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On July 6th, the SBA released borrower information for many businesses that received loans through the Paycheck Protection Program (“PPP”). The public is now able to see the “loan-level data, including business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, name of lender, [and] jobs supported” of any borrower who received greater than $150,000 worth of PPP loans.
The exact loan amount for each business is not to be disclosed. Instead, the SBA is providing ranges, which are as follows:
- $150,000-$350,000
- $650,000-$1,000,000
- $1,000,000-$2,000,000
- $2,000,000-$5,000,000
- $5,000,000-$10,000,000
Many large businesses that received PPP loans have had negative reactions from the public, but the value of receiving the loan was apparently worth more than the loss of revenues or value from unfavorable publicity. PPP loans were limited to businesses with less than 500 employees, but many franchises of larger chains were able to use an exception granted by the SBA by allowing applications by each separate franchise location.
This news has led some to question the fairness of the PPP loan program. I have provided advice to hundreds of PPP borrowers, and have moderated and presented in webinars reaching over 10,000 viewers. We have answered hundreds of questions for borrowers and CPAs. There are a lot of very tough situations out there that are not really appreciated in the public eye. I have also been interviewed by journalists for national magazines who have had concerns about PPP loans going to borrowers who may not be in need or deserving of them, as opposed to being concerned about small businesses that have had to close down or terminate many employees because of not being familiar enough with the loan rules.
An update Webinar on recent PPP loan rule changes and interpretations will be presented free of charge on Wednesday, July 27 at 10 a.m. EDT, and replayed at 5:30 p.m. EDT. You can register by e-mailing info@gassmanpa.com with the subject line “PPP.” Those who attend will get a free copy of my friend David Finkel’s book, Build a Business, Not a Job, which is more needed than ever during this crisis.
The following is a summary of a conversation I had with a reporter this week, and some afterthoughts.
Of your clients, who was hit the hardest by the Covid-19 pandemic?
A high number of our clients are owners of medical practices. The Coronavirus caused many of these practices to come to a standstill because of health concerns of patients and staff, and government orders requiring the postponement of elective surgeries and procedures. Even our infectious disease and critical care physician clients who were much busier in the hospital were much slower in the office, and had significant negative economic results because of this, not to mention the high risk of getting sick and not being able to work or cover their overhead for many weeks.
Regardless of sector though, a vast majority of business owners were emotionally devastated and financially uncertain because of the pandemic. There was, and still is, great uncertainty regarding the reliability of the internet, the health and safety of employees, and the impact on supply chains. The United States’ relationship with China, for instance, has deteriorated, and thousands of businesses rely on China for products essential to the survival of their business. PPP loans were able to stabilize and provide needed confidence to many of these businesses during this uncertain time.
When applying for loans, did businesses worry about the public having access to their information as a result?
No. I do not think that any of my clients were necessarily aware that their information would be public knowledge, but even if they did, it is doubtful that the result would have been any different. These businesses needed the money to retain their valued employees, pay bills, and keep the businesses afloat. Privacy was and still is, secondary, if even a factor, for a vast majority of borrowers.
How should small businesses react to their loan information being public knowledge? Will customers, shareholders, and business partners be upset?
Covid-19 has caused one of the worst economic recessions in the history of the United States, and business owners had a fiduciary and ethical responsibility to their businesses and their family to take these loans. For the vast majority of borrowers, the public will understand why they took the loans, which were based upon approximately 20.833% of their prior year’s payroll, health care insurance and retirement plan costs. Millions of people were able to keep their jobs, or at a minimum benefits, as a result of PPP loans. The loans are only forgiven to the extent that they are spent on payroll and certain other permitted core expenses that are needed to keep doors open, lights on, and personnel in place.
The public has a right to be upset over borrowers who clearly did not need the loan for the survival of their business, but years of audits and litigation will certainly be coming the way of many who may have abused the system. There seems to be an insinuation that all large borrowers that receive millions of dollars is a bad thing, but this is not the case. If, for instance, a business received a $5 million PPP loan, this means that the average yearly payroll, health care and pension costs are approximately $24 million. There is no reason for the public to be uniformly upset by this, because a great many jobs and would be unpaid creditors were saved through these loans.
- My friend Kevin Cameron, CPA has the following to say about this: Small businesses in this country contribute a significant amount to the total income and payroll tax revenue as well. That $24 million in payroll also generated about $2 million of employer FICA taxes alone…
- …Small businesses will not be able to deduct the expenses used in the PPP Loan forgiveness. If their business otherwise breaks even, these small businesses will pay about $130 billion in income taxes. So, the Government gets back some of their own money.
On large business borrowers, I would be outraged at the board of directors and officers if they did not allow a business to take PPP loans because of political pressure. I predict that there will be a number of class action lawsuits against companies that did not take PPP loans to save employees and business operations when they could have. There is no excuse for businesses to not take PPP loans because they are worried that the public may be upset, unless it would hurt sales or profitability. If the loan can save employees’ salaries and benefits, then it is worth some degree of public disapproval.
- My friend Kevin Cameron, CPA has the following to say about this: We’re already seeing negative results of the Treasury releasing contact information for Borrowers. Some nefarious individuals are targeting these businesses with solicitations and calls in attempts to gain additional information to likely commit fraud. While it may have seemed to be a good idea on Treasury’s part to release this data, it will lead to exploitation of some small business owners when they are already hurting and could be subject to being taken advantage of. Additionally, this could lead to more public “outings” or the shaming we saw with companies like Ruth’s Chris Steakhouse and Shake Shack. The vast majority of borrowers legally applied for the PPP Loan and should not have to answer to anyone other than the Lender or SBA on their motivations and reasons for applying for the loan.
- Treasury stated they did this to increase transparency with the PPP. If that is the case, then they should disclose the same for the Lenders, particularly just how much in fees the Lenders received.
Is there any recourse for businesses that received a PPP loan without the loan being “necessary”?
This topic is explained in great detail in my previous article entitled, “Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions.”
The United States is in for a great deal of litigation regarding whether a good number of PPP loans were “necessary.” Borrowers were required in the application process to answer whether “[c]urrent economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant.” If an audit of a borrower were to show that the loan was not “necessary,” then possible felony charges will follow.
The SBA stated that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Despite this protection from SBA scrutiny for smaller borrowers, whistleblowers may still report the abuse of PPP loans for a reward.
What about Churches? Should these institutions be receiving PPP loans?
Churches employ people and were able to use PPP loans to save jobs. Many Churches have not had in-person attendance, so donations have dramatically decreased. Any organization that employs people can be praised for receiving a PPP loan, if they were able to retain employees because of it. The employees of churches that received this loan are able to pay for rent, food, and other expenses because of the PPP loan.
Final Thoughts
Businesses should prepare for a possible upcoming economic recession that could make 2008 look like a cakewalk, and may last for a number of years. Congress is currently discussing a further reallocation of funds through a new stimulus program, and businesses should not be made to worry about the public implications of receiving these funds if they were “necessary” to assure that they could continue with their businesses.