interest, though, is not enough to protect you. In fact, an attached security interest without more provides little security indeed. In order to protect your interests, you must perfect the security interest. This gives notice to others that you have a security interest (in the form of a lien) against the goods. That way if they attempt to attach their own security interest to the goods or other assets to protect their extension of credit (for instance in the form of a loan), they know that they are behind you in order of priority with respect to those goods. (We’ll have more to say about priority in our next post—sometimes a previous secured lender like a bank may have priority for even newly acquired goods).

The exact details of perfecting a security interest are a matter of state law, but in general the primary method of perfecting a security interest is by filing a financing statement with the relevant public office—usually the Secretary of State. The UCC specifies the elements required in a financing statement in § 9-502:

  • The name of the debtor
  • The name of the secured party
  • An indication of the collateral

Typically, you can use as your financing statement a Form UCC-1, which is a standardized form that is widely available online, often via the very state agency with which it must be filed.

The most important thing to note in completing the financing statement is that the name of the debtor (your customer) must be precise. The UCC explains that it should be the name that is listed on the company’s most recently filed document in its jurisdiction of registration. (See UCC § 9-503). Put another way, the debtor name on the financing statement should be the most up-to-date name of the organization as filed in its state of incorporation. This level or precision is necessary because the financing statement is recorded under the debtor’s name and it must be of sufficient detail to put other potential secured parties on notice.

The secured party’s name is more straight forward (your company) and the indication of the collateral can be the same as appeared on the security agreement we discussed above, for instance, part number, nomenclature, and quantity.

The financing statement is generally filed where the debtor is incorporated, so make sure you are identifying the appropriate jurisdiction’s requirements. You can often kill two birds with one stone because the Secretary of State is typically where the financing statement is filed (and can be found) and you should also be going there to identify the correct name of the debtor for the financing statement anyway. As always, if you have any questions, you should consult an attorney.

As a secured creditor you can have confidence you will get paid (at least in part) even if a company becomes insolvent, because the liquidated assets of an insolvent company are first used to pay secured creditors. Specifically, the money raised from the liquidation of your secured goods is used to pay your security interest. This also applies to proceeds from those goods when the proceeds are directly identifiable. Creditors with no security are often left hoping for a share of what little is left after the secured creditors are paid.

Attaching and perfecting a security interest in goods sold is a valuable risk mitigation strategy. While it may not be as relevant when the economy is hot, when the economy gets rocky and the industry sees upheaval it is an important way to protect yourself against the unpredictability of the global aviation market.

PPP Amendments Make It Easier to Get Loan Forgiveness

Many of you have heard that Congress has passed a bill that would change some of the standards associated with the Paycheck Protection Program (PPP).

H.R.7010 is entitled the “Paycheck Protection Program Flexibility Act of 2020.”  That bill was signed into law today by the President.  We have a short status update at the bottom of this post.

The Changes

The bill features a number of important changes to the CARES Act Paycheck Protection Program (PPP) and the loan forgiveness program associated with it.

Covered Period for Spending and Loan Forgiveness

The covered period is changed in two different places in the new law.

First, the covered period for basic PPP program is changed the so that it ends at the end of the year (not June 30, 2020) as originally established.  Technically, this covered period is the period during which applicants can seek a loan.  More importantly, this is also the period during which PPP funds may be expended.  So, companies that were worried about whether they could pay out the money they received for PPP loans (on authorized expenses), will have a longer period for spending that money.

Second, the covered period for purposes of PPP loan forgiveness is also changed.  This is slightly more complicated.  For loan forgiveness purposes the covered period will end on the earlier of (A) 24 weeks after PPP loan origination or (B) December 31, 2020.

How will this work?  Let’s say that you received a PPP loan on April 28, 2020.  The 24-week period should end on or about October 12.  This means that you would have until December 31 to spend the PPP money to comply with the loan program requirements, but if you want to obtain loan forgiveness for the loan then you would need to spend the money on forgivable expenses by the earlier deadline of 24 weeks after PPP Loan origination (in this hypothetical that begins with an April 28 loan origination, October 12, 2020 appears to be the last day for forgivable expenditures).

Thus, for most PPP businesses (who intend to seek PPP loan forgiveness), it will be important to spend the PPP Loan on forgivable expenses by the 24th week after the loan origination.  For many businesses, this means spending the money on verifiable forgivable expenses before the 24-week anniversary of the loan origination.

