A lawmaker who helped create the federal loan program to aid struggling businesses during the economic downturn warns that some companies that took advantage of the program could be in trouble down the road.
Sen. Marco Rubio, R-Fla., said in a tweet April 20 that the Paycheck Protection Program (PPP) loan certification is “real and enforceable.”
“That is why any company (of any size) that hasn’t been harmed by the current economic conditions & nevertheless applies for & receives a #PPP has a big problem. They made a false certification to the federal government,” Rubio wrote.
The tweet comes after recent reports that major restaurant chains such as Ruth’s Chris Steak House and Shake Shack received millions in PPP loans, which some argued they didn’t really need and that took away money from smaller businesses. Shake Shack has since announced it’s returning the $10 million in loan proceeds it received.
But practitioners were quick to point out that the certification language for businesses to qualify for a PPP loan in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) is broad, requiring a loan applicant to certify in good faith that “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”
Arguably, every business is uncertain of the current economic conditions, practitioners pointed out.
“I think the reading implied by Sen. Rubio is not necessarily what a reader would get when reading the statute initially,” Edward K. Zollars of Thomas, Zollars & Lynch Ltd. told Tax Notes. “I presume the senator is focusing on the word ‘necessary’ to require that there be a harm triggered by the COVID-19 crisis and that a loan is now required for continuing operations.”
Zollars said he wondered about that word in the certification the more he looked at the law, and had advised clients thinking of applying for the loan that they probably should be able to give a reasonable explanation of why the loan was necessary for the continuing operations of their businesses.
Christopher J. Wittich of Boyum & Barenscheer PLLP said the Small Business Administration has the ability to interpret and administer the CARES Act, and that the PPP application issued by the SBA phrased the certification differently. The second certification on the application says, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Even with the SBA’s certification language change, Rubio’s tweet doesn’t add up, Wittich said.
“I think Sen. Rubio’s quote does not quite match up with either the language in the CARES Act or the certification on the SBA application, and it’s a bit of revisionist history now that the program has struggled for three weeks and run out of money,” Wittich said.
Referring to another Rubio tweet on the matter, Wittich said the senator has focused “on the revenue to cover ongoing operations, but in the CARES Act and the SBA certification, neither mentions revenue.”
The CARES Act gave employers options for paying workers while the nation is on lockdown trying to halt the spread of COVID-19. Those options include an employee retention credit that is fully refundable and applied against the employer’s portion of payroll taxes, but only $10,000 in wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.
Employers can forgo that credit and instead apply for a new loan under the CARES Act to help with payroll costs. The CARES Act modified section 7(a) of the Small Business Act to create the PPP, for which Congress authorized nearly $350 billion to provide guaranteed loans for businesses.
As of last week, that money has dried up and lawmakers are negotiating on additional funding for the program.
Loan Forgiveness
But while lawmakers scramble to replenish the PPP, Anthony J. Nitti of RubinBrown LLP said he’s more concerned with the ongoing saga surrounding the program’s crown jewel: forgiveness of the loan on a tax-free basis.
A history of the loan forgiveness timeline is a helpful starting point. (For other issues stemming from loan forgiveness, see analysis from Martin A. Sullivan.)
In the CARES Act, section 1102 lays out the allowable uses of the covered loan, which includes payroll costs, the continuation of group health benefits, interest payments on mortgages, rent, and utilities.
Then, in section 1106(b), the law says a borrower is eligible for forgiveness equal to the sum of payroll costs, rent, mortgage, and utilities, Nitti pointed out.
“Back in section 1102, the required certifications said nothing about stating that you will use a certain percentage of the costs on payroll,” Nitti said.
But then the SBA issued an interim rule April 2, and things changed. Under that rule, at least 75 percent of the PPP loan proceeds must be used for payroll costs. Also, the SBA changed the CARES Act’s rules on forgiveness by adding language to the certification requirement that requires at least 75 percent of the loan proceeds be used for payroll costs, Nitti said.
“If you put it all together, you can envision a scenario where the SBA tells banks that if the loan proceeds were not used 75 percent for payroll during the eight-week period, the loan was fraudulently acquired, and no forgiveness is allowed,” Nitti said. One bank even sent an email highlighting guidance it received from a local SBA chapter.
That email outlined several issues with the PPP loan process that didn’t have answers, but one bullet point jumped out to practitioners, which read: “If a business doesn’t use at least 75 percent of PPP proceeds for payroll, it is possible none of the PPP loan will be forgiven.”
“This is extremely concerning,” Nitti said. Say a taxpayer borrowed $100,000 in a PPP loan and over the next eight weeks, it spent $50,000 on payroll and $20,000 on rent and utilities.
Under the CARES Act language, $70,000 of the loan would be forgiven, Nitti said. Under a reasonable reading of the April 2 interim guidance, $66,667 would be forgiven ($50,000 of payroll costs divided by 75 percent).
But under the SBA’s possible approach, none of the loan would be forgiven because the borrower didn’t spend $75,000 on payroll, Nitti said.
“From a purely anecdotal perspective, I’ve been sent two forgiveness calculators from banks that have this cliff effect; if 75 percent of proceeds are not spent on payroll, no forgiveness is allowed,” Nitti said.
“This is a big problem,” Nitti concluded. “Borrowers deserve to know what they need to do in order to have the loan forgiven; unfortunately, they needed to know this before they took out the loan, and that didn’t happen.”