Are other uses of PPP loan permitted

CARES Act Commentary
Written by Paul Polito, CPA
(Author’s comments in italics)

A lot of people are asking “what else can I use PPP Loan funds for?”
There is a simple answer to this question and, a not so simple answer.

The Simple answer is “payroll costs” as defined in the Act and the Interim Final Rule published on April 2, 2020 as rent, utilities, and interest on secured debt also defined in the CARES Act.

Here’s an argument for more…, the “not so simple answer”:

On May 27th, 2020, President Trump Signed the CARES Act into law.

In Section 1103 of the CARES Act titled “Paycheck Protection Program” amended Section 7(a) of the Small Business Act.

Congress, knowing that this money needed to get into the economy rapidly, chose an existing government loan structure with an existing infrastructure and pipeline.

In Section 1102(F) “Allowable Uses of Covered Loans”, the Act states in F(i)”In General.—During the covered period, an eligible recipient may, in addition (emphasis added) to the allowable uses of a loan in this subsection, use the proceeds of the covered loan for—

  1. payroll costs;
  2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  3. employee salaries, commissions, or similar compensations;
  4. payments of interest on any mortgage obligation;
  5. rent (including rent under a lease agreement);
  6. utilities; and
  7. interest on any other debt obligations that were incurred before the covered period.

Section 7(a) is the typical Bank Loan program for small businesses that cannot obtain a typical bank loan without the SBA guarantee.  The need to be rejected for alternate credit was waived by the CARES Act.

The Small Business Act in Section 7(a) titled “LOANS TO SMALL BUSINESS CONCERNS; ALLOWABLE PURPOSES; QUALIFIED BUSINESS; RESTRICTIONS AND LIMITATIONS—The administration is empowered to the extent and in such amounts as provided in advance in in appropriations Acts to make loans for plant acquisition, construction, conversion, or expansion, including the acquisition of land, material, supplies, equipment, and working capital, and to make loans to any qualified small business concern………

Clearly the Small Business Act had to be amended to include such things as operating expenses like payroll costs, rent and utilities.  Those simply were not provided for in the Act before the PPP “amendment.

Many clients are concerned about getting in trouble for using the proceeds from a PPP loan for anything other than the “covered costs” (payroll, rents, utilities, interest).  What started out as an up to 10 year 7(a) loan with a maximum rate of interest of 4% with a special forgiveness feature if used for Payroll and other covered costs turned into a very restrictive program focused on just the amending feature, namely Payroll costs and the others.

My question (and this question is asked by a few attorneys I greatly respect) “How does the SBA administrator have the right or the power to make such significant changes to the law as passed by Congress?  Clearly SBA has administrative authority… but to virtually change a new Loan program probably intended as a lifeline to US small businesses into a grant program for retaining employees only?”

The SBA created the “Interim Final Rule” on April 2, 2020.  The rule does not mention the other costs alluded to above as detailed in the Small Business Act.  The certifications the borrower made when applying for the loan are:

All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program Rule.

To the extent feasible, I will purchase only American-made equipment and products.

Wait a minute, this sounds like the items listed in the Small Business Act but conspicuously missing from the “Interim Final Rule”

The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments as specified under the Paycheck Protection Program Rule; I understand that if the funds are used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.

I find it hard to believe that if a borrower used the funds for other than payroll, rents, utilities, and interest and, used the funds for purposes described in the Small Business Act described above, and, to the extent possible purchased American made equipment and products, and most importantly, paid the loan off within the agreed upon terms, that the government could successfully assert anything like fraud against the borrower.

Many restaurants may find themselves in this quandary:  In order to re-open under the “new normal” investment in infrastructure, fixtures, menus and other non-payroll items might need to be made before the restaurant can re-open.  Suppose a restauranteur obtained a PPP loan for $1 million, spent $300,000 on remodeling, an electronic ordering system, a delivery vehicle, etc. then brought the crew back with the other $700,000 for payroll, would he have violated the provisions of the CARES Act?  Said Restauranteur might be asked to repay the loan immediately instead of within the 2 year term, but I doubt that the SBA would want to take such a case to court.



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