But if you get a late PPP loan (a loan that is originated after July 16, 2020), then your ‘spend period’ and ‘forgiveness period’ will be the same.  Both would end on December 31, 2020; so, your total time period may be less than 24 weeks.

One other note on the covered period.  If you received your loan before June 5 (the date of enactment) and want to elect to retain an eight week period as your covered period then may elect to do that (retaining a covered period that begins on the date of the loan origination).

Minimum Floor – 60% of PPP Must Be Spent on Payroll to Obtain Forgiveness

Under the original law, one generally wanted to spend a certain percentage of the loan on payroll and spend no more than a certain percentage of the loan on authorized non-payroll expenses like rent. This was because the loan program was designed to set a maximum loan based on 80% payroll and 20% other expenses (like rent).  Assuming your headcount remains the same, you keeps salaries at 75% or more of spending from the reference period in order to maximize your potential for forgiveness.  Everyone’s numbers are different but in an ‘optimized’ situation, that meant keeping your payroll at about 60% of the loan amount (or more) in order to maximize forgiveness.  Under the old law, anything less would likely be subject to a reduction in forgiveness.

Treasury regulations applied a flat 75% test, requiring 75% of the funds provided to be spent on payroll if you intended to seek forgiveness.  This interfered with the numerical simplicity of the ‘optimized’ situation.  The new law returns the 60% threshold as the minimum amount that must be spent on payroll in order to qualify for forgiveness.

For those who do spend less than 100% of the PPP Loan on payroll, the new law imposes a “60% floor” for those who seek loan forgiveness.

The new law sets a minimum threshold that requires at least 60% of the PPP be spent on payroll, or else you lose all possibility of loan forgiveness.  You can still spend 100% of the PPP loan on payroll without penalty – you don’t need to hit the 60% mark exactly – but if you spend less than 60%  of your PPP loan on payroll then you may be ineligible for loan forgiveness.  This does means you can spend up to 40% of your PPP Loan on other forgivable expenses (covered mortgage interest, covered rent, or covered utility payments) and still get some or all of your loan to be forgiven.

What if I Can’t Rehire Employees?

The PPP loan forgiveness program also has a reduction in the percentage of a loan that can be forgiven for businesses that lose headcount as compared to their previous headcount. The comparison period is either February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020 (at the option of the borrower).  If your average headcount in the comparison period was 40 and your average headcount in the covered period, today, is 30 then the maximum loan forgiveness would be reduced to 75%.

A concern expressed by a number of ASA members has been that they are seeking to rehire furloughed/laid-off workers and those workers refuse to return (for a variety of reasons, including because of fears about continuing danger from Covid-19, and because of lucrative unemployment benefits currently offered pursuant to the CARES Act).  Thus, they are encountering difficulties in returning to the higher numbers based on this refusal.

The new law provides a safe harbor for businesses that make a good faith effort to rehire, but are rebuffed by the past employee.  To make use of this safe-harbor, the employer must be able to document that it has tried and failed to rehire individuals who were employees on February 15, 2020; and that it has also tried and failed to hire similarly qualified employees for the unfilled positions on or before December 31, 2020.

As an alternative, the new law also permits the employer to document an inability to return to the same level of business activity (as compared to the level of activity as of February 15, 2020) due to certain legal compliance requirements (e.g. if CDC rules or OSHA rules would preclude a return to work).  This latter provision is unlikely to apply to most members of the ASA community, but it would apply to businesses that cannot return to work because inability to engage in social distancing makes the job dangerous for employees.

Interest Deferral

Under the original provisions, interest on the PPP loan was deferred for six months.  The new law changes this so that interest is deferred until the you apply for the loan forgiveness and tell the bank the amount of loan forgiveness to which you are entitled.  After you apply for loan forgiveness the law requires a decision within 60 days about whether loan forgiveness is warranted.  The new law is a little vague on whether interest accrues during this 60-day period – it is likely that this question will be answered in regulations.

Don’t look at this provision and think that if you never apply for loan forgiveness then your obligation to pay the loan back never applies.  The law set up a ten-month limit.  If you haven’t applied for PPP loan forgiveness within 10 months after the last day of the covered period, then you will need to start making payments of principal, interest, and fees on the loan beginning 10 months after the last day of the covered period.

