Twenty years from now, when you mention the pandemic of 2020 to an accountant who was working then, he or she might not remember COVID-19 was the name of the virus. Paycheck Protection Program – that will be remembered.
The Biggest Uncertainty
I see that Tony Nitti has addressed PPP this morning with Paycheck Protection Plan Loans: Three Things The SBA And Banks Need To Agree On Now. Good stuff there. Check it out. I am going to focus on one of the three and also take a step back and look at a larger picture.
The language in the legislation that is now driving accountants crazy is this exclusion from defined “payroll costs”:
(bb) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
Chapter 24 is the biggest concern – Collection of Income Tax At Source on Wages.
A really on-the-ball CPA Daniel Baratz of the Zenith Group wrote me on March 29 (two days after the act passed)
“Based on my read of this, the Act excludes taxes assessed or withheld under Chapters 21, 22 and 24 of the Code. From what I can tell, this is FICA, Railroad and Withholding at the source.
To me, this seems to indicate that the amount of “payroll costs” eligible to be the basis for calculating the loan amount is your gross payroll MINUS federal income tax withholding as well as both employee and employer shares of social security and Medicare. Maybe I am missing something but I am having a hard time not reading it this way and also a really hard time believing that this was congress’ intent.
If I am reading it right, this would mean, in theory at least that if an employee has chosen to have 100% of their pay withheld for FIT, the employer could borrow nothing to keep paying that employee during this period. Similarly, their ability to have loan amounts forgiven would actually be partly determined by each employee’s W-4. I really hope I am reading this wrong or the regulatory interpretation can get around this – what do you think?”
Here is my lame response.
“That is interesting. I don’t read it that way. I’ll look again. It will be clear pretty quickly when people start applying.”
That was last Sunday. It was around Wednesday or Thursday, that most of the rest of the world was catching up with Daniel Baratz. The CPA I consult for who drops F-bombs like a B-17 drops 500-pounders was on me about it on Thursday.
Why Accountants Think It Cannot Be So
I just don’t think of withholding as a tax that the employer is paying. I think of it as money that no longer belongs to the employer and is held in trust to be paid over rather quickly. And for many if not most employers, it goes into the hands of a payroll company at the same time the net is paid. Given the nasty stuff that happens when you fail to pay withholding it is a reasonable view.
But remember Reilly’s First Law of Tax Planning: It is what it is. Deal with it. In this case what it is remains unclear.
More From Daniel Baratz
At any rate, yesterday I call Mr. Baratz to eat a little crow, congratulate him for being ahead of the curve and ask for any further comments. He was very gracious. Here is some of what he wrote back to me:
“The federal government has an existing definition for “payroll costs”. It is reported by every employer in America on quarterly payroll tax returns. Despite that,
Section 1102 of the CARES act creates its own original and unique definition of “payroll costs” that does not exist anywhere else in the known universe and actually has no bearing on the actual amount of dollars (cost) employers must expend to pay their payroll!
The result in a practical sense is that based on the current definition, even if an employer maintains 100% of their workforce and pays them 100% of their existing wages, they will likely have only a portion of their loan forgiven even though they have complied with the stated intention of the program. What is even crazier is that the amount of the forgiveness will actually be driven by each individual employee’s withholding elections. So, an employer that has several employees who request more tax to be withheld from their pay because maybe they like to get a big refund is penalized and will have less of their loan forgiven than someone whose employees choose to have less withheld. There is no economic basis for this approach. I do not know for sure what Congress’ intent was with excluding certain employee-paid taxes from the definition of Payroll Costs but I surely hope this was not it.”
I still think you should probably still apply for the loan, but please put it in a separate account and wait for some clarity before you count on not having to pay it back.
Take A Step Back
Remember that the Paycheck Protection Plan is not the only tool that Congress has given us to help deal with the crisis.
There is the Employee Retention Credit Tony Nitti explained it further here.
There is the Economic Injury Disaster Loan.
There is Pandemic Unemployment Assistance.
That is not all, but it’s a lot.
And then there are tools that were already in the tool-box, but kind of buried pretty deep. One of those is Code Section 139 – Disaster Relief Payments. John E. McGrady discusses that here.
Some Probably Bad Ideas You Should Consider Anyway
It has occurred to me that an alternative or supplement to PPP might be laying some people off and then helping them out with some deductible disaster relief payments. Maybe you just use PPP money for people that can keep doing something during the crisis. Of course that sort of course assumes you have some resources.
On the other hand, that $600 per week supplement to unemployment might be a better deal than you paying them money that you might have to pay back even if you don’t have something extra to throw in.
I would not recommend taking up to $100,000 out of retirement accounts that you can put back during the next three years, but perhaps when combined with the net operating loss carryback that might be what lets you pull through.
Start With A Blank Slate
Now, I just gave you two quite likely bad ideas, but there might be the germ of a good idea buried in there. This reminds me a little bit of the Tax Reform Act of 1986 which made my career, because I read a bit more than the average accountant in my firm who lived by oral tradition and following last year. All of a sudden everything they knew was wrong.
As you look at these programs and how they interact and what your particular situation is, try to clear your mind of preconceived notions. Don’t fixate on any one tool. PPP might be a great hammer, but maybe your problem is not a nail.