A few weeks ago, when the Paycheck Protection Program (PPP) was announced, there was a mad frenzy for the money mainly because of the limited funds and the opportunity to have the loans forgiven. The money was depleted within a matter of days with many people being unable to obtain loans. There was a backlash against large, publicly traded companies that were able to get these loans due to suspicions of preferential treatment and because they had access to other sources of capital.
Now, with a new round of funding with a reminder of certain conditions from the Small Business Administration, the rush seems to have died down a bit. Large, public companies have either reconsidered applying or have returned the funds. A portion of the funds were allocated exclusively to smaller banks. And the large banks have upgraded their systems so that more smaller businesses can have their applications submitted. The latest reports indicate that $120 billion remains in the second round of funding.
Over the past few weeks, since the publication of my earlier column on the PPP loan, I helped a number of people obtain funding, and I want to share some common issues I have seen in the process.
Getting the loan amount right. Many people had trouble calculating the correct loan amount to determine their average monthly payroll. There are a number of reasons for this. Some people incorrectly added 1099 independent contractors as employees. Others were unable to produce necessary paperwork such as W-2s or Form 941s. S-corporation shareholders were only allowed to use their W-2 employee salary amounts instead of their total withdrawals for the year. And some of these people paid themselves a very low salary to avoid payroll taxes.
Others didn’t add correctly or just missed some numbers because they didn’t understand the rules since they had little time to read them. And in some cases, the banks did not want to follow the rules.
As a result, these people did not get the amount they hoped for.
Some of these problems can be remedied while others cannot. If you think you should get more, have someone familiar with the PPP rules review your loan application and supporting documents. You might have to change lenders if you suspect they are not following SBA guidelines.
Have an employment plan set up as soon as possible. Another common problem applicants had was that they had trouble maintaining previous employment levels, which is required to qualify for full forgiveness. This was usually because employees they previously laid off were unwilling to come back. This was because they found another job or they were financially better off not working due to the weekly $600 Pandemic Unemployment Assistance supplement to their unemployment benefits.
This can be remedied by hiring replacements for those unwilling to come back to work. Or, under a new SBA rule, the employer can make a good-faith rehire offer to the laid-off employee. If the employee refuses to return, then the loss of that employee will not count against the business’s loan forgiveness application.
But the more prudent thing to do is to have an employment plan for the next eight weeks following the receipt of PPP funding. This should be done before the application is submitted or soon afterward. Make sure the employees will be available for those eight weeks and plan to have replacements in case one of the employees does not want to come back to work or leaves in the middle of the eight-week period.
Have a budget and segregate PPP funds. For PPP funds to be forgiven, at least 75% of the proceeds must be used for payroll costs. The remaining 25% can be used for rent, business mortgage interest, and non-home-based utility costs. Ideally, 100% of the funds should be used for payroll costs, while the rent and utilities should be used as backup once payroll costs have been met.
So while you are setting up the employment plan described earlier, set up a budget to ensure that the funds will be used for forgivable purposes.
It is generally a good idea to have a separate bank account for the PPP funds for easier accounting and tracing. But if you plan to have only a few transactions during the eight-week period, a detailed journal with supporting documents should be enough. This tends to be the case for sole proprietors with no employees.
Do you really need the money? The CARES Act states that to qualify for PPP funding, the borrower has to certify that current economic conditions makes the loan necessary to support ongoing operations.
Recent SBA guidance states that the borrower must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA guidance gives an example stating that a public company with substantial market value and access to capital markets is unlikely to make this certification in good faith.
The SBA recently made a similar determination for private companies with adequate sources of liquidity.
The SBA also stated that in consultation with the Department of the Treasury, it will audit all loans over $2 million and other smaller loans as appropriate.
With all of this scary language, is it appropriate to request the money if you have an existing credit line, a cash hoard, or another source of funding? It seems like the risk for government scrutiny is greater when the loan amount is higher and the size of the company (along with its reputation) is bigger.
Honestly, I don’t know. Every business’s situation is unique. Also, a lot of ambiguities require clearer guidance from the SBA. But in my opinion, I doubt that businesses that receive less than $1 million should be worried so long as they use the PPP money for the intended purposes.
The SBA should provide more detailed guidance on businesses using other sources of capital. Should the business owners be forced to exhaust their savings? Or should business owners be forced to take a loan against their retirement savings? Or max out their credit cards? Or all of the above before they finally qualify for PPP funding? I’ll tell you this much: a lot of business owners will just let most employees go instead of going into further debt or exhausting their savings. Only a few star employees will be kept.
Barry Melancon, the President and CEO of the American Institute of CPAs, in a blog post stated that it is nearly impossible to find a company whose financial situation has not been negatively impacted to some degree. The last thing this economy needs is small businesses laying off employees and closing shop for good because they chose to return PPP funds or not apply at all.
While the truly needy should be given priority, banning and punishing fiscally conservative small businesses that apply for PPP funds seems to send a message that saving for a rainy day is for suckers.
Businesses that want to make the most of their PPP money should plan to use it for its intended purpose and as allowed by law. To maximize forgiveness of the loan, they should borrow no more than necessary, have a spending plan before funding is received and make sure that all of their employees will be available. I believe that most small businesses should apply for the loan because the down economy will affect them eventually. But for those who feel that the PPP money is not for them, they have until May 14 to return the funds with no questions asked.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.