If the PPP Funds Remain as a Loan …

PPP loans can remain unforgiven (it is legal to use them on certain non-forgivable expenses).  In such a case it becomes a low-interest loan.

The new law establishes a minimum maturity of five years for loans that remain unforgiven (the original bill set 10 years as a maximum, so this means the term for remaining unforgiven portions of loans will be 5-10 years).

Tax Status Not Fixed

Congress anticipated that the PPP would be forgiven if the payroll-related purposes of the PPP loan were met. To ensure that the debtor doesn’t need to pay extra taxes for this life-line, Congress explicitly stated that the forgiven amount is not included in gross income.

Congressional intent was thwarted by IRS Notice 2020-32 which explains that 26 U.S.C. § 265 disallows a deduction to a taxpayer for any amount that is allocable to income that is exempt from income taxes. The IRS Notice interprets this to mean that the expenses on which the forgiven loan is spent become non-deductible expenses.

The net result of the IRS Notice for many businesses would be the same as if they had treated the loan forgiveness as taxable income in the first place.  This issue has not been addressed in the new law.

Bills to address this concern have been introduced in the House (H.R.6821) and Senate (S.3612).  A full analysis of this provision is found here.

Status

The House passed H.R. 7010 on May 28 by an overwhelming vote of 417-1.  The bill has been held up in the Senate, where Senators Lee and Johnson have expressed concerns with some details in the bill.  They feel that the bill was intended to be a short-term solution and that loan applications should be limited to Aug. 15 (not through the end of the year).  The concerns were resolved and the bill was passed in the Senate.  The next step is for the President to sign it.  There is no reason to believe that the President won’t sign the Bill into law.

Update: The President signed the bill into law this afternoon.  June 5, 2020

Bankruptcies are Happening. What do you need to know to protect yourself?

It is no doubt that these are trying times. With air travel substantially curtailed the need for parts to support commercial fleets is significantly reduced. That means challenges for distributors. Adding to those challenges is a harsh reality: even when customers are buying parts,  they may have difficulty paying. And when a customer to whom you’ve extended payment terms becomes insolvent, you may be left holding the bag.  So far in 2020 we’ve already seen several operators enter bankruptcy, including Flybe (UK), Virgin Australia, Avianca, and LATAM.

Struggling operators still need parts to maintain their aircraft, and therein lies the rub. Distributors want and need to sell parts, and airlines want and need to buy them. With an airline that may be on the brink of bankruptcy, the question becomes how can a distributor make a much-needed sale, and protect itself against the risk that the customer may not be able to pay?

Obviously, the safest way to protect yourself is to require cash up front. If you and your customer are in a position to make such an arrangement, great! You can stop reading now. But the reality of our (and may others) industry is that goods are typically sold on Net 30 or similar terms. If you send goods to your customer and they declare bankruptcy before you get paid (or worse, have several outstanding invoices unpaid), you may be placed into a class with dozens of other unsecured creditors fighting for pennies on the dollar of what you were actually owed.

When cash is tight invoices can pile up. So, what steps should a distributor take to protect itself in the face of a struggling customer? In this series of articles, we’ll discuss the steps necessary to attach and perfect a security interest in goods, as well as mistakes to avoid to ensure payments your customer makes to you can’t be clawed back.

First, though, there are some things to know about bankruptcy filings. For the purpose of these articles we’ll be focusing on the US bankruptcy laws, which are found in Title 11 of the United States Code. The two types of bankruptcy filings most people are familiar with occur under Chapter 7 of the Bankruptcy Code (Liquidation) and Chapter 11 (Reorganization).

Under a Chapter 7 filing, an organization (like an airline) will cease operations and a trustee will be appointed to sell the company’s assets to satisfy creditors. Creditors are divided into classes with secured creditors being first in line to be paid, followed by unsecured creditors, and finally stockholders.

Secured creditors are those whose credit is backed by collateral. Unsecured creditors have extended credit but without the backing or security of collateral. Aircraft parts distributors can fall into either category depending upon whether they have taken the necessary steps to attach and perfect a security interest in the goods they’ve sold.

Secured creditors can sometimes have their collateral returned to them, though this process has some limitations and requires very quick action.  It also has very strict requirements that the debtor (customer) have been insolvent and the goods be delivered within 45 days before bankruptcy. A specific written demand for the goods must also be made within 45 days of delivery or within 20 days after bankruptcy if the 45 days expired after the declaration.  Chapter 2 of the the Uniform Commercial Code may also provide rights to reclaim goods. We’ll discuss these options in a future post.

