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The window to use PPP loans begins to close this week—but big issues remain unresolved

May 28, 2020, 7:00 PM UTC

As the window for some small businesses to use funds from Paycheck Protection Program (PPP) loans is starting to close—the first loans’ eight-week forgiveness period will be up at the end of this week—new interim rules issued by the Treasury and Small Business Administration (SBA) still leave plenty of questions up in the air.

The new guidance—in the form of two final interim rules issued after 10 p.m. ET on the Friday before Memorial Day weekend—clarifies and further outlines the recently released forgiveness application, parts of which have caused some confusion.

For those like Nate Whitehouse, cofounder of craft cocktail company Drifter Spirits, the shifting guidance for the PPP loan (which his company received on May 1) has been “confusing,” and the forgiveness process now looms for his business—which has effectively been stopped in its tracks by shutdowns. Drifter Spirits employees go “door to door” to pitch their brands to restaurants, bars, and hotels, and with shutdowns in place, business has just about dried up.

The new guidance issued Friday didn’t change rules that businesses must spend 75% on payroll, or the time frame (eight weeks) to use funds—a frustration for those like Whitehouse. “Our market is still not reopened. It’s put us in a position where we’re able to help keep some of our employees, but they can’t really do anything either or their normal jobs,” he tells Fortune.

Questions remain

The new interim rules released Friday (one for lenders and borrowers and the other addressing more specific line items on the forgiveness application) did clarify several points, but failed to fully answer who is actually eligible for loans as well as several points about getting full forgiveness.

While loans of more than $2 million were specifically targeted for review, the SBA noted in the new rules that loans “of any size…at any time in SBA’s discretion” could be reviewed and set up detailed processes for how the SBA would review loans. Other provisions in the new rules built on the ability of businesses to avoid having forgiveness reduced if they documented an attempt to rehire employees, but noted that businesses must now alert state unemployment offices if the employees declined to return to work.

Yet among other questions, Eric Mitzenmacher, partner at law firm Mayer Brown, points out that the new guidance seems to create “possible issues around the extended time frame” for the SBA to make “decisions, [which] might languish for a period of time that could be up to 150 days after the lender obtained the completed forgiveness application.” The issue might need more clarity, he notes, but the flexibility in the timeline for reviewing loans might push some decisions about forgiveness out beyond the six-month deferral window for repaying the loan—creating some “questions about how lenders and borrowers should handle repayment.” The new rules also state borrowers would be given the chance to appeal the SBA’s determination that they were ineligible, but said there would be further guidance on that later. An SBA spokesperson did not specify when further guidelines would be issued, but said the SBA and Treasury will continue providing guidance to lenders and borrowers.

A big pain point for many small businesses in recent weeks has been whether or not they are eligible for the loans based on certification of economic necessity. After news broke that dozens of publicly traded companies and large chains had received funds, new guidance was issued that confused many borrowers about their eligibility for the loans if they had access to other sources of liquidity.

The new PPP interim rules do not provide any further clarity about eligibility. “We still need guidance on ‘adequate liquidity,’ whatever that means,” argues Glen Birnbaum, CPA at Heinold Banwart based in Illinois. The rules note that any loan is subject to review at any time—potentially up to six years after a loan is forgiven or repaid, lawyers believe (that’s how long borrowers are required to keep documents relating to their loan, the new rules said).

While Mayer Brown’s Mitzenmacher doesn’t anticipate that will be a huge concern for most businesses (he expects reviews will likely take place prior to forgiveness), the SBA has established the authority to conduct reviews down the road, when many businesses may be “forging ahead, thinking they have an answer [about forgiveness],” he says. “And later, a year or two, three, down the road, while they’re still trying to recover from this, [they’re] hit with a claim from the government and either need to pay that directly or need to defend themselves.”

And while firms like Drifter Spirits say they are comfortable that they’ve met eligibility requirements, “in an uncertain regulatory environment like this, there’s always concern,” says Whitehouse. To stay afloat, the business has tried to raise additional funds through an equity raise and online crowdfunding: “We’re raising $500 here, $1,000 [there] from a buddy or relatives or somebody who found it online,” says Whitehouse.

But the new interim rules “unfortunately didn’t provide any additional clarity around eligibility. The existing confusion over the economic necessity certification and other issues remains,” Andrew Kugler, a partner at Mayer Brown, says.

Smaller questions

Some smaller questions center more specifically on whether sole proprietors and other businesses might be able to even get full forgiveness without rounding payroll figures to meet the full 75% payroll cap, and others like Birnbaum point out there is still confusion around some payroll issues for “owner employees” of an S corp.

Meanwhile, lenders may have their own set of concerns. As part of the new rules released Friday, if the SBA determines a borrower was ineligible, the lender that originated that loan won’t get its processing fee—a possibly challenging situation for some lenders who followed SBA rules for determining eligibility, but “incurred costs [or] potentially diverted resources from other operations in order to essentially do a public service, and through no fault of [their] own, is now uncompensated for that activity,” notes Mitzenmacher. The Independent Community Bankers of America wrote in a letter sent to policymakers Wednesday that the new rules issued Friday were “more than a source of disappointment” and that they “[open] up a new source of liability risk for community bankers who have acted in good faith.”

Despite lingering questions, CPAs and lawyers did cheer several additions, such as allowing businesses to include hazard pay and bonuses in eligibility; more guidance on how to calculate full-time equivalent employees; examples of how incurring or paying utilities (which include electricity, gas, water, transportation, telephone, or Internet) should be more flexible time-wise; and further flexibility around when businesses can choose to start their coverage based on an alternative pay period.

“There was some loosening of things, but in general, the things that have been really bothering borrowers, and are the subject of a lot of discussion in Congress, remain the same,” Kugler points out. “The big issues are still unresolved.”

Yet small businesses may be getting a few more answers to those lingering questions—not from the SBA but from Congress. Both the House and the Senate have proposed separate bills to amend various aspects of the program, centered on extending the time frame in which businesses have to use the funds (various periods have been proposed, from 16 weeks to 24 weeks) and altering the 75/25 rule on how businesses must allocate payroll versus non-payroll expenses. On Thursday, the House nearly unanimously passed a bill to amend aspects of the program, but it still faces passage in the Senate.

In the meantime, lawyers are advising their clients to prepare as much documentation as they can with the rules they have to go on right now. “Plan for no changes to the program; figure out ways to maximize forgiveness assuming nothing changes,” advises Mayer Brown’s Kugler. And then he adds, but be “able to quickly pivot if the rules do change.”

Update, May 29: This article has been updated with a comment from the Small Business Administration.

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