Payroll Protection Program loans. What a fine mess this has become!
Banks
Some bankers told me the banks didn’t want to make these loans. The rate is only 1%, there are no personal guarantees, no collateral required and the banks expect high administrative costs and high default rates. For defaults and any portion of the loans forgiven, they’ll have to fight with the SBA for reimbursement. Many banks did them because their customers expected them to. Other banks did them for non-customers and I don’t understand why.
Terms of Forgiveness
This is the real attraction of these loans to borrowers. They were promoted as loans that would turn into government grants. Who wouldn’t want free money? And, of course, they were meant to help small businesses, inject funds into a reeling economy and keep paychecks coming to working people. It is the Payroll Protection Program, after all.
The terms of forgiveness—turning loans into grants—has gotten lots of publicity. The rules are generally well known at this point and most recipients of these loans will have no trouble documenting where the money has been spent. Most know about the eight-week time period, the 75%/25% payroll vs. other stuff rule, etc. Our inboxes have been jammed with the details of gaining forgiveness. The SBA has been issuing clarifications of the rules but there is still much confusion.
For example, Section 1106 of the Act says that “borrower shall be eligible for loan forgiveness equal to the amount spent…on payroll costs.” One paragraph later, the language says, “…payroll costs incurred during the 8-week period…” Do they really mean incurred and spent? Is it just sloppy drafting? Most companies accrue payroll and then pay it in arrears, about five days later. If you were accruing the eighth week in this eight-week period, but paid the payroll in the ninth week, does that count?
Much of the confusion stems from the rules being changed, subsequent to the first round of loans having been made. Big companies have been shamed into returning their loans. Others have no shame. Secretary of the Treasury, Steve Mnuchin, is saying everyone who got a loan over $2 million will get a full audit. Who is going to do these audits? The SBA doesn’t have a corps of auditors. The banks can’t do it. Treasury? No.
Deductibility
What hasn’t gotten much publicity, is the question of whether these expenses, which qualify the borrower for loan forgiveness, will be deductible for tax purposes. The law states that forgiveness of the debt will not be taxable income. But nowhere is the deductibility of the underlying expenses addressed. Generally, one has to pay for something to be able to deduct it. In this case, the borrowers will be reimbursed for these expenses, assuming they are successful getting all or part of their loan forgiven. The IRS has now stated that these expenses will not be deductible.
Words Matter
The Loan Application form from the SBA required borrowers to make a number of assertions. One was:
“…the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments…”
I don’t see this as a problem and this is easy to document. There are a bunch of rules to follow, but with careful documentation, this shouldn’t be an issue for most borrowers.
There is another required assertion that gave me pause when I read it:
“…current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant…”
So, what does “necessary” mean in this context? I was told by several bankers that if your business was negatively affected by the pandemic, you qualify. That would qualify about 98 percent of all businesses. The dictionary definition of necessary is “…essential, required to be done. The basic requirements of life…” Secretary Mnuchin is now saying that borrowers will have to show the business would not have made it through this period without the loan. Some businesses would meet this test, but most would not. But they would have laid off more people. And wasn’t that the point of the Payroll Protection Program? And what of “current economic uncertainty?” If the future was certain, we’d have known whether we needed the money or not. But, of course, the future was/is anything but certain.
So far, there has been no definition of “necessary.” But there have been threats of criminal action and treble damages against borrowers who took money and should not have represented the funds were “necessary.” Treasury has magnanimously allowed those who should not have taken the money until May 7th, that’s two days from today, to pay the money back with no repercussions. Do you need more than two days to figure out what the government meant by “necessary?” Sorry. The real problem is, no one knows what “necessary” means in this context.
FAQs
The SBA’s most recent FAQs on these loans, at least the most recent I’ve seen, are dated May 3rd, last Sunday. I enjoyed the FAQ Q&A format so much; I’ve decided to create my own FAQs on this topic:
Question: They are changing the rules retroactively. Can they do that?
Answer: Yes.
Question: We borrowed money under one set of rules and now they’ve imposed a new set of rules. That doesn’t seem right.
Answer: You have a keen sense of the obvious.
Question: Is this the biggest cluster you’ve ever seen?
Answer: No, but it is right up there and deserves at least a Dishonorable Mention.
Question: Will there be any winners in this?
Answer: The lawyers.
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