SBA Favorable Interpretation of CARES Act Allows Small Business Employers Participating in the PPP Loan Program to Include Withholdings and Employee Share of OASDI Taxes 

April, 2020 - Leigh Griffith, Nicole Dressler

In revised Frequently Asked Questions (as of April 6, 2020) (the “FAQ”), linked here, the Small Business Administration in consultation with the Department of the Treasury addressed the questions of whether a small business borrower participating in the Paycheck Protection Program (PPP) could count the employee withholdings and the employee share of Old-Age, Survivors, and Disability Insurance (OASDI) tax in determining the maximum amount of borrowings and whether such amount will be permitted to be forgiven. In an extraordinarily favorable interpretation found in FAQ 16, the Small Business Administration responded “Yes” to both questions!

This is a critical expansion of the lifeline to small businesses (generally less than 500 employees) to enable them to meet payroll, rent, utilities and debt service obligations. In essence, the employer cost of retaining most of its employees is largely the employer share of social security tax (6.2% of wages). This increases the chance of survival of an untold number of small businesses. Additionally, the FAQ noted that the restrictions on allowable uses of the borrowed funds may extend beyond June 30, 2020 for some borrowers to permit the satisfaction of the allowable use requirement for loan forgiveness.

The rationale for this interpretation and the potential extended restricted use period is found in footnote 2 of the FAQ which is associated with FAQ 16:

“The definition of “payroll costs” in the CARES Act, 15 U.S.C. 636(a)(36)(A)(viii), excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020. As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages. Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.

 

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