It can often be difficult to reclaim specific goods, but a secured creditor still has a claim for the value secured by those goods if they are liquidated by the trustee in the course of the bankruptcy and in satisfaction of other secured debts. (If the value of secured collateral is insufficient to cover the amount owed, creditors become unsecured creditors for the balance due.) Because of the value of remaining assets when a company enters liquidation, unsecured creditors often receive only pennies on the dollar, if they receive anything at all.

Under a Chapter 11 filing the organization remains in operation and under management’s control, but major decisions must be approved by the Bankruptcy court. Rather than liquidate all assets in satisfaction of outstanding debts, a committee of unsecured creditors will be formed to develop a plan to allow the company to eliminate part of its debt to regain its financial footing. Committees representing secured creditors, stockholders, and other interested parties may also be formed. The plan the committees develop specify classes of claims and how those claims are to be treated, in addition to numerous other considerations to enable the company to continue to function.

Under Chapter 11, aircraft parts subject to a security interest may also be subject to special treatment. A customer filing under Chapter 11 may be preferable to Chapter 7 for a distributor who is unsecured because although the full amount owed may not be paid, partial payments may be made to encourage the distributor (and other suppliers) to continue selling to the company to allow it to operate. On the other hand, a distributor with a security interest in aircraft parts may have the right to take possession of the collateral or be assured of payment under the security agreement.

Being a secured creditor is always preferable to being unsecured. It puts the creditor in a position to reclaim its collateral or get paid to the greatest extent possible. Unsecured creditors are often left with significantly diminished claims if they receive anything at all.  In our next article, we’ll talk about the steps you need to take to attach a security interest to the parts you sell.

Bankruptcy is confusing and can be fast-moving, and we haven’t even scratched the surface here. Always be sure to consult a bankruptcy attorney if you have a customer file for bankruptcy that owes you a significant amount.

This post has been updated for clarity.

Start Gathering Your Loan Forgivess Documentation, Now

Many of ASA’s members obtained Paycheck Protection Program (PPP) Loans.  The US Treasury Department has issued a loan forgiveness application, and even though it is likely too early to early to start applying today, you can still use this application as a guide to the sort of documentation you should be gathering and retaining  in support of your PPP loan forgiveness application.

Your bank may ask you to complete a slightly different form – with additional information that the bank desires – but this appears to be the form that will have to be submitted on your behalf to the SBA to obtain loan forgiveness (which involves the SBA reimbursing your bank for the loan.

The application includes the following simple calculation mechanism:

Forgiveness Amount Calculation: Payroll and Nonpayroll Costs

Line 1.Payroll Costs (enter the amount from PPP Schedule A, line 10):_____________________

Line 2.Business Mortgage Interest Payments: ____________________

Line 3.Business Rent or Lease Payments:_____________________

Line 4.Business Utility Payments:_____________________Adjustments for Full-Time Equivalency (FTE) and Salary/Hourly Wage Reductions

Line 5.Total Salary/Hourly Wage Reduction (enter the amount from PPP Schedule A, line 3): _____________________

Line 6.Add the amounts on lines 1, 2, 3, and 4, then subtract the amount entered in line 5:_____________________

Line 7.FTE Reduction Quotient (enter the number from PPP Schedule A, line 13): _____________________Potential Forgiveness Amounts

Line 8.Modified Total (multiply line 6 by line 7):_____________________

Line 9.PPP Loan Amount:_____________________

Line 10.Payroll Cost 75% Requirement (divide line 1 by 0.75): _____________________Forgiveness Amount

Line 11.Forgiveness Amount (enter the smallest of lines 8, 9, and 10):_____________________

The referenced “PPP schedule A” is a worksheet that is included as part of the application form.

Part of the criteria for loan forgiveness include retaining headcount.  The loan forgiveness is reduced by the percentage by which your headcount was reduced.  Companies have until June 30 to rehire workers to satisfy the headcount conditions.  But what if the workers do not want to come back?  The worksheets and their supporting calculations include “safe harbors” for borrowers who have

  1. made a good-faith, written offer to rehire workers, if that offer was rejected;
  2. fired employees for cause
  3. had employees who voluntarily resigned or requested reduced hours

If you had any of these events occur and you did not refill the position, then you can still count these as full time equivalents for employee headcount purposes under the loan forgiveness application.  If you did refill the position then you haven’t lost headcount in that position and there is no problem under the loan forgiveness-headcount rules!

