Reading the Fine Print
By Julie Quink
The economic stress created by the COVID-19 pandemic compelled business owners and individuals to apply for the relief funds provided by the Small Business Administration (SBA) in the form of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans (EIDL).
The rollout of these programs came at a time when the reality of the pandemic began to unfold, creating a frenzy for businesses and individuals to apply for the funding, in some cases, before the funding ran out.
Before the ink on the guidance and requirements for these stimulus funds was dry, applications for the funding were being processed, and funds were in the hands of businesses and individuals. To expedite getting funds to those who needed them, much of the clarification about the use of the funds, taxability of the funds, and criteria for forgiveness were ironed out after the funding was in hand and being spent by the recipients. What ensued was months of additions to the SBA’s frequently-asked-questions (FAQ) document clarifying the eligible uses of the funding to ensure forgiveness and further attempts by Congress and the SBA to adjust program requirements as the pandemic continued.
More than 50 FAQs were issued to clarify the PPP requirements, and 20 relating to the EIDL loans.
In the frenzy to obtain the funding for the PPP and EIDL loans, it became clear that not everyone read the fine print, or that the fine print changed as clarity was provided for these programs. The fine print provided recipients with additional requirements for the funding they may have been unaware of at the time of application or even during the spend-down period.
As trained professionals, accountants and business advisors spent months learning the requirements and pivoting as they changed. It would be unreasonable to assume that those who received the funding could keep up with the fast-paced changes that were occurring, including the fine print. For accountants, there have been times we could barely keep up with the changes.
“With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.”
The result is that those receiving the funding need to be aware of those items in the fine print for the PPP funding and the EIDL loans that may impact them.
Recipients of the EIDL loans, which could be up to $2 million in amount, were required to sign loan paperwork, outlining the terms of the funding. In the fine print of these loan documents are provisions that the borrower should look out for and be aware of. Some of the provisions are:
• For loans under $25,000, collateral is not required. For loans of more than $25,000, the SBA is provided collateral through business assets, current and future. Transfers or sales of collateral, except inventory, require prior SBA approval. In addition, prior approval is required by the SBA in the event these business assets will be used to secure other financing;
• Borrowers are required to keep itemized receipts, paid invoices, contracts, and all related paperwork for three years from the date of disbursement;
• Borrowers are encouraged to the extent feasible to purchase only American-made equipment and products with the proceeds of this loan;
• Borrowers must keep all accounting records five years before the loan and three years after in a manner satisfactory to the SBA;
• Borrowers must agree to audits and inspection of assets, if requested by the SBA, at the expense of the borrower;
• Borrowers have a duty to provide hazard insurance on collateral and may be asked to provide proof;
• Within 90 days of the borrower’s year end, financial statements, in the format specified by the SBA, are required to be furnished by the borrower;
• The SBA may require a review-level financial statement for a borrower upon written request by the SBA at the borrower’s expense;
• Prior approval from the SBA is required for distributions of the borrower’s assets to the owners or employees, including loans, gifts, or bonuses;
• Borrowers must submit, within 180 days of receiving a loan, an SBA certificate or resolution. For most borrowers, the SBA has followed up or is following up on this requirement now;
• Default under the provisions may result if a borrower merges, consolidates, reorganizes, or changes ownership without prior SBA approval; and
• The loans can be prepaid, without penalty, if the borrower does not need the funds or secures other financing.
For most borrowers, the requirements may be routine considerations, but for others, these may be new requirements.
In the fine print of the PPP loan documents are also provisions that the borrower should consider, as follows:
• For borrowers who received a PPP loan greater than $2 million, the SBA has indicated it will likely audit those borrowers for compliance with spending requirements;
• Although Congress has confirmed that the proceeds of the PPP loan are not taxable and the expenses paid with PPP are deductible, some states, such as Massachusetts, are not following the federal laws relative to forgiveness of the PPP loans as they have their own rules. For individuals in Massachusetts, the loan forgiveness is taxable income. This affects sole proprietors, S-corp shareholders, and partners of partnerships. A bill, co-sponsored by state Sen. Eric Lesser, state Rep. Brian Ashe, and five other co-sponsors, has been proposed to allow for non-taxability of the forgiveness amounts in Massachusetts;
• Depending on when the PPP loan was funded, the borrower may have a repayment term of two or five years for the loan; and
• Although forgiveness may be granted, the borrower should retain the records used for forgiveness. Generally, most records should be retained for seven years.
Navigating the fine print is key for those who received the PPP and EIDL loans. The navigation becomes increasingly more difficult when the requirements continue to change and the funds have already been received and used to operate the business.
With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.
Julie Quink is managing partner with West Springfield-based Burkhart Pizzanelli; (413) 734-9040.