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Huge Problem with PPP - True Costs of Retaining Employees?

  • 1.  Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-06-2020 16:01
    ASA Community,

    I have been struggling with various interpretation issues in the PPP, and I need everyone's help. The Paycheck Protection Program is supposed to help employers who are shutdown/impacted by the coronavirus crisis continue paying their employees.  The program is referred to as a loan that will be forgiven, but as long as you follow the rules (use it for paying employees and other permissible expenses, retain employees, etc...) it's really a government grant that needs to be used for paying your employees for 8 weeks.  

    The problem we are just starting to realize after already securing the funding is that a large (and varying) cost of employment for each employee still remains.  This problem lies in the definition of "payroll costs" during the "covered period".  Payroll costs DO NOT include federal income and payroll taxes imposed or withheld  during the 8 week period that you are continuing to pay these employees.  Effectively, this means the program is only covering the net amount deposited in your employees' accounts - you are still stuck with the rest of the employment costs.  This is a sweet deal for businesses that are still open and operating as normal or just down a little, but it does nothing for retaining employees of business who have seen revenue drop 90-100%.   We are a small IT staffing firm (around 50 employees) with a heavy focus in the hospitality/travel industry.  Here's a quick example of what this looks like for the costs of retaining an employee that makes $2,953 in gross pay each 2 weeks.  With the 22% federal income tax withheld +7.5% employer paid FICA employment tax, that means this still costs us $871 to pay this employee for 2 weeks but we no longer can bill our client.  We're permitted to take it as an unforgivable loan but that wouldn't make sense because we'd be operating at a massive loss for 8 weeks and have nothing but debt to show for it. So the only obvious solution right now seems to be not participating in the program (even though our loan is already approved), laying everyone off until the crisis is over and then staffing back up.  

    However, I still can't accept that Congress intended these results, and I can't believe the perverse results this will cause.  Businesses in industries hardest hit by the crisis will still have to layoff employees because they don't have enough revenue to even cover the reduced payroll costs.  Businesses in industries not that negatively impacted will get a windfall of having 60-70% of the payroll costs covered.  The only way for this legislation to do what it's supposed to would be for it to cover all payroll costs.  Is anyone else seeing these issues?  Does anyone have any different interpretations?

    Thanks everyone,

    Thomas

    ------------------------------
    Thomas Arnold
    Owner/CFO/General Counsel
    Alleare Consulting
    DallasTX
    ------------------------------
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  • 2.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    2020 Staffing World Attendee
    Posted 04-06-2020 16:59
    Edited by Michelle Hodapp 04-06-2020 16:59
    Well, this is pretty important information to be aware of!  Thank you for bringing it to our attention, and I'm looking forward to seeing the responses.

    ------------------------------
    Michelle Hodapp CSP
    President
    Excel Personnel Services
    Lompoc CA
    (805) 735-6723
    ------------------------------

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  • 3.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 05:05
    Yes, as accountants to the industry, we are seeing the same issue under the PPP, insofar as as a company is considering bringing back idled workers to merely collect a paycheck for 8 weeks.  If there is no work for the employee, you, the employer, may essentially be borrowing money to pay idle workers - and the full amount of the PPP loan may not be ultimately forgiven, given how the current regulations define allowable "payroll" costs (currently defined as net pay paid out, not gross pay paid out)

    we similarly hope for this issue to be resolved in upcoming guidance, but as it stands, we advise our clients who are considering accepting PPP funds to merely bring idle workers back on staff who will remain idle (non-chargeable) over the 8 week period to be extremely cautious about doing so!

    ------------------------------
    Brian Hoffman
    Partner
    Citrin Cooperman & Co. LLP
    Philadelphia PA
    (215) 545-4800
    ------------------------------

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  • 4.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 08:39
    Hopefully, ASA staff can provide guidance on this asap.  Surely our legislators didn't mean for this to happen.  There is no small business that could take that big hit exactly how you have defined it above.  Any small business, not just staffing companies would take a huge hit signing up for PPP. Thanks so much for providing the example for us to review.

    ------------------------------
    Deborah Martin CSP
    President
    Service Specialists
    Ridgeland MS
    (601) 898-1085
    ------------------------------

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  • 5.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:45
    The other issue is the "reduction of forgiven amount" calculation. it reads that the amount forgiven may be reduced if your head count falls during the 8 weeks as compared to your average headcount for 2019. there is talk that this is incorrect but no one as of yet has proven the inaccuracy. You might end up with 0 forgiven dollars if you drop in headcount.

    Borrowers beware!

    ------------------------------
    Thomas Landry
    Co-Founder
    Allegiance Staffing LLC
    Spring TX
    (281) 355-9222
    ------------------------------

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  • 6.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:51
    I believe that the reduction will be proportional to the headcount during an earlier period (possibly Jan - Feb 2020). Thus, unless you have let go of everyone including yourself, the number forgiven should not be zero. Please note that no more than 25% can be used for non payroll expenses.

