The federal government initially reacted to the coronavirus crisis by enacting three legislative responses: first, the Coronavirus Preparedness and Response Supplemental Appropriations Act, then the Families First Coronavirus Response Act, and finally, the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, all of which provide a mix of myriad benefits. And at press time, the House and Senate looked poised to enact a fourth bill to top up some of the earlier relief funds.
These benefits include economic impact payments, emergency funding for federal agencies, provisions for paid sick leave, coronavirus testing, additional unemployment benefits, tax credits for small businesses, suspension of student loan payments, protections against eviction (for renters) and mortgage foreclosure (for homeowners). The Paycheck Protection Program and the Economic Injury Disaster Loan advance were the most widely reported benefits for small businesses.
Protecting paychecks
Although the speed of enactment and rush to apply for the PPP resulted in some confusion and criticism at the start, most observers were impressed with the speed and effectiveness of the program in getting the funds to applicants. “The stimulus legislation was done in record time,” said Mark Koziel, executive vice president for firm services at the American Institute of CPAs. “When you look at the sheer volume of definitions and guidance necessary, it’s been challenging.”
The most ambitious part of the CARES legislation was the PPP. “There was more money processed by the [Small Business Administration] under the PPP in one day than in all of 2019,” said CPA.com president and CEO Erik Asgeirsson. “There are other programs, such as the EIDL program. There was a strong focus on getting the money into the hands of small businesses quickly.”
The legislation tried to mitigate the need for the SBA to approve every loan. “It put pressure on banks to complete the verification process,” said Koziel. “The process was supposed to be simple — all you can do is hope that small businesses will be able to survive through this.”
In fact, the PPP was launched in just one week. Following its launch, the SBA processed more than 14 years’ worth of loans in less than 14 days, according to a statement from Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. “Nearly 5,000 lenders participated in this critical program, including significant lending by community banks and credit unions,” they stated. “The vast majority of these loans — 74 percent of them — were for under $150,000, demonstrating the accessibility of this program to even the smallest of small businesses.”
In helping to craft the legislation and generate support, the AICPA and CPA.com led a coalition of 30 companies and other stakeholders with ties to 44,000 CPA firms, 2.5 million small businesses and 30 million employees. In the early stages of the rollout, the AICPA recommended a defined set of documents for lenders to rely on, as well as key clarifications in the application process.
For example, in the calculation of the average monthly payroll cost under the PPP, payroll providers and CPAs should use the gross payroll approach, according to the coalition and the National Payroll Reporting Consortium. “Based upon statements from members of Congress, it appears that the intent of the PPP was to base the salary calculation on gross wages with no adjustment for federal taxes,” said Koziel. “This ensures that payroll tax expenses are not passed on to the small businesses in need.”
The initial tranche of money available for the PPP was used up by mid-April; at press time, Congress looked poised to approved an additional $320 billion in funding. There was also some controversy over who, exactly, was receiving relief, with some concerned that not all the money was going to small businesses.
The professionals’ response
When the PPP was announced, preparing taxes took a back seat, according to Roger Harris, president of Padgett Business Services. “We heard there might be SBA funds available the same week that the July 15 filing extension was announced,” he said. “We held a company meeting that week, and told all of our offices to stop worrying about taxes and proactively get in touch with their clients to tell them to start preparing for any documentation that might be required. We also told our members to be prepared to delay, waive or reduce their fees.”
There was some initial frustration with the PPP, according to Jake McDonald, director at the Philadelphia office of Top 100 Firm CBIZ. “Even though the SBA issued general guidelines, it was still SBA-approved lenders who could accept and process these loans, as opposed to just any bank,” he said. “The issue is that banks typically only work with their existing clients base, since they already know the clients. They don’t have to do a compliance check on unknown entities.”
On the plus side, McDonald noted, was that bank regulators were given guidance to prudently and in good faith work with borrowers who could not make payments: “They were also advised to perform loan restructuring of up to six months, to waive payments, interest and other fees during that period.”
The relief effort encompasses a variety of options across agencies, addressing small businesses to midsized to larger businesses, according to Morgan Lewis partners Andrew Budreika and Jennifer Breen. “The CARES Act allocated $377 billion to small business, with $349 billion of that targeted to the PPP,” said Budreika. “That was for two-year loans to small businesses that must be used 75 percent for payroll, with the remaining 25 percent available for mortgage, rent, utilities and certain other functions in order to qualify for full forgiveness by the SBA.”
The borrower is eligible for forgiveness on all loan proceeds used during the period that is eight weeks following the origination of the loan on payroll costs, mortgage interest payments, rent payments and utility payments, according to Budreika. “Forgiveness applies to both principal and any accrued interest.”
“In the event the loan is forgiven, the CARES Act specifies that it would not constitute cancellation of indebtedness income,” said Breen.
The application process was streamlined, requiring very little or no negotiation, according to Budreika. “It was signed ‘as is’ for most people so they could get funds and needed relief quickly. Now the focus has turned to forgiveness. It’s important to keep really good records to show they used the money the way they are supposed to use it.”
The economic impact payments were distributed to those who filed a 2018 return, observed Ed Renn, senior equity partner at law firm Withers. “If they pay you the wrong stimulus amount, you can keep it, but there will be a number of checks cashed for those that have passed away since filing,” he predicted. “The intent was that you should be alive when your check is cashed.”
“The whole tenor is that as long as 95 percent of the money goes where it is supposed to go, it’s a success. It’s almost accepted that there will be a fairly large error rate in the PPP — a two-page form and very little in the way of required documentation. I need more documentation to apply for a credit card than someone asking for $10 million. But it’s keeping a lot of businesses open, and a lot of people in jobs.”
“I’ve heard from CPAs that had smaller clients that the really small guys had trouble with the paperwork,” he continued.
Stephen Mankowski of Mankowski Associates CPA, agreed. “A lot of smaller businesses were not able to get much needed funds,” he said, adding that some financial institutions reached the limit of their capitalization early in the rollout.
