Proverbs 22:7 – “The rich ruleth over the poor, and the borrower is servant to the lender”

Give Me Back My Money: PPP Loans

Give Me Back My Money: PPP Loans. On December 22, 2020, Congress passed the stimulus bill which provides for new Paycheck Protection Program loans and other small business relief.

The Paycheck Protection Program (PPP) offers a loan that could be completely forgiven if funds are spent correctly—mainly on payroll. Some small businesses have applied for it as a lifeline only to discover it’s not the perfect fit for their business and may want to return their PPP loan.

One of the main appeals of the PPP is that the loan may be forgiven in full if proceeds are used properly. But the rules around PPP forgiveness are confusing and there are many remaining questions the SBA and Treasury have yet to answer.

Some employers will discover they do not qualify for forgiveness and will instead be taking out a loan. While a 1% interest rate on any balance is attractive, the loans carry a two-year repayment period (five years for loans made after June 5, 2020), and in this period of economic doubt many business owners are wary about taking on debt. Returning the funds may feel like a safer option.

Update: The PPP Flexibility Act which became law on June 5, 2020, makes it easier to obtain forgiveness. It gives employers up to 24 weeks to spend funds and still be eligible for forgiveness.

Loss of employees

The primary purpose of PPP is to help employers keep employees on their payroll so they can be ready to return to work when business resumes. But some employers are finding that hard to achieve, due to financial concerns, health concerns or both.

Some employers have reported their employees stand to make more through Pandemic Unemployment Assistance than they would if hired back and paid using PPP funds.

Some workplaces are closed, or business is so slow that employers can’t find important work for their employees to do anyway. It’s confusing and frustrating to employers to pay their workers not to work, or to try to find something for them to do.

If you offer employees their job back but they don’t accept the offer to come back to work, they may lose unemployment benefits. (note they may qualify for Pandemic Unemployment Assistance under specific circumstances, even if they do not return to work.) Even if you do bring them back and they are making less money than they would have on unemployment, they may be bitter enough to look for another job in the future. It’s a tough decision many employers are facing— especially those with lower-paid employees.

Take the Employee Retention Tax Credit

In addition to other programs, the CARES Act created the Employee Payroll Retention Tax Credit. Businesses  suspended due to government orders may be eligible for a employee retention tax credit against Social Security wages for up to 50% of $10,000 in qualified wages (including health plan expenses) paid after March 12, 2020 and before January 1, 2021.

Eligible employers can get immediate access to the Employee Retention Credit (ERC) by reducing employment tax deposits they are otherwise required to make or even get an advance payment from the IRS if the employer’s employment tax deposits are not enough to cover the credit.

But employers can’t get both a forgivable PPP and this tax credit. Some employers who applied weren’t aware of the Employee Retention Credit. Nor did they discuss the two options with their bookkeeping professional before they applied for PPP.

Will your business survive

If you cannot qualify for forgiveness, it might make more sense to return your PPP loan. Given, it’s a pretty attractive loan. PPP loans carry no personal guarantee, no collateral, and non-help for authorized purposes. (See The CARES Act section 1102.)

What if you never reopen your business and can’t or don’t repay a portion of the balance in authorized ways. Could you be on the hook personally for that balance? It seems totally possible. Even if you aren’t, defaulting on a federal loan of any type is serious business. At a minimum, it means you aren’t eligible for any other federal loans for at least several years.

Do you need the funds

When applying for PPP, the CARES Act requires borrowers to certify that “current economic doubt makes this loan request necessary.

Initially that didn’t seem to be a huge bind as most businesses are facing economic doubt. After backlash due to publicly traded businesses who got PPP loans. The SBA indicated it will audit businesses that received more than $2 million in funding.

You have time to return the funds

If you saw this program as a gold rush of free money and decided to take advantage of it.  You may be in trouble. Investigations are already starting. The Justice Department has announced it has charged two businessmen in the District of Rhode Island with allegedly filing bank loan applications fraudulently seeking more than a half-million dollars in PPP loans. If you applied fraudulently you’ll likely want to return the funds— and call a lawyer.

If you have already received PPP funds and changed your mind, talk with your lender. There is no prepayment penalty if you pay back these loans early though interest will accrue.