Small businesses struggling to survive during the COVID-19 pandemic now have something else to worry about: Could they be in trouble for taking the money the government offered through the Paycheck Protection Program for help them? Should they pay it back? If they don’t, could they be held responsible for fraud?
Time is running out: they have until close of business, local time today, Monday, May 18, in deciding whether to return their money to avoid possible penalties, and this causes great anguish for many small business owners. The cause of this confusion and worry: Yet another change in the rules governing the program, leaving some of those who have taken out P3 loans worried that they would not qualify after all.
The root of the PPP problem
Let’s take a step back for a second.
PPP was a surprisingly straightforward application, as far as government was concerned. It was only two pages long. And on the second page, there was a keyword: Small business owners were encouraged to apply for the forgivable loan. whether they felt that the money to pay salaries and expenses was “necessary” because of the economic uncertainty. The goal of this simple program was to keep as many people employed as possible.
Yet four weeks after the initial requests were accepted and several weeks after the funds were released, the SBA changed that keyword. Suddenly, instead of telling small business owners that they were eligible if the money was’ needed ‘, the requirement now had to meet a new standard:’ need ‘, as in’ I need this money. or else I will close ”.
Do I have to return my PPP money? The story of a small business owner
Let me tell you exactly how this seemingly minor change has affected employers.
A client I work with recently called me to tell me he was considering giving his PPP money back. When he applied for the loan, three employees at his manufacturing plant had tested positive for COVID-19. There was a real chance he would have to shut down production, and maybe his entire business.
This client certainly met the “necessary” standard at the time of his application. Yet, through quick thinking, he had managed to keep his employees safe and his production lines open. The business had not gone out of business and the business seemed to be doing well in the short term.
With the SBA’s keyword change, however, he was suddenly worried. Would keeping money that it technically didn’t need constitute fraud in the eyes of the government? Was he in years of costly litigation and investigations due to actions he had already been encouraged to take?
Some reassuring advice
I told my client to hold on. And of course, early last Wednesday morning (May 13), the SBA issued additional guidance for small businesses on whether they should opt for penalty-free repayment of money from unnecessary PPP loans. The bottom line is that companies receiving less than $ 2 million in PPP loans were considered to have met the original certification guidelines.
Well, that’s a relief, isn’t it? For my client, yes. But how many other legitimately needed loans had already been returned to the government because of these same fears felt by the small builder? How much additional economic carnage has been caused by this and other forms of additional uncertainty? (Watch Bruce Willey’s webinar on the Paycheck Protection Program by clicking here.)
This was not the first problem plaguing PPP
Almost exactly a week ago, I published another column about a frustration small business owners have encountered with the payroll protection program. (Please see the IRS ‘superb ruling that can bankrupt small businesses that have taken out P3 loans.) An article that has elicited more readership than any other I have ever written.
This room railed against new IRS guidelines which eliminated the tax deduction for expenses paid for using PPP money. This greatly helped to minimize the benefits, in some cases almost 40%. Fortunately, since the publication of this article, some elected officials have taken action. Shortly after the IRS ‘nighttime broadcast, a bipartisan group of senators introduces yet another law. This one, the Small Business Expenditure Protection Act, seeks to repair the significant damage caused to the PPP by codifying the possibility of deducting loans as expenses.
The bottom line
While the government program was intended to help small businesses, it is not perfect. Nothing is done so quickly, in such difficult circumstances. But the good news is that, in this case, my clients are now safe. And for other small business owners, I urge you to document the factors involved for you and your business when applying for PPP regardless of the amount.
This documentation needs to be done anyway, as does detailed documentation of how you spend the money in order to receive forgiveness. Protect yourself, use the money as intended, and document every step of the way. If you have refunded the money but there is still uncertainty in your business, reapply – the funds remain in the program.
No one knows what the future holds during a global pandemic. No one knows when small businesses will be able to reopen, let alone when their customers will feel comfortable doing something as simple as going out and buying a cup of coffee.
At times like this, what these small business owners, and the millions they employ, need the most is certainty. Hope they get it soon. And that when it comes, they still have a viable business.
Founder, American Tax and Business Planning
Bruce Willey has worked with small and medium-sized businesses across the country for over a decade, helping them navigate business and tax law in a variety of situations. Its services include assistance with business start-ups, operations, growth, asset protection, exit planning and estate planning.