    ------------------------------
    Michael Reichwald
    President
    Yorkson Legal
    New York NY
    (212) 265-1400 x212
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  • 7.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:18
    You do not need to exclude the federal income taxes. You cannot include the employer FICA portion but you can include state and local taxes such as SUI.

    ------------------------------
    Michael Reichwald
    President
    Yorkson Legal
    New York NY
    (212) 265-1400 x212
    ------------------------------

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  • 8.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:49
    Michael,

    Our accounting firm, Baker Tilly, has a task force of accountants that have been looking at this.  Myself of other attorneys have looked at it too.  Everyone has concluded that federal income tax withholding will not be forgiven.  Page 12 of the CARES Act says "(II) payroll costs shall not include taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code, during the covered period."  Federal income tax withholding is chapter 24 of the IRS code.  End result is the scenario I described in my original post.  Also, here is a excerpt from the Lender Guidance section of the SBA's website, look at #3:
    Is there anything that is expressly excluded from the definition of payroll costs?
    • The Act expressly excludes the following:
    1. Any compensation of an employee whose principal place of residence is outside of the United States;
    2. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
    3. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee's and employer's share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
    4. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127)
    I'd be happy to discuss further.  Just hope the word will get out and they'll fix this.


    Thomas Arnold


    ------------------------------
    Thomas Arnold
    Owner/CFO/General Counsel
    Alleare Consulting
    DallasTX
    ------------------------------

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  • 9.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:55
    Tom,

    I think if you review the FAQ's from the Treasury late last night, you will answer most of your questions. See #16 for more about FICA.

    Michael​

    ------------------------------
    Michael Reichwald
    President
    Yorkson Legal
    New York NY
    (212) 265-1400 x212
    ------------------------------

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  • 10.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 10:58
    Tom,

    Here is the response:

    Question: How should a borrower account for federal taxes when determining its
    payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan,
    and the amount of a loan that may be forgiven?
    Answer: Under the Act, payroll costs are calculated on a gross basis without regard to
    (i.e., not including subtractions or additions based on) federal taxes imposed or withheld,
    such as the employee's and employer's share of Federal Insurance Contributions Act
    (FICA) and income taxes required to be withheld from employees. As a result, payroll
    costs are not reduced by taxes imposed on an employee and required to be withheld by
    the employer, but payroll costs do not include the employer's share of payroll tax. For
    example, an employee who earned $4,000 per month in gross wages, from which $500 in
    federal taxes was withheld, would count as $4,000 in payroll costs. The employee would
    receive $3,500, and $500 would be paid to the federal government. However, the
    employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from
    payroll costs under the statute.

    Michael

    ------------------------------
    Michael Reichwald
    President
    Yorkson Legal
    New York NY
    (212) 265-1400 x212
    ------------------------------

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  • 11.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 11:20
    Oh my gosh Michael, thank you so much!  It does look like #16 fixes this whole problem​.  I saw these FAQs a few days ago, but I guess they just added number 16.  The footnote explaining their rationale is pretty hard to follow, but who cares if this interpretation stands.​​  I'm going to go sleep for like 15 hours now.  Let me know where I should send the champagne!  :-)

    Thanks again,

    Thomas

    ------------------------------
    Thomas Arnold
    Owner/CFO/General Counsel
    Alleare Consulting
    DallasTX
    ------------------------------

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  • 12.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 11:59
      |   view attached
    Tom,

    Actually the whole document is new. It came out late last night. I have attached it to this message. Best of luck.

    Michael

    ------------------------------
    Michael Reichwald
    President
    Yorkson Legal
    New York NY
    (212) 265-1400 x212
    ------------------------------

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  • 13.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-07-2020 13:23
    Hallelujah!!!

    Service Specialists
    www.servicespecialistltd.com
    Principal Office-
    157 N Union St.
    Canton, MS. 39046
    601.407.6161

    Branch Office-
    201 Hwy 51, Suite C
    Ridgeland, MS 39157
    601.898.1085




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  • 14.  RE: Huge Problem with PPP - True Costs of Retaining Employees?

    Posted 04-08-2020 06:17
    You are confusing two separate matters - yes, yesterday they "fixed" the gross/net pay distinction - but only on the HISTORIC computation of 2019 payroll, which drives the amount of the allowable Borrowing.  There has been no update yet to the definition of the allowable payroll costs that may be incurred in the post-loan closing 8 week spending period -. Those allowable payroll costs, which drive the amount of loan FORGIVENESS, remain as a net payroll computation - not gross.  Still a major problem...

    ------------------------------
    Brian Hoffman
    Partner
    Citrin Cooperman & Co. LLP
    Philadelphia PA
    (215) 545-4800
    ------------------------------

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