Frisco restaurateur Bob Starekow got some devastating news last week. His federal Paycheck Protection Program loan came with unexpected strings.
“My accountant informed me that due to the ‘income’ of the forgiveness portion of the PPP loan, I will owe $45,000 in taxes on phantom income,” Starekow, owner of Silverheels Bar & Grill and Kemosabe Sushi & Sake, said in an email on Dec. 15. “I would explain it better if I understood the IRS’s extreme position better.”
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Taxes have been a sore spot ever since recipients of the federal small business loan began realizing that if their loan was forgiven — which made PPPs particularly attractive — the business could not deduct expenses normally allowed.
Congress overruled that IRS position on Monday evening by passing a new $900 billion COVID-19 relief package. And the sequel to the CARES Act brings back the popular small business loan program — with tweaks to keep the focus on smaller companies and limit the amount of the loan. Businesses that received aid the first time around can apply for a second dose of relief.
“There’s a lot of businesses in our communities that are hurting and needing help. I think we’re going to see high demand,” said Justin Menge, executive vice president for commercial and industrial business at Alpine Bank in Glenwood Springs. “I think this is going to be similar to round one, where it was a rush for funds.”
New terms for PPP part two
While the new $284 billion Paycheck Protection Program will largely abide by the same rules set by the Small Business Administration and U.S. Treasury Department last time, there are limits on who can apply a second time, but there is also more flexibility in what can be done with the money.
Instead of just using the loan for payroll, rent and utilities, businesses can spend the money on personal protection equipment, supplier expenses and technology upgrades or other operating costs needed to help employees work from home, such as cloud computing or accounting help. But, as before, 60% of the loan must be used on payroll to qualify for 100% forgiveness.
The relief bill was tacked on to a catch-all $2.3 trillion spending bill and added more details to the paycheck program than the CARES Act did. President Donald Trump is expected to sign the plan Tuesday.
For those who apply again, the second round limits a company’s size to 300 employees, compared with 500 in the first round. Businesses must show a 25% decline in quarterly revenues between 2019 and 2020, instead of just economic hardship. The loans also max out at $2 million, instead of the prior $10 million.
“Congress is shrinking the universe of borrowers,” said Sarah Mercer, an attorney and lobbyist at Brownstein Hyatt Farber Schreck in Denver. “I really think that the part where the program found a lot of criticism was on those loans that were over $2 million. They’re trying to trim some of the fat, if you will, to ensure that these loans are really for smaller businesses.”
Another change allows recipients of an SBA Economic Injury Disaster Loan grant — originally up to $10,000 — to receive the benefits of both programs. Nim Patel, chief strategy officer for the nonprofit Colorado Enterprise Fund, said that some small businesses weren’t getting 100% forgiveness because they didn’t realize the SBA allowed one or the other.
“It’s an issue for anyone,” but especially small firms with no accountant, Patel said. “If you typically operate more close to a break-even basis, just by taking the loan would have pushed you into a tax situation.”
Restaurants and hotels are eligible for a loan 40% larger than other businesses because those industries were especially hard hit during local and statewide restrictions and closures. Most companies are eligible for loans that are 2.5 times their average monthly payrolls, but hotels and restaurants are allowed to go to 3.5 times.
“The ability to get a second PPP loan will be hugely beneficial for the Colorado businesses most impacted by COVID-19: hotels and restaurants,” said Greg Anton, a partner at the accounting firm BDO Denver. “The COVID-19 relief bill allows these businesses to secure a loan of up to an average of 3.5 times their monthly payroll costs, which should offer needed assistance to Colorado’s hospitality industry.”
Ceyl Prinster, CEO of the Colorado Enterprise Fund, expects to be up and running to offer the new PPP round quickly. She suspects many first-round applicants will return.
“We saw that about 40% of our portfolio were in those vulnerable industry groups of food and beverage, entertainment, retail and those kinds of things that have had restrictions put on them for how much business they can do,” Prinster said. “I think they’ve been pretty hard hit. If they’re eligible and can show the expenses, why not? It’s forgivable.”
PPP aid helped more than 100,000 Colorado businesses
Paycheck loans helped thousands of Colorado businesses this year — approximately 109,170 small businesses in Colorado were approved for loans valued at $10.4 billion. The Colorado Sun received a PPP loan.
