The smallest businesses need changes to the PPP

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The Paycheck Protection Program is not exactly one-size-fits-all in its effects on loan recipients. A business with 500 employees has different challenges when it comes to reopening than a business with five employees. The program, introduced as part of the CARES Act, initially ran out of funds within days of its beginning, but has since been refunded and at last report the Small Business Administration was still providing loan funds to banks.

Rules and guidance on loan forgiveness have been issued on an ongoing basis since the start of the program, but a number of issues are still up in the air, according to Roger Harris, president of Padgett Business Services, and a past chair of the IRS Advisory Council. “Forgiveness is fluid,” he said. “The eight weeks [in which money must be spent on payroll and rent or mortgage interest plus utilities] is not over yet — in fact, it may not even have started. The final details are still being worked on.”

As for the details already in place, Harris has some objections: namely, the requirement that, for loan forgiveness, funds received should be spent within eight weeks, and that at least 75 percent of the funds should be spent on payroll obligations, with the rest going to rent or mortgage interest, plus utilities.

In a letter to SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin, Harris outlined his objections, and recommended exceptions to both rules for smaller businesses, particularly those with 50 or fewer employees.

“As many of the smallest business owners have begun receiving their loan proceeds, their thoughts have turned to qualifying for forgiveness,” he wrote. “Most have been completely, or for the most part, closed for more than a month and a half, having been characterized as nonessential businesses by state and local governments. The greatest number of their employees have applied for and are receiving unemployment benefits. With the anticipated influx of capital from the PPP now being made available to them, many of these smallest businesses are facing accumulated fixed costs such as rents and utilities. Additionally, states that are beginning to open are requiring most small businesses to spend money to reconfigure their workplaces before they can rehire employees and open to the public.”

“Their first need is to pay these bills while they re-establish contact with their former employees, providing them the assurances they need to work during the largest pandemic in the last 100 years,” he continued. “Also, because of workspace distancing requirements, many employers will not be able to bring back all their pre-pandemic workforce. As you can imagine, the smallest businesses are caught between a regulatory standard that allows only 25 percent to go to essential fixed costs like rents, mortgages and utilities and the reality of bringing employees back online to receive their incomes from their former employers.”

The Padgett letter next addresses the eight-week rule, stating that the eight-week payout period does not line up with the reality on the ground of when and how an employer can reopen its doors. “This is particularly true for the smallest businesses, which most likely operate in only one location,” he stated. “If that particular location is considered a COVID-19 hotspot when the PPP loan arrives, the impacted business may not be able to take advantage of loan forgiveness even if they eventually use a substantial portion of the loan on rehiring employees. This situation can create a competitive advantage to some businesses.”

To alleviate the unintended consequence of the two rules, Harris recommended that a small business with fewer than 50 employees be granted an exception to both the 75 percent rule and the eight-week payout rule.

“For instance, this special smallest-business exception could provide for a 50-50 percent use rule and allow the eight-week window to begin when it is legal and safe to reopen in a particular area as established by the local jurisdiction,” he suggested.

“To me, it’s just a simple question of fairness. If the eight-week period starts when you get your money, a business in New York may not be open for half of the eight weeks, while a business owner in Georgia can open the next day,” Harris said.

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Coronavirus Paycheck Protection Program SBA IRS Treasury Department Steven Mnuchin