According to an SBA press release, the agency has forgiven over $100 billion in PPP loans as of January 12, 2021, and has approved forgiveness for nearly 85% of the applications that it has received. That’s great, but what should you do if your client is in the other 15%? This Dorsey & Whitney memo says that a borrower’s only recourse is the SBA appeals process, and this excerpt says that it should expect an uphill battle:
The only appeal process allowed by law is set out in the SBA regulations found at 13 CFR § 134.1204, et seq. The decision on the appeal will be made by an administrative law judge (ALJ) who will review the petition filed by the borrower, the response of the SBA, and the “record,” that is the documentation submitted by the borrower and the SBA. However, in order to obtain a reversal of the denial of loan forgiveness, the borrower must convince the ALJ that “the SBA loan review decision was based on clear error of fact or law.” 13 CFR § 134.1212.
That is very difficult to prove because courts have ruled that “clear error of fact or law” means that “although there is evidence to support [the decision], the [administrative law judge] . . . is left with the definite and firm conviction that a mistake has been committed.” Concrete Pipe & Prods. of California, Inc. v. Constr. Laborers Pension Tr. for S. California, 508 U.S. 602, 622, 113 S. Ct. 2264, 124 L. Ed. 2d 539 (1993); see also, PGBA, LLC v. United States, 389 F.3d 1219, 1224 (Fed. Cir. 2004). All of that means that thorough preparation and diligent prosecution of the appeal is absolutely necessary.
The memo reviews the appeals process, including deadlines and the matters that must be addressed in an appeal petition. The most important part of the process to keep in mind is that deadlines are very tight – an appeal must be perfected within 30 days of the SBA’s final decision on forgiveness, and it is applied rigidly. That means that even if a company expects that its forgiveness application will be approved, it needs to prepare to move quickly in case it receives an unpleasant surprise.
PPP Loans: Unforgiven? You May Be Eligible for a Tax Credit
If your client is not successful in obtaining loan forgiveness from the SBA, all is not lost! The IRS says that it may be eligible for a consolation prize in the form of a tax credit:
Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
If you received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and your request for forgiveness was denied, you can claim the ERC related to those qualified wages on your 4th quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.
This recent “Accounting Today” article provides additional details on the tax credit, which is limited to the 4th quarter of 2020.
PPP Loans: Fraudulent? Now You’re REALLY Unforgiven
The DOJ recently announced its first civil fraud settlement associated with a PPP loan. The case involved a company called Slidebelts & its CEO Brigham Taylor, and centered on allegations that the company falsely represented that wasn’t bankrupt on PPP loan applications. Here’s an excerpt from this Troutman Pepper memo that describes the terms of the settlement:
The settlement agreement states that Slidebelts and Taylor are liable to the United States for nearly $4.2 million in damages and penalties for violating the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act. Because of the compromised financial condition of Slidebelts and Taylor, DOJ agreed to accept a settlement amount of $100,000 in exchange for releasing Slidebelts and Taylor from liability for these civil claims. The settlement agreement did not, however, release Slidebelts and Taylor from any liability under the Internal Revenue Code, criminal liability, or any other administrative liability or enforcement right not specifically released in the agreement.
The memo points out that DOJ can seek maximum penalties of approximately $2 million per violation under FIRREA and $23,000 per violation, plus triple damages, under the FCA. What’s more, both incentivize whistleblower actions. That means that borrowers need to monitor compliance closely and ensure that their internal reporting system addresses potential violations of PPP loan requirements.
– John Jenkins