By Susan M. Tillery
Help during the pandemic or a nightmare?
It has come to our attention, in the last day and a half, that there are increasing reasons that you may want to rethink taking out a PPP loan. If you have already received funds you are able to return them by Thursday, May 7th.
The PPP loan program was enacted to make funds available to qualifying businesses so that those businesses could retain their employees. Businesses were encouraged to apply for the PPP loans and Secretary Mnuchin even announced on April 15, 2020 that they wanted every eligible small business to apply so they could get the resources they needed. The CARES Act provided the SBA loan program with the ability to cut back eligibility restrictions including:
suspending the requirement that borrowers must not be able to obtain credit elsewhere, and repealing the requirement that owners who had liquidity, contribute capital alongside the SBA loan; which created the presumption that loan applicants were adversely impacted by COVID-19. The Act also reduced the complex affiliation rules.
However, the PPP loan program has now created a situation that the Wall Street Journal reports: “Small business borrower BEWARE”. The WSJ shared that businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The WSJ further stated that the ultimate cost may dramatically outweigh the temporary gain.
What has happened in the last couple of weeks?
First, since the CARES Act has come out, daily guidance from the SBA and Treasury has been issued. In total, seven formal Interim Final Rules for the CARES Act have been issued and 12 updates to the SBA’s FAQs on the PPP loans have been published.
Second, one of the FAQ (Question 31) issued by the SBA and Treasury (on April 23) abruptly shifted course and stated that the certification each small business borrower makes in its application that:
“…current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” must be made “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.” (emphasis added). Then, less than a week after this, Mnuchin stated there would be audits of all loan amounts over $2 Million and there are now hints that every loan will be subject to an audit.
There are no answers and no guidance as to what this certification means except that the question of access to “other sources of liquidity” will be determined in retrospect. There is no indication of how long the look back risk will exist. The fact that the CARES Act originally stated that the business owner would not be required to prove they were unable to obtain credit elsewhere, and liquid owners were not required to contribute capital, is of such concern to us that we now feel receiving PPP loan proceeds is a high risk.
Third, any fraud found on an application will be considered a federal offense punishable by prison and fines and considered a felony. Now we know none of you would do anything fraudulent, however, with rules changing every day even after many have received their PPP loan proceeds, we do not feel the risk is worth any amount of loan proceeds unless you can undeniably make the certification above. Granted there is no criminal liability for mistakes or inadvertent omissions, but when actions are judged retrospectively, trying to prove a lack of intent is not a situation any small business would want to face.
Fourth, your bank is not going to be held liable and in fact, your bank is being paid for each loan it approves. So do not rely on them to say you are not eligible for this loan. The SBA is permitting lenders to rely on the borrower’s documentation to determine if the business is eligible for the loans. Lenders have been specifically released from being held responsible for any fraudulent or inaccurate information.
Fifth, the IRS released guidance Monday, May 4th that a taxpayer who receives a PPP loan is not permitted to deduct expenses that are normally deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was forgiven. The Association of International CPAs (AICPA) believes strongly that this is not the intent of the CARES Act, but as we discussed above, that doesn’t seem to be a consideration.
Sixth, information on determining your eligible costs and the requirements for forgiveness have not been released yet. Computing both of these amounts is going to be difficult as well as confusing and you will undoubtedly need your CPA to assist in this process.
It is of course your decision, but we felt it was our responsibility to advise you of the high risk you are taking on, should you decide to receive and/or keep PPP loan proceeds.
For those of you who do keep PPP loan proceeds it is advised that you work with an attorney to create a contemporaneous, written record to support your certifications, or your current decisions to keep the PPP loan proceeds based on the certifications made in the loan application. As of today there are two key areas where you need this support: the “necessity” certification and compliance with affiliation rules. Regarding the “necessity” certification, you should have support for:
1. The specific facts and circumstances showing that you bore financial hardship and faced material economic uncertainty.
2. That you considered your ability to access capital, including conducting discussions with those who were in a position to provide capital such as your current lenders and equity holders.
3. A forecast projecting your liquidity position and effect on the operations by not obtaining a PPP loan; and can demonstrate that the loan was necessary to support the ongoing operations of the borrower.