You should plan on submitting certain documents in support of your loan forgiveness application:

  • PPP Loan Forgiveness Calculation Form
  • PPP Schedule A (from the application)
  • Payroll documentation to verify the payments for the covered period
    • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
    • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
      • Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
      • State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state
    • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount
  • Headcount: Documentation showing (your choice):
    • the average number of full time equivalent (FTE) employees on payroll per month between February 15, 2019 and June 30, 2019;
    • the average number of FTE employees on payroll per month between January 1, 2020 and February 29, 2020; or
    • there are additional rules for seasonal employers.
  • Nonpayroll: Documentation (1) verifying existence of the obligations/services prior to February 15, 2020 and (2) showing eligible payments from the Covered Period.
    • Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    • Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    • Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

You will want to keep copies of all of the submitted documentation, and all of the non-submitted supporting documentation, for at least six years after loan forgiveness.  The terms of the loan forgiveness application state that all records relating to the Borrower’s PPP loan must be made available to authorized representatives of SBA, including representatives of its Office of Inspector General, upon request.

The Importance of Accurate Training Logs

FAA has proposed a 1.29 million dollar civil penalty against against the City of Chicago Department of Aviation.  The Department is accused of falsifying airport firefighter training logs.

There is an important lesson to be learned from this civil penalty.  While the ASA community may not include firefighters, we do have mandatory training, including hazmat training for hazmat employees.  Falsifying the training logs can yield a very expensive civil penalty, and a lot of bad publicity.

We offer low-cost hazmat certification training (open to anyone).  Also, ASA members can also access free hazmat recognition training for non-shipping staff (a video from the ASA webinar series).  For a link to the hazmat recognition video, ASA members can send an email to ASA and they will forward a link to the session recording and a copy of the presentation.

ASA, MARPA and AFRA have also been offering free webinars for members. They have been providing training on variety of useful subjects every Tuesday and Thursday in order to keep skills sharp for the industry.

The FAA’s Press release describes the civil penalty allegation against the City of Chicago Department of Aviation:

The FAA alleges that between April and August 2019, three firefighters at Chicago O’Hare International Airport were assigned to a High Reach Extendable Turret vehicle for a total of 18 shifts when they had not completed required training on operating the turret. One of the firefighters, a lieutenant, falsified 13 training-log entries to make it appear he had completed the training, the FAA alleges.

Additionally, a captain at Chicago Midway International Airport was assigned to a vehicle for two shifts when she had not completed required recurrent training, the FAA alleges. That firefighter also accessed the airfield during nine shifts when she was not properly badged or under proper escort.

The FAA also alleges the City of Chicago Department of Aviation failed to ensure that the Fire Department maintained required training records.

Note: this FAA press release was issued before the formal response from the City of Chicago Department of Aviation, so they may have defenses to the allegations that are not reflected in the FAA’s notice document.  The Chicago Tribune reported that the City of Chicago Department of Aviation released a statement on this issue:

“Upon learning of these serious allegations, CDA immediately began working with the FAA and CFD to initiate a series of actions, including leadership changes and the retraining of ARFF personnel to ensure all firefighters have the proper training and certifications to operate at the airports,” the department said. “Additionally, CFD training methods and recordkeeping practices have been overhauled to ensure those qualifications are tracked properly. This was all completed in 2019.”

[this statement was not on the City of Chicago Department of Aviation press release listing as of this morning]

Fleet Retirements Affect Post-Covid-19 Planning for ASA Members

A number of airlines have announced that they will will accelerate the retirement of older aircraft types.  It is important for ASA members to be aware of these retirements so they can adjust inventory appropriately.  This table shows some of the retirements about which we are aware.  Many of these were retirements were already planned, but Covid-19 is causing the retirements to be accelerated.

If you know of other fleet retirements, please let us know and we will add them to the table.

Airline Aircraft
Type
Number
in Fleet
Link to
Source
American Airlines Airbus A330-300 9 Link
American Airlines Boeing 757 34 Link
American Airlines Boeing 767 17 Link
American Eagle/PSA Bombardier CRJ200 19 Link
American Airlines Embraer 190 20 Link
Copa Airlines Boeing 737-700 NG 14 Link
Delta Airlines MD-88 47 Link
Delta Airlines MD-90 29 Link
Emirates Airbus A380 115* Link
Virgin Atlantic Boeing 747 7 Link

* = 8 more A380s are pending delivery, according to the Emirates website.  It is unclear whether Emitrates plans to retire the entire fleet or just a part of it.

