Who “CARES”? The Feds Do


If you are a small business owner who struggled to make financial ends meet during the COVID pandemic, chances are you may have benefitted from the Paycheck Protection Program (PPP). The PPP is essentially a loan program implemented by the federal government with the passage of the CARES Act stimulus package, and is administered by the U.S. Small Business Administration (SBA). This federal stimulus was designed to provide economic relief to businesses that sustained drastic losses in revenue during the pandemic. Qualified small businesses were able to obtain SBA-backed low-interest loans in amounts up to 2.5 times a company’s monthly payroll costs on the condition that loan proceeds were used to cover recurring payroll (the primary purpose of the stimulus), rent, interest, and utilities costs. Perhaps most notably, businesses issued PPP loans are permitted to apply for loan forgiveness as long as the business retained its employees and kept wages stable and any forgiven loan amount is not considered taxable income.

Naturally, many small business owners jumped at this unprecedented opportunity to avail themselves of this $950 billion program. Time was of the essence to get funds out to struggling businesses hoping to stay in the black and avoid employee layoffs. To a certain extent it worked, though other provisions of the CARES Act that expanded unemployment insurance compensation benefits may have complicated the goal of avoiding labor shortages. But as we approach the two-year mark of when the CARES Act was passed, it is vital for business owners awarded PPP loans to keep in mind the following:

Don’t Forget to Apply for Loan Forgiveness

Getting a low-interest loan in the realm of 1% is one thing, but it is certainly better to have the entire loan forgiven. You can submit your forgiveness application to your PPP lender or the SBA directly. Many lending institutions provide a straightforward way for businesses to apply for direct forgiveness, and they will even send it to the SBA for a decision on the borrowing company’s behalf. To qualify for loan forgiveness, small business owners awarded PPP loans must:

  1. Ensure all issued PPP funds have been exhausted – as long as the awarded funds have been spent, companies can apply for loan forgiveness at any time up to the maturity date of the loan.
  2. Ensure PPP funds were used for “eligible expenses” (more on this later) – at least 60% of the PPP loans must have been used to service payroll. Generally, the more PPP funds were used on paying payroll, the better chance there is at complete loan forgiveness.
  3. Keep meticulous records – this applies for both payroll and non-payroll expenses that were paid with PPP funds. Be sure to properly calculate each of these costs and save your work in the event of an audit.

Don’t Put Yourself or your Business in Criminal Jeopardy

Back in 2020, the SBA moved quickly to implement the PPP loan program. In applying, businesses were largely permitted to self-certify the company was qualified and had the requisite financial need for PPP support. In August 2021, a study released by the University of Texas Austin revealed that up to 15% of the PPP loans issued may be fraudulent – stated numerically, about $76 million of the $800 million in loans issued. Examples of fraudulent conduct include falsely inflating payroll costs and the number of employees to increase PPP loan eligibility; misuse of the PPP loan proceeds for ineligible purposes; submitting fraudulent PPP loan applications in the name of fictitious or defunct businesses; and issuing false statements to financial institutions in an effort to defraud the U.S. government.

As former Department of Justice attorneys, we know reports like this do not go unnoticed. As a result, we have seen a more concerted enforcement effort by federal agencies like the SBA Office of the Inspector General, the U.S. Department of Treasury, and the U.S. Department of Justice. This crackdown has spawned thousands involving pandemic program fraud investigations, with more than 150 successful federal prosecutions for crimes like bank, mail and wire fraud, identity theft, and federal program fraud. Federal penalties are stiff, are directly related to the amount of funds fraudulently obtained, and restitution must be made on most occasions.

The recommended course of action is to ensure your business has robust internal controls and a strong compliance program that is consistent with the applicable state and federal regulatory framework. This is particularly important when a business has obtained the great financial benefit of a PPP loan. Keep accurate records and retain them. Ensure mathematical accuracy on any forms or written submissions made in conjunction with PPP loans. Follow the conditions and mandates of the PPP or other applicable federal program, and make sure you use the funds for the statutorily-mandated eligible uses – payroll, rent, interest payments, certain debt service, and/or utilities. As one great naval officer once told us, “Before you think great thoughts, consult the rules.”