Understanding the Current PPP Landscape

The Paycheck Protection Program (PPP) provided a lifeline for thousands of small businesses across the nation, helping struggling owners pay employees to remain in business during the pandemic. Once borrowers provided lenders and the Small Business Association (SBA) with verification that the proceeds were used appropriately, the loans would be forgiven. Small businesses hope for a second round of stimulus in the coming months to help offset the second COVID waive.Businesses that received loans this year are either beginning to apply for loan forgiveness, or are planning to do so, but confusion remains about the timing of the application process, as well as the tax implications. Investigations of PPP recipients are gaining steam as reports of waste and abuse have captured the attention of government watchdogs and the public. Authorities are targeting businesses that did not apply for loans in good faith or use the funds appropriately for payroll, utilities, rent, or other permitted expenses.

A second stimulus bill is appearing likely, unlocking a second round of available funds for businesses. Regardless of where your business stands, it is important to mitigate risks associated with the application or forgiveness process. There are several takeaways and common misconceptions that have arisen over the past several months of the PPP as investigations heat up:

  • Misuse of proceeds is not the only focus. There are many reports of businesses receiving loans despite exceeding the 500-employee workplace limit, taking more money than they were eligible for, or using funds on ineligible expenses. Investigators are also looking at technical or clerical errors with statements made on original PPP applications.
  • Investigations are not isolated to large sum loans. Loans under $50,000 are facing scrutiny.
  • Investigations are not isolated to the largest U.S. districts. Assignment of multiple Assistant U.S. Attorneys, along with dedicated law enforcement officers and resources in such federal law enforcement agencies as the HHS, FBI, Department of Homeland Security, Department of Postal Investigation Services, among others, highlights a sharpened focus on discovering and prosecuting criminal conduct related to COVID-19.
  • The trigger for flagging a loan for investigation varies, and could be spurred by a whistleblower, the lender, or the federal agencies pursuing instances of fraud.

As you proceed with any component of the PPP process – from loan forgiveness to new loan origination – it is important to understand the legal background. During and after the loan forgiveness process, PPP loans can also complicate certain types of corporate transactions. PPP borrowers that are considering a sale transaction, a financing, or other significant corporate transaction should thoroughly understand the PPP landscape.

We represent a number of clients with both small and large Payroll Protection Plan loans, and we are working with their lenders and advisors on the new loan necessity requirements for those with loans in excess of $2 million, and on forgiveness compliance. Given the many changes made to the program on the fly, we anticipate that being prepared for the audit process will be highly prudent. 

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