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Gianelli Nielsen News Blog

Wednesday, May 6, 2020

Uncertainty in the Time of COVID-19 & the PPP

As attorneys, we’ll leave it to the physicians and scientists to navigate through the uncertainty of the pandemic. However, Congress has given small and large business owners alike something new to be uncertain about. It’s called the Payroll Protection Plan (PPP) and it is in some ways almost as frightening as the virus that created the need for this legislation.

The problem is the PPP itself is fraught with uncertainty and instead of things getting clearer, they are getting less clear.

If you get anything out of this short blog, please mark your calendar for May 14th.

On May 14th you have to make a decision whether your loan certification was correct when it said:

“Current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant”;

If it is not correct then you need to return the funds by the end of the business day on May 14th to avoid the possibility of criminal penalties.

Therein lies the uncertainty. There are no definitions or metrics to help guide the borrower on whether they should have applied for this loan, although SBA has made it clear that an applicant must establish that the claimed economic injury is substantial and a direct result of the declared disaster. Before FAQ 31 was implemented it was assumed that it was simple enough. If you were in a business that was or could be seriously impacted by the virus you could reasonably assume that you needed the money to protect your operations and keep your labor force. However guidelines from the SBA (FAQ 31) require that you look at your current activity to determine if you have the “ability to access other sources of liquidiity.” While most analysts do not believe that means other borrowing sources or your own personal capital (because Congress said it wouldn’t mean that), it is simply not clear what it means. 

The penalties for violation of the PPP loan program, i.e. submitting an intentionally false certification, are criminal fines of up to $1M and up to 30 years in prison.

It is not clear what happens if you don’t refund the PPP loan on May 14th if you think you may not meet the “necessity” requirement. It is also unclear how anyone could really know at that time what your cash flow is going to be like over the next 8 weeks or whether it is just the 8 weeks we need to consider. SBA asserts only that if you take a loan out and return it before May 14, 2020, you cannot face any criminal consequences. Great.

Whether the PPP legislation is clear and concise enough that anyone who enters into this realm of uncertainty with a good faith belief that the coronavirus pandemic can have a serious effect on their business (most of us) could ever be convicted a criminal act is for another day.

Today, we need to determine what action we are going to take on May 14th. In making your decision, make sure you have done your cash flow analysis and that it is appropriate within the guidelines of what was contemplated by the law. Include in your calculations the total loan proceeds, estimated rental payments, utility payments, payroll payments subject to limitations and caps provided by the law (for instance compensation not to exceed $100,000 per employee) for 24 months.

If you decide to keep the loan proceeds, be sure to segregate the proceeds in a separate bank account. Have backup for each check that you write and the invoices to support the payments (including payroll reports). Work closely with your CPA in doing this analysis, or on your own, only if you have the financial sophistication. And while it is unknown whether you have to document general economic activities, keep timelines of events that caused you to make your decisions, document your industry and regional factors (how many virus cases are there in Stanislaus County), document the status of your business or show how you used the PPP funds, all of the above is highly recommended, just in case you are one of the lucky ones who gets audited.

While Steve Mnuchin, Secretary of the Treasury assured us that anyone borrowing more than $2M will be audited, there may be many other businesses that will face audit down the road.

The word is “uncertainty”. However, this author believes that no one who has a legitimate reason for being concerned about the affect this pandemic is going to have on their business should be in fear of doing what they can to protect their business and thereby protect their employees. Just be careful, and don’t play games.

~~ Michael L. Gianelli and David L. Gianelli


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