Small businesses struggle to assess whether they are eligible for PPP funds

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Some small businesses struggle to determine if they are eligible for loans from the recently reopened Paycheck Protection Program, especially those that are affiliated with other businesses.

The program, which is overseen by the US Small Business Administration and the Treasury Department, reopened in January after Congress in December authorized its relaunch with $ 284 billion in funding. The SBA has approved $ 125.75 billion in loans since the February 15 second round. Since the initial launch of the PPP program last spring, it has disbursed $ 648.18 billion to businesses.

This time it’s target companies hardest hit by the pandemic. The program sets aside funds for loans to businesses with 10 or fewer workers, as well as loans of $ 250,000 or less to businesses in low and moderate income areas. The loans, which are repayable if applicants meet certain criteria, are based on the size of a company’s payroll and available to first-time and second-time borrowers. Businesses must submit an application by March 31. There were about 31.7 million small businesses in the United States last year, according to the SBA.

The rules for the second round of PPP differ from the first and now exclude SOEs. Businesses only receive a second loan if they can demonstrate that their turnover fell by 25% during a quarter in 2020 compared to the period of the previous year. The requirement did not exist during the initial execution of PPP, which ended in August.

Many small private businesses struggle with SBA rules regarding membership and criteria for measuring revenue declines, according to accountants and business advisers. Affiliates are generally companies that have common shareholders or that are controlled by the same entity. Entrepreneurs often run more than one small business.

In the absence of further guidance from the SBA, a company could interpret that the income test should be applied to itself and its combined subsidiaries, said David Merzel, director of the accounting firm Kaufman, Rossin & Co. Combined entities meet the requirement, it appears that every affiliate applying for the loan would initially be eligible, he said.

“There are a lot of unanswered questions from the SBA,” Mr. Merzel said. Last month, the agency gave guidance on how to calculate eligibility for a second PPP loan for a borrower with affiliates, but accountants said it was still too broad.

For companies that share ownership, it’s unclear which of them might qualify for a second loan, especially if a subsidiary such as a management company or holding company received the first loan, Lisa Simpson said, vice-president of the American Institute of Certified Public Accountants. , a professional organization.

The uncertainty makes it more difficult for companies, some of which are in serious need of funds, to know if they are eligible. It could also present a problem for taxpayers who fund the program and potentially help businesses that don’t particularly need it. “That’s not what the program was supposed to do,” Merzel said.

Small businesses struggled with vague membership rules in the first PPP program. In some cases, affiliated entities were unable to apply if they had a combined number above a threshold of 500 employees, said Jack Rybicki, director of accounting firm CliftonLarsonAllen LLP.

It is not clear whether the SBA will address affiliate concerns before the program expires. A spokeswoman for the agency did not directly comment on questions about membership rules, but said lenders, who process PPP applications for businesses, can provide general guidance.

The program’s income criteria pose additional challenges for potential borrowers. Some small businesses are not sure which methodology to use to determine the decline, such as a cash-based accounting approach or a different method, said Ben Richmond, US national director of the accounting software company.

Xero Ltd.

The SBA has asked companies to apply the same methodology to the two quarters they compare.

Owners who think their business is eligible are also concerned that the SBA may change the rules, which she did several times during the first round of the PPP, Rybicki said.

Meanwhile, some companies that have received $ 2 million or more from the first round in recent weeks have had to justify why they needed the funds. Businesses are now waiting to see if the SBA will cancel their loan.

O’Brien Industrial Holdings LLC, a multi-business owner based in St. Louis, Missouri, received a second PPP loan earlier this month and apologized to the SBA for the first, the CFO said. Jim Spellmeyer. The company, which hasn’t had any issues with membership rules, hopes to regain a foothold with the funds, Spellmeyer said.

O’Brien reduced its workforce by 25% to around 100 in the second quarter of 2020, but was able to rehire some workers after the business improved, in part thanks to the first PPP loan he received. “It helps to make up for some of the ground that we have lost,” he said.

Write to Mark Maurer at mark.maurer@wsj.com

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