CARES Act Commentary May 27 2020
Written by: Paul M. Polito, CPA
(Author’s comments in italics)
We accountants follow a set of guidelines known as generally accepted accounting principles (GAAP). One of the most sacred of these principles is the matching of revenue and expense. Often, payrolls that have been earned by the employees but not paid by the end of the accounting cycle must be accrued in order to match revenue with expense. Under GAAP, when the hours are worked, the payroll is incurred. The terms paid, incurred and accrued are very familiar terms to us. When someone says a cost has been incurred, the cost must be recorded in that accounting cycle. “Paid” and “incurred” have very different meanings! If a cost must be both incurred and paid, that means that both conditions must be met. Whereas, if a cost can be either incurred or paid, either condition can be met.
When the CARES Act was signed into law, we had no idea how this program might develop. We are learning that words are really important and sadly, (probably because some very dedicated people are working way too hard under difficult circumstances trying to help our country get through COVID 19) the guidance we are getting isn’t written very clearly.
First came the Act itself:
Sec. 1102(viii) “The term payroll costs—
- (aa) the sum of payments of any compensation with respect to employees…”
Sec. 1106(a)(3) “Loan Forgiveness. The term covered period means the 8-week period beginning on the date of the origination of a covered loan.”
And the important paragraph we have been hanging our hat on since early April…
Sec.1106 (b) “Forgiveness….an amount equal to the sum of the following costs incurred and payments made (emphasis added) during the covered period.”
Did congress mean either costs incurred or payments made???? Or did it mean that both conditions must be met?
Second came the “interim final rule” on April 2, 2020 with updates through May 20, 2020
f. “What Qualifies as ‘payroll costs?’
Payroll costs consist of compensation (no mention here as to either paid or incurred) …; payment for vacation, parental, family, medical, or sick leave; allowance for separations or dismissal…….”
The long-awaited Loan Forgiveness Application was issued on May 15, 2020.
“Summary of costs eligible for forgiveness:
- Eligible payroll costs. Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight week (56 day) covered period……payroll costs are considered paid on the day that paychecks are distributed. Payroll costs are considered incurred on the day that the employee’s pay is earned. Count payroll costs that were both paid and incurred only once.”
It was clear to most of us in the Accounting Profession that the payroll had to be both paid and incurred based on these instructions and 1106(b).
On May 22, 2020, SBA issued ‘Business loan program temporary changes; Payroll Protection Program-Requirements-Loan Forgiveness.
On page 5 of that document was this sentence: “Specifically, SBA has determined that advance notice and public comment would delay the ability of PPP borrowers to understand with certainty which payroll costs and nonpayroll costs that are incurred or paid during the covered period are eligible for forgiveness.”
Clearly, this says incurred OR paid.
Later in this document on page 6
Section 1106(b) of the CARES Act provides that subject to several important limitations, borrowers shall be eligible for forgiveness of their PPP loan in an amount equal to the sum of the following costs incurred and payments made during the covered period (as described in section III.3.below:”
Then on Page 8:
“III 3. Payroll Costs Eligible for Loan Forgiveness
- When must payroll costs be incurred and/or paid to be eligible for forgiveness? In general, payroll costs paid or incurred during the eight-consecutive week (56 days) covered period are eligible for forgiveness”
Can you see why there is confusion over “incurred and paid”? The Act says incurred and paid. The interim final rule says, “incurred and paid”. The application explains when payroll is considered paid and when payroll is considered incurred. It then says on page 5 “incurred or paid”, on page 8 it says, “incurred and/or paid.”
Words really matter and the words “and” & “or” seem to be used almost interchangeably. Perhaps the copywriter assigned to the Forgiveness application didn’t have the same sensitivity for the meaning of the words “incurred” and “paid”. Perhaps SBA simply wanted to make this super flexible. It is really hard to know exactly what SBA intends. For now (May 27,2020), we are advising clients that if the payroll was either incurred or paid in the 8-consecutive week (56 day) period, it counts as qualified payroll costs. Use the most favorable payrolls for your circumstances. Just make sure you do not claim more than 56 days of payroll. This interpretation provides some flexibility to borrowers with payrolls that vary from pay period to pay period. A more conservative approach would be to include only payroll that has been both incurred and paid during the 8-week period (either the Covered Period or the Alternative Payroll Covered Period).