Many Sonoma businesses missed out on initial loan program

Encouraged by the success of their peers in obtaining forgivable loans in the U.S. Paycheck Protection Program, interest in the third and likely final round among small businesses in Sonoma is high.

The initial roll out of the program was not clearly coordinated, say some local tax specialists, and many small businesses who needed the funds were unaware that they could qualify for the program.

On July 4, President Trump signed a bill extending the application deadline for loans to Aug. 8, up from the earlier deadline of June 30. And months after the passage of the original legislation, the details of Congress’ relief package are still being settled.

“PPP was pushed out hard and fast,” said Mary Piasta, a partner at the downtown Sonoma law firm of Haeuserm Valluzo & Piasta LLP. As businesses scrambled to claim the money, it quickly ran out.

“I have clients who are in the agriculture business who had no idea that this was something that could benefit them,” she said. “By the time they wanted to do it, it was too late for that first wave of funding.”

Though Congress subsequently allocated additional funding for the program to allow more businesses to apply, some business owners were confused about how they could use the funds.

“The intent of Congress in drafting the PPP was to keep people on their existing payroll, rather than having them file for unemployment or other government assistance,” said Nate Lamar, a Sonoma tax manager and certified public accountant.

“Even today, some businesses are struggling with how much is going to be forgiven, and what are tax issues related to the money taken,” said Piasta.

Over recent months, Congress has changed the spending requirements on the loans. Originally, businesses could be eligible for loan forgiveness if they had spent at least 75 percent of their loans on payroll. However, the original legislation stated that businesses only had eight weeks, starting from early April, to spend their loans. This put many businesses in a bind, since Congress’ timeline was not in line with the slow and phased re-opening of counties across the country which had not given businesses the green light to open their doors.

In early June, Congress passed a bill extending the timeline to spend the PPP loans from eight weeks up to 24, and lowering the threshold on payroll spending to 60 percent (down from 75 percent), giving businesses more room to breathe and plan.

“Probably the most common feedback I hear is that business owners are really not sure how to use the loan in such a way as to achieve 100 percent forgiveness,” said Lamar. “The rules have changed so many times, and it’s difficult to keep up. Some have even returned the money, having decided it was more trouble than it was worth. Others are confused about when and how to apply for forgiveness,” he said.

And even those businesses that are eligible for partial- or full-loan forgiveness still need to be aware that expenses paid with forgiven loan amounts are not tax deductible. This means that a business that spent all its PPP loan on payroll and was forgiven the entire face of the loan, may see an increase in their taxes paid that year, since that payroll spending cannot be deducted from their revenues.

“A profitable business will almost certainly incur additional tax expense due to forgiven PPP loans,” said Lamar. “To the extent that PPP funds are used and forgiven, non-deductible expenses are created, which has a similar character to adding income.”

As businesses anticipate and plan for re-opening, it increasingly seems that they will need to manage many moving parts. Alongside getting customers back in the door and creating mitigating measures that will prevent employees and clients from getting sick, business owners will need to carefully plan their finances as economic uncertainty and the inability to plan for the future continue to cause stress.

As further adjustments to the program are anticipated in the future, business owners are wondering what this could mean for them and how they could best prepare.

In this situation, Lamar says that “the best thing that business owners can do is to consult with an expert. Many in the accounting and legal professions are following the PPP developments closely, so good advice is out there.”

Piasta and Lamar agree that despite the confusion that the PPP roll-out may have caused, applying for a loan is always a good idea.

“The worst-case scenario is that a business will have a 5-year loan at 1 percent, which is about as cheap as borrowing gets,” said Lamar.

“If they can use the money, go get it!” said Piasta.