A Potential $20 Billion Mistake in the CARES Act, or is it a Legitimate Opportunity?

As details of the new CARES Act continue to emerge, on the surface its seems like applying for an SBA Paycheck Protection Program (PPP) loan is simple and straightforward. 

In fact, I read a post this morning that basically said the application is so straightforward it should require a maximum of 15 minutes for an attorney or CPA to assist (if you even need assistance at all)! Up until a few days ago, I might have agreed with that.

I'm not so sure anymore, and here’s why. 

First, a quick refresher:

1. PPP loans are a $349 billion dollar centerpiece of the new CARES Act. If you need a quick summary of PPP loans compared to a couple other programs in the Act, read my earlier article. Generally, if the PPP loan money is used for payroll costs (and a few other things such as rent, utilities and interest) within 8 weeks after receiving the loan, the loan is fully forgiven.
2. For entities that were in business for all of 2019, the PPP loan amount is generally calculated as the monthly average of your 2019 payroll costs x 2.5. For example if your payroll costs in 2019 were $1,000,000 per month, your loan would be 2.5 x $1,000,000, or $2,500,000.

The definition of “payroll costs" is the huge issue. It seemed fairly clear at first, but in the past few days I’ve been alerted to a potentially huge discrepancy that would, if correct, boost the average loan application amount by perhaps 5-10%. If you multiply 5-10% x $349 billion, that is where I came up with the number in the title of this article.

I hate to bore you with the law but I’m going to have to. Here is the section in question:

It's going to be really hard to explain the issue (especially to non-accountant readers) so I’ll use an example of a what a single employee paycheck might often look like:

What are the "payroll costs" in this example? Any accountant worth their salt would say the payroll costs are $1,000 (the gross wages). Anything more than that would be “double-dipping," other then legitimate extras like state unemployment tax the business pays on top of the wages.

How does the CARES Act define "payroll costs?" Some would suggest a strict reading of the law seems to indicate payroll cost equal to the following:

1. "Salary, wage, commission, or similar compensation." In our example that seems like $1,000.
2. "Payment required for the provision of group health care benefits." Accountants, hang on to your seats – the law says nothing about whether the employees reimbursed the employer for any of these health insurance payments. What we know for sure is that the company is the one who ultimately physically pays the $200 health insurance premium to the insurance company.
3. "Payment of any retirement benefit." Again it doesn’t say who is doing the paying, or whose money it is. In our case a strict interpretation of the word “any” could theoretically include the $100 withheld, which the company pays to the retirement plan provider.
4. "Payment of State or local income tax assessed on the compensation of employees." Who actually pays in the state taxes withheld from paychecks? The business. Does the law exclude these payments from the definition of payroll costs? Some would say, strictly speaking, it doesn't. Add another $200 to “payroll costs” for these state taxes.

Potentially, applying the above strict interpretation to the verbiage of the law, we get the following calculation of payroll costs:

I can hear accountants coming up for air everywhere. I am too. But it’s a little hard to deny that a strict reading of the law could be construed to permit the interpretation described above. And it clearly would result in expanded average monthly payroll costs, and therefore expanded loan amounts. 

Is it a mistake, or is it intentional?

You could ask the question: Does loan size even matter? Isn't it the amount of forgiveness you receive after 8 weeks, that really matters?

Yes, but forgiveness is based on payroll expense during the 8 weeks after you receive the loan. The cost during those 8 weeks can be controlled to some extent. If a company started with a larger loan, they might hire more workers and therefore receive increased forgiveness.

This issue has unsettled me, and I sincerely wish the SBA would release clear rules on this. It would provide clarity to conscientious, law-abiding citizens, and keep all loan applications on the same page.

Often my articles end with a conclusion, but this time I'm asking for answers. Are there any attorneys or CPAs out there who have read the law and care to weigh in?