Early on, PPP loans kept many businesses from closing, as they tried to adapt to the pandemic operating restrictions and retain staff. Restaurants forced to close their indoor dining expanded take-out choices, with some offering toilet paper and alcohol. Some gyms rented out equipment. Rum maker Montanya Distillers in Crested Butte kept employees busy by making surface sanitizer for Gunnison County’s Incident Command Team.
“Yes, it allowed me to sustain a three-month shutdown and return to mostly normal operations ever since,” said Karen Hoskin, founder of Montanya Distillers. “It helped me to keep from spilling 35 people into the unemployment pool and possibly having trouble getting them back. It was essential.”
Hoskin said she’ll apply for another PPP loan if the business is forced to shut down again.
The mad rush in early April to get a share of the $350 billion in forgivable loans with few restrictions created a backlash as the public learned that several publicly traded companies had taken $10 million loans when many much-smaller businesses were shut out. Rules were added to let applicants know that loans above $2 million would be audited. Companies like Ruth’s Chris Steakhouse returned their loans.
A second round set aside $310 billion for new loans after the first round in early April was exhausted within days. But ultimately, the program ended in early August with more than $100 billion available.
New rules and ongoing changes kept small businesses — and lenders — guessing about whether they would be forgiven.
“The program mutated and mutated and mutated, which I think added to some of the confusion,” said Bruce Alexander, CEO of Vectra Bank, which handled around 3,800 loans in Colorado for a value of about $500 million. “But as we got to figuring out how to process them through the SBA and take the applications, it really worked out, I think, quite well. … In our case, we opened it up to noncustomers and I think 30-plus percent of our total applications were noncustomers, which was also great for us because it created other opportunities for us.”
Forgiveness has begun with the SBA last reporting on Nov. 22 that nearly 600,000 forgiveness submissions had been submitted, with about half of the $83.2 billion completed.
Over at Alpine Bank in Glenwood Springs, the bank started forgiving the more than 4,000 clients that received a PPP loan. As a community bank that serves a number of clients in the mountain resort community, officials expect that many will benefit from a second loan.
“Most of our loans are being forgiven on payroll alone,” said Menge, adding that loans are getting forgiven at a rate in the “high 90s.”
“We’ve had a few that applied a little bit higher amounts then they were probably eligible for initially because they were going off of draft financials,” Menge said. “But again, it’s been a very high success rate so far.”
Loans that aren’t forgiven or not completely forgiven become actual loans at a 1% interest rate.
But not all first-rounders plan to return for a second time. Gail Lindley, owner of the Denver Bookbinding Co., had mixed feelings. From the start, she questioned why businesses with hundreds of employees were considered small because they took funds that should have been given to truly small businesses. She’s worried about the small companies that used up their loan in the first eight weeks, which was the original rule. Her company is surviving better than most.
“We won’t try for another one,” Lindley said in an email. “This one helped us out — a lot. If the government doesn’t squander the money on large businesses, it would be refreshing.”
PPP and taxable deductions
The tax issue has been of great concern for months. In May, U.S. Treasury Secretary Steven Mnuchin had called it a “double dip” if businesses accepted the money but then took write offs on expenses funded by the forgiven loan. A Brookings Institute report put the potential tax windfall for businesses at $203 billion, with a large chunk of it going to well-off business owners.
The IRS issued a statement in November saying essentially businesses needed to pick forgiveness or deductions — not both.
Not anymore. The loans were never considered taxable income, but this time, the new relief bill also states “no deduction shall be denied” effective this year.
“The business is really getting it both ways, which means that it is totally free money, completely free money. That’s the biggest provision here,” Mercer said. “Yes, Congress is overruling the IRS.”
That’s a big deal for a small business and especially restaurants that have struggled to survive, retain workers and pay the bills through the nine months of the pandemic so far.
The write off is a relief, said Starekow, the Frisco restaurateur. Still, he’s more wary than ever about any program offering free aid. He declined to specify his PPP loan amount but according to public records, it was between $150,000 and $300,000.
“I have learned one lesson over the past year,” Starekow said, “and that is to verify first, before I trust.”