Uncertainty shrouds the loan program intended to help small businesses weather the coronavirus pandemic as Treasury Secretary Steven Mnuchin announces new rules without additional guidance from Treasury.
Paycheck Protection Program (PPP) loans in excess of $2 million will be fully reviewed by the Small Business Administration before they are forgiven, according to an April 28 update by Mnuchin on CNBC’s Squawk Box.
Yet the program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) is still lacking guidance from the SBA and Treasury that would bring more certainty to Mnuchin’s announcement.
Large public companies such as Shake Shack and Ruth’s Chris Steak House have come under fire for receiving millions of dollars in PPP loans while the program ran out of money for small businesses.
“While I understand why the Treasury secretary is issuing this warning, it does add to the impression that borrowers are entering into a program with unknown rules which will only be disclosed after the borrower may have relied on a different interpretation of how the program works,” Edward K. Zollars of Thomas, Zollars & Lynch Ltd. told Tax Notes.
Language in the CARES Act says that a taxpayer applying for a PPP loan must certify that current economic uncertainty makes the loan necessary to support ongoing operations of the applicant. Treasury and the SBA updated an FAQ warning companies to review the certification language carefully before applying for a loan.
Businesses Battle Unknowns
Shake Shack and Ruth’s Chris — as well as the NBA’s privately owned Los Angeles Lakers — plan to return their PPP loans, and after Mnuchin’s announcement, other businesses are left wondering if they should do the same.
Some lenders have contacted private companies and suggested they consider returning their loans, said James Anderson of BKD LLP.
“Private companies are concerned about reputation risk and government scrutiny of accepting PPP loans, even though they are experiencing serious business disruption and future uncertainty,” Anderson told Tax Notes.
Treasury will forgive the loans if the money is used to cover payroll, mortgage, rent, and utility costs and employee and compensation levels are maintained.
A large private company could have been approved for a loan greater than $2 million in good faith, but it’s no longer guaranteed that it will be forgiven if it is audited by a third party, said Anderson.
“These companies may have already spent 25 percent of the loan proceeds under the assumption they had done everything according to the law to have their loans forgiven, only to find out later they may or may not have a loan to repay,” Anderson said.
Guidance Would Add Certainty
Part of the problem is the SBA and Treasury haven’t released final guidance on how businesses will calculate their loan forgiveness.
“It's tough to plan for a review of the loan forgiveness without knowing what standards the borrower will be measured against,” Zollars said.
Zollars questioned whether borrowers would be penalized for accepting larger loans than Treasury deems appropriate based on their lender’s interpretation of the law before receiving clear guidance from Treasury.
It’s not yet clear how to interpret the “costs incurred and payments made” phrase that defines what is eligible for forgiveness within the CARES Act. Businesses also don’t know how much they can acceptably contribute to employees’ retirement as part of payroll costs or how an SBA rule requiring that 75 percent of PPP funds go to payroll costs will be applied at the time of forgiveness, Zollars said.
“Quickly creating such a massive program to support private businesses is a difficult task, but imposing fear on small businesses surrounding loan forgiveness without formal guidance or any details is unfortunate, to say the least,” Anderson said.