The PPP Debacle: You Are Not Alone

Frustrated people stressing out over business planning and accounting by bizhippo in houston texas.

The SBA proudly tweeted yesterday that 13,669 PPP (Paycheck Protection Program) loans had been funded for a total of $4.3 billion. Who got those loans? Of my accounting clients working with six different banks (regional and national), none was able to submit an application until late in the afternoon and most were told it would be two to three days before they hear back on next steps.

So if you were one of the millions of small businesses that applied for a Paycheck Protection Loan and are relying on that money to keep your employees through the next two months— you are not alone in your frustration. After the excitement of learning that a program was available to help your small business, and working diligently all week to make sure you were ready to submit your application, I think every applicant felt very disheartened and concerned to hear their banks respond, “We don’t know how we are going to handle this. Stay tuned.”

What kind of a show was that?

Yes, I would say the rollout of the PPP Loan Program was a bit disappointing. Some might even call it a certain two word term with wonderful alliteration that ends with “show.” The banks complained that the SBA hadn’t given them enough lead time and guidance, the SBA complained that banks were holding up the process, Congress complained that banks were shutting out non-customers.

In the end, I don’t care what the problem is or who caused it. I just implore the players involved to solve it and fast.

Many of my clients delayed layoffs anticipating the funds this loan would provide. If the funding is delayed by three to four weeks, the government’s attempt to keep small business from laying off workers will have failed. Businesses will have run out of their cash reserves and will start doing what the CARES Act was trying to avoid. The businesses will begin hibernating until the economy recovers. That’s at least three months these small businesses will lie dormant, hoping that when the recovery begins, they can start to rebuild the business they had. And in one to two years, they might be back to the headcount they are today.

Resolution Needed

From mine and my small business clients’ perspectives, here is what needs to be addressed immediately:


Clarify the lookback period for the average monthly payroll calculation.

The SBA loan form says 1/1/2019 through 12/31/2019. The CARES Act (H.R. 768) and the Treasury’s Interim Final Rule released April 2, ( Docket No. SBA-2020-0015) say the previous 12 months. Some banks are using the calendar year, some are using the previous 12 months.

For most small businesses, the previous 12 months provides a higher average monthly payroll number and should be used.


Clarify 2. g. iii. of the Interim Final Rule

Clarify what is intended by 2. g. iii. of the Interim Final Rule regarding exclusion from payroll costs “federal employment taxes…including employee’s share of FICA… and income taxes required to be withheld from employee.”

This guidance seems to be new and does not follow anything contained in the CARES Act or the SBA Application. It also seems to directly contradict the computations shown in 2.e. of the same document.

Reducing the payroll costs by the employee’s withholding reduces the amount eligible for the PPP loan by as much as 33%. Yet, the employer still has to pay the employee’s gross wages going forward, meaning the 2.5 months of payroll is now less then 2.5 months of actual payroll.

Again, some banks are following this guidance and others are not. Should employee payroll taxes be excluded for payroll costs and if yes, what is the purpose?


Provide an Average Monthly Payroll Computation Worksheet

The IRS is good at creating forms that allow all users to compute a number consistently. Create a similar form allowing the business to calculate its Average Monthly Payroll. Then, the banks have a consistent form to review and can easily verify those numbers with the documents required in the next section. Perhaps the bank certifies what documentation they reviewed on that very worksheet.


Provide guidance on documentation requirements

Provide guidance to the banks on what documentation the SBA will require and encourage or demand that they not request more than is necessary to receive the 100% SBA guarantee.

One of the banks yesterday requested nearly 35 different documents to apply for the PPP loan. And interestingly, most of the documents did not give them additional or relevant information to verify the payroll amounts being used to calculate their PPP qualification amount.

Given that the applications are starting after the first quarter of 2020, it seems it would be very easy to limit the request of borrowers to:

  • Quarterly 941 reports documenting payroll for the 4 previous quarters – Q2 through Q4 of 2019 and Q1 of 2020. If the 941 has not been prepared or filed for Q1, accept a quarterly payroll summary. The SBA will have to come up with an equivalent documentation standard for companies using PEOs (Professional Employee Organizations).
  • A prior year tax return (2019 or 2018) and an Employer Identification Letter and/or a State Certificate of Formation to prove the company’s existence. If the company is too new to have a tax return, drop the tax return documentation requirement.
  • 2019 W-2’s or Q4 2019 quarterly unemployment reports to verify which, if any employees, were compensated over $100,000.
  • If health benefits and retirement plans are included in the computation, request a document verifying the total number claimed for the period. If the total isn’t available, perhaps request one representative payroll journal or bill that reflects one month of the amounts claimed. If the sample times 12 months is within 10-15% of the number used in the PPP calculation, accept it.

Please, just get the money moving

The goal should be to get money into hands of small businesses as quickly as possible to prevent them from laying off their employees. This is not the time to be hamstrung by unnecessary regulations or for the banks to be more concerned about the negative consequences from the SBA than they are for the terrible outcomes to their potential borrowers.

I also think the SBA should process these applications in addition to the banks, since the banks are limiting applicants to only their existing customers. The SBA processes and funds the loans under 7(b)(2), so it seems it would not be a huge leap for them to do the same with the PPP loans.

The banks have made it clear they weren’t ready to handle the influx of applications and it appears some have even worked to make the process as cumbersome as possible. So give borrowers the choice to work with the SBA, who at least has a mandate to get this money in the appropriate hands quickly.