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Small Business Owners Air Grievances on PPP Loan Program Rules

Posted on Apr. 30, 2020

Restaurants and dry cleaners are calling for changes to the small business loan program that provides for forgiveness on a tax-free basis, while large businesses are starting to return proceeds they arguably don’t need.

Jesse Hassinger, a chef and the owner of Belly of the Beast, a restaurant in Northampton, Massachusetts, said the failure of the Paycheck Protection Program (PPP) is “literally destroying true small businesses.” In a comment posted on the loan guidance at regulations.gov, Hassinger said the lack of available guidance at first meant small business owners were left in the dark on receiving the loans while larger corporations with ample resources were able to take advantage.

“We took advantage of everything that there was available to us in the area: a financial consulting firm, the owner of which worked at the [Small Business Administration] for many years, and even he was shocked at the rapidity of the depletion of funds,” Hassinger said. “We literally got off a Zoom meeting with him and dozens of other local businesses where he was answering all of our questions, only to hear rumors that the funding was running out.”

Shake Shack and Ruth’s Chris Steak House — as well as the NBA’s privately owned Los Angeles Lakers — plan to return their PPP loans after public outcry and a warning by Treasury Secretary Steven Mnuchin that businesses that don’t need the money should return it.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into law March 27, modified section 7(a) of the Small Business Act to create the PPP, which provides businesses with loans that are forgivable on a tax-free basis as long as specific requirements are met. One of those requirements is that the business dedicate at least 75 percent of the loan proceeds to payroll costs for eight weeks after the loan is disbursed.

Hassinger told Tax Notes he was approved for a PPP loan but didn’t receive it right away, so he assumed his business didn’t get it and had to wait for the next round of funding. But the company did receive funding in the first round; it was just delayed. When the restaurant eventually received the loan proceeds, Hassinger set up two new bank accounts to hold the proceeds separately: 75 percent in one account to be used for payroll and 25 percent in the other for rent and utilities.

“This will make it easy so when an audit does inevitably come around, we can point to where the proceeds came from and how they were spent,” Hassinger said.

The government has highlighted that millions of small businesses have received PPP loans. Mnuchin has pointed out that more than 1 million businesses with fewer than 10 workers received funding. Fewer than 0.3 percent of the loans were for at least $5 million as of April 23, according to a Treasury spokesperson.

The spokesperson said the average loan size has fallen from $207,000 in the first round of the program to only $111,000 in the second.

Following creation of the program, the SBA processed more than 14 years’ worth of loans in less than two weeks, according to the spokesperson.

Guidance on various aspects of the loans has been released over the past few weeks, including a series of interim final rules that continue to shape the program. (For a list of the recent guidance, see Treasury’s CARES Act page.)

According to the Office of Management and Budget website, interim final rules are generally issued in conformity with the statute and allow agencies to publish a final rule that’s effective soon after publication without having to go through the proposed rule stage.

“The ‘good cause’ exception in the Administrative Procedure Act allows agencies to bypass public notice and comment on a rule when it would be impracticable, unnecessary, or contrary to the public interest,” according to the OMB’s Office of Information and Regulatory Affairs. “This process typically allows for public comment after the rule is published so that the agency still has an opportunity to consider public input and revise the rule accordingly.”

Weighing In

And public input they have received. So far, thousands of comments from taxpayers have rolled in to the SBA on various aspects of the loan program and even the CARES Act in general.

Edward Tamin of Mechanicsburg, Pennsylvania, owns a dry-cleaning business that has been affected by the economic downturn, and he recommended changes to the structure of the program. Several changes Tamin recommended in his comment on the interim rules would need congressional intervention, but one that wouldn’t is a good-faith standard for efforts to rehire workers, to satisfy the requirement that employee levels be maintained for full loan forgiveness.

According to Tamin, some workers simply won’t want to come back to work during the eight-week period because they’re concerned about contracting COVID-19.

“If we can't bring our people back, the penalties on us are extremely punitive,” Tamin said. “If we bring back some of them, pay them even if there is no work, we are assuming that the PPP is forgivable. But if they don't come back — then we are now forced to pay the funds back. We are caught in an extremely delicate situation.”

Jeremy Anderson, the owner of Acme Cleaners Inc. in Muskegon, Michigan, also called for PPP benefits and guidelines to be reevaluated and adjusted appropriately to focus on small businesses.

Professional groups are starting to weigh in, specifically on the topic of loan forgiveness, which has sparse guidance so far.

Businesses that are lucky enough to receive PPP loans must use the proceeds largely for payroll costs over an eight-week period after receiving them. But that eight-week period should begin once local stay-at-home orders are lifted and should align with the beginning of a pay period, the American Institute of CPAs said in an April 29 comment letter.

The National Payroll Reporting Consortium also called for clarity on loan forgiveness, saying in an April 27 comment letter that the eight-week period should begin with the first payroll pay date following receipt of the loan proceeds. The group joined others in calling for a definition of full-time equivalent employee and asked for clarity on the exclusion of annual compensation per employee over $100,000 on a prorated basis.

“Small businesses are in desperate need of guidance on the forgiveness aspects of PPP,” said Glen Birnbaum of Heinold Banwart Ltd. With every passing day, there is more concern about what that guidance will say, he added. 

“Owners I’m talking to want to do the right thing, but feel like the yardsticks have been moved during the game,” Birnbaum said. “Immediate layoffs are being discussed if the PPP forgiveness has risk to it. It leaves businesses in a very tough spot.”

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