This past Friday, April 3rd, 2020 our federal government rolled out its much anticipated Paycheck Protection Program (PPP). The program was designed, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), to loan money to small businesses who have been greatly affected financially by the COVID-19 pandemic. Small businesses would use the loan to pay their employees for eight weeks and then, as long as certain parameters were met, the government would forgive the loan. That’s right, completely tax free money to pay your employees (including other qualified expenses, i.e. utilities, rent, and interest on debt), without having to pay it back.
Obviously this caught the attention of small business owners all across the country and sent them frantically trying to understand how to apply. Then, adding to the chaos, was the fact that the program was rolled out as “first come first serve”, i.e. the faster you applied the better chance you had to receive money. Then to top it off, the loan had to be initiated with a bank, who, like the rest of the country were not completely given the time to prepare or understand the law themselves. So, what you’re left with is a program with a ton of confusion.
The information below assumes you’ve already familiarized yourself with the basics of the Paycheck Protection Program, if not, we have a summary article on our website you may want to read first before proceeding in this article, click here.
As I’m sure you’re well aware by now, there are thousands and thousands of articles, blog posts, tweets, etc. by accountants (including excel formulas in some cases) floating around on the internet trying to explain their own interpretations of how to calculate the most important part of the program, the loan amount. This brought many Americans around the country, including myself, to ask, why hasn’t the Small Business Administration (SBA, the government agency giving us guidance and backing the loan) provided a uniform way to interpret the law and calculate the loan amount.
The main debate by many accountants is whether a borrower should or should not include payroll taxes (i.e. Social Security, Medicare and Federal Withholding) in their calculation of “payroll costs”. Over the past three days we’ve spoken with several colleagues, bankers, tax attorneys and each of them are just as confused as we are.
Late Friday afternoon, the American Institute of Certified Public Accountants CEO, Barry Melancon, issued his interpretation of whether or not to back out payroll taxes, by saying “that was not the “intent” of Congress and to calculate using gross wages, rather than net wages (i.e. gross wages, less payroll taxes)”.
The source of confusion is directly from the CARES act bill itself. The bill states excluded from payroll costs are “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period”. These chapters cover employer and employee share of payroll taxes including federal income tax withholding. Therefore one might interpret that the calculation should not include payroll taxes withheld from an employees paycheck.
To add to the confusion, ADP, one of the leading payroll processors, has already prepared PPP reports to certify and calculate payroll costs in which it removes payroll taxes in its calculation of total payroll costs.
For example if you pay your employee $2,000 with Social Security, Medicare and Federal withholding equating to $500, you would then only use $1,500 in your calculation of “payroll costs” for the PPP loan. Many accountants across the country believed this did not make much sense, if I pay an employee $2,000, shouldn’t that be what we use to calculate my payroll costs.
Mark Koziel, CPA, CGMA and the AICPA’s executive vice president of firm services, stated in an article on Saturday, “Based upon statements from members of Congress, it appears that the original intent of the PPP was to base the salary calculation on gross wages with no adjustment for federal taxes. This ensures that payroll tax expenses are not passed on to the small businesses in need. In a program of this magnitude, it’s expected that guidance will evolve and terms will be clarified.”
As you can see, there is still confusion as to what should be used to calculate payroll costs as part of the PPP application process to determine the total loan. For obvious reasons it appears many experts are pushing for payroll costs to include gross pay rather than net pay.
Small businesses who have already submitted applications to their bank using “net” payroll in its calculation of payroll costs, may want to reach out to see if their application has already been submitted to SBA for approval. Let the bank know you may need to make a modification in the amount of loan prior to final submission.
We hope to have clear guidance on this issue in the very near future.
Mike Torres – Managing Partner