A lack of clear guidance, the threat of penalties, and an imminent deadline combine to make the Paycheck Protection Program’s forgivable loans a potentially perilous subject for tax advisers.
Recognizing that, Treasury and the Small Business Administration are giving some reprieve to businesses that received the loans unnecessarily and want to escape criminal and civil liability. In an announcement quietly released late on May 5, it extended the deadline for returning PPP loans from May 7 to May 14.
But vague guidance from the Treasury Department thus far, muddled by unofficial guidance including tweets by a member of Congress, still makes determining if a loan needs to be returned complicated.
Some observers have suggested that if a business hasn’t suffered a revenue downturn, it ought to return the loan, but even that isn’t a clear marker, Martin M. Shenkman of Shenkman Law observed on a May 5 Leimberg Information Services Inc. webinar. “I’d be shocked if anybody on this call, unless they’re in a unique business, could possibly say they anticipate a revenue uptick,” he said.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) offers few guidelines for the loan program, and simply states that a taxpayer must self-certify that current economic uncertainty makes the loan request necessary to support the ongoing operation of the business.
That supports a broad interpretation of the program, according to Alan S. Gassman of Gassman, Crotty & Denicolo PA. For example, section 162 regarding business expenses doesn’t define necessary as absolutely vital — it just means reasonably needed as determined by the business owner, he said.
“We looked at the meaning of necessity under federal tax law, and we felt that any business that might not have sufficient capital to get it through a year or a year and a half of this terrible mess would have every duty to its owners to make this loan request,” Gassman said.
Shenkman added that Congress could have easily included more restrictions on the loans, such as limiting them to very small businesses or mandating in the law that the business have no access to any other source of capital, yet lawmakers didn’t. Instead, the SBA has released successive sets of FAQs that impose more requirements, and many of those are vague.
But the most disturbing thing, according to Robert S. Keebler of Keebler & Associates LLP, were tweets by Sen. Marco Rubio, R-Fla., who said that whether the loan is necessary should be determined on an eight-week timeline: If the money wasn’t necessary because of the danger of becoming insolvent during those eight weeks, the taxpayer shouldn’t be taking the loan and can face civil or criminal consequences.
“No accountant or accounting professor or finance professor would look at this over eight weeks,” Keebler said. “You're going to look at ‘Do I need this loan — big picture — to keep my business viable for a much longer period of time, six or nine months?’”
“We could be looking at a Dust Bowl depression,” Gassman added. “I don't think that any reasonable corporate officer or director can conclude, for most industries, that this loan request is not necessary to support your ongoing operation.”
Playing Defense
Keebler said that advisers need to plan now for how they will deal with SBA audits of loan applications.
“How are we going to approach that first meeting?” Keebler asked. “Do we send the CPA with the client and just handle it low-key, or does the auditor show up at your office in a room packed with three CPAs and three lawyers and you treat it like a criminal investigation from day 1?”
Gassman suggested that if a client desperately needed the loan at the time he applied for it, a low-key approach makes sense. But if the client only risked going bankrupt a year later, it would be wise to have a lawyer who is experienced in both tax litigation and white-collar crime defense attend that meeting, he said.
Gassman added that practitioners should be especially careful about what they say to their clients and their clients’ CPAs in writing, as that could become important evidence requested directly in the SBA’s initial audit letter.
Shenkman said he would still be surprised if the SBA took a hard line in its audits, especially if a client was acting in good faith. “How do you hold people accountable for standards that were issued afterwards that don't seem at all reflected or indicated in the initial legislation?” he asked.
Gassman suggested that the tightening of loan rules by Treasury and the SBA on big loan applicants could have been more aimed at relieving public pressure rather than actually enforcing stringent requirements.
“I’d hope not,” Gassman said. “But I certainly wouldn’t rely on that assumption.”
Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.
Correction, May 6, 2020: Treasury and the SBA extended the deadline for returning PPP loans.