Month: June 2020

The Department of Justice has recently filed criminal charges against 6 individuals for participating in schemes to defraud the government regarding PPP loans.

The alleged acts of these individuals range from creating fake lists of employees and salaries to obtain a PPP loan to the misuse of PPP funds for personal use as opposed to paying employee wages and other qualifying expenses.

The DOJ, SBA and Treasury Department are teaming up to prosecute these cases and are using analytics and data mining to review millions of loans to identify potential instances of fraud. While the SBA encouraged lenders to relax some of the due diligence and underwriting standards normally used to write loans – the DOJ, SBA, Treasury and other law enforcement agencies are reviewing loan data obtained from the lenders to recognize fraud.

In general, the DOJ is finding that fraudulent applicants have overstated their payroll costs, overstated the number of employees and misled the SBA with respect to the use of the PPP for their business. This prosecution of these cases is a multi-agency effort that also includes the FBI, U.S. Postal inspector, the IRS Criminal Investigations Division and the FDIC.

The President signed in to law the PPP Flexibility Act of 2020 H.R. 7010 (“FA”), which provides several amendments to the current PPP under the CARES Act. These measures were earlier approved by the House of Representatives and the Senate . The amendments are as follows:

• The 75% Payroll Threshold – Currently the law requires loan recipients to spend at least 75% of the loan on payroll costs to qualify for loan forgiveness. The FA will reduce this level to 60% and allow borrowers to use additional PPP funds on nonpayroll costs such as rent, utilities and mortgage interest.
• Extension of Covered Period to Spend PPP – Instead of the 8-week period borrowers will have a 24-week period or until the end of 2020 (whichever comes first) to spend PPP funds and qualify for loan forgiveness. The spending period begins after the PPP loan is approved. This is intended to ensure that borrowers have sufficient time to appropriately spend PPP funds.
• Time Period for Loan Forgiveness – The FA extends the loan repayment period from 2 years to 5 years.
• Extension of Employee Rehire Period – The FA revises the safe harbor period for rehires from June 30, 2020 to December 31, 2020. This extension of the rehire period provides additional time to borrowers to rehire full-time equivalent employees (“FTEs”).
• Payroll Taxes – This provision of the FA allows borrowers who applied for PPP forgiveness to delay the payment of payroll taxes.
• Exemption from Loan Forgiveness Reduction – The amount of the loan to be forgiven will not be reduced by a reduction in the number of FTEs if the employer made a good faith effort to rehire employees and was unable to rehire qualified new employees to bring the FTE count back to pre-COVID 19 levels. This exception will also apply to employers that were unable to rehire employees based on government restrictions related to standards of social distancing, sanitation or safety.
• Unanswered Question Regarding Taxation of PPP – While forgiven PPP loans are not subject to tax as debt forgiveness, the IRS ruled that expenses paid with PPP loan proceeds are non-deductible and thus subject to taxation. The FA did not address this issue. While many believe the intent of Congress was that loan forgiveness would be non-taxable, the legislation did not explicitly state this. Without a legislative change, the related expenses paid with PPP loans will not be deductible.