 

Updated May 17, 2020 to reflect Emirates’ plans

IRS Thwarts Congress’ Efforts to Make PPP Loan Forgiveness Tax-Free

The IRS has published new guidance that makes Paycheck Protection Program (PPP) Loan Forgiveness less valuable (but it is still valuable).

Under ordinary circumstances, when a loan is forgiven, the debtor recognizes taxable income in the forgiven amount. So, if a debtor borrows $100,000 and the lender agrees that the loan does not need to be repaid, the lender typically gets a $100,000 deduction for bad debts and the debtor must declare income in the amount of the $100,000 forgiven (or “cancelled”) loan. For tax purposes, it is like the bank paid that money to the debtor.

Congress anticipated that the PPP would be forgiven if the payroll-related purposes of the PPP loan were met. The US government would reimburse the bank for the loan amount. Thus, the bank would not have an offsetting deductible loss associated with the cancellation of debt. To ensure that the debtor doesn’t need to pay extra taxes for this life-line, Congress explicitly stated in the CARES Act Loan Forgiveness provisions:

“For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”

So far it all makes sense. Forgiven PPP loans become truly free money to those who receive them. And this fits the intended purpose, which is to bail out companies in a time of need. But recently, the IRS issued IRS Notice 2020-32 explaining how this provisions would be interpreted. And that is where the problems begin.

The IRS Notice explains that there is a law – 26 U.S.C. § 265 – that disallows a deduction to a taxpayer for any amount that is allocable to income that is exempt from income taxes. The IRS Notice interprets this to mean that the offsetting payments that make the loan forgivable become nondeductible under section 265. In other words, the expenses that the forgiven loan is spent on becomes non-deductible expenses. The net result of the IRS Notice for many businesses would be the same as if they had treated the loan forgiveness as taxable income in the first place. Here is a simple example to illustrate the effect:

Example

Let’s say that a business has $1,000,000 in taxable income from normal operations in 2020. That business obtained a $100,000 PPP loan and used 100% of it on payroll. During 2020, the business paid total deductible wages of $600,000. Late in 2020 our hypothetical business applied for and received 100% loan forgiveness. To make this simple let’s assume that the business had $400,000 of other ordinary business expenses and no retained revenues.

If this had bean an ordinary loan that was forgiven, then the business would have an extra $100,000 income from the loan cancellation. Since it had $1,000,000 in taxable income from normal operations, $1,000,000 in ordinary business deductions, and an extra $100,000 income from the loan cancellation, it would pay 2020 taxes on $100,000 of income.

Because of the way that the IRS has interpreted the deduction issue under the Notice, when filing 2020 taxes, the business would exclude the $100,000 loan cancellation from income, but it would need to also exclude $100,000 of payroll from its deductions (because of section 265). Which means that the net result would be a payroll deduction of $500,000 instead of $600,000. The business would still be liable for taxes on $100,000 of income. This gets the business to the same tax result as if it had treated the loan forgiveness as income in the first place!

In some cases there may be a slight advantage to this approach (e.g. if the business has concerns about income caps or deduction caps) but for most businesses it simply unnecessarily complicates their tax filing, with little real change. Most importantly it frustrates the clear intent of Congress to prevent the loan forgiveness from being treated as taxable income.

There are ways to address this discrepancy. Many have talked about a legislative solution by which Congress would clarify that it did not intend to impose extra taxes on recipients of PPP loan forgiveness. If the IRS wanted to come up with a corrected notice, then the IRS could recognize that the language of the CARES Act excludes the forgiveness from income while the language of the section 265 talks about exemption from income (and could use this semantic difference to declare that section 265 does not apply in this particular situation).

To the extent that the PPP replaces lost revenues, on which a business would have paid taxes anyway, the IRS Notice puts businesses in a comparable situation to that they might have experience without Covid-19 (comparable – not the same). The business receives money and pays taxes on that money as income. The reason the IRS position is disappointing is because it is clear that Congress intended something different.

Even if this issue does not receive a legislative solution, PPP loan forgiveness is still a positive thing for those who are able to benefit from it.

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