Business Bites 128: The Pitfalls of PPP & EIDL of Which You Need to be Aware

The Pitfalls of PPP & EIDL of Which You Need to be Aware

Episode 128 on the Business Bites Podcast

The Gist Of This Episode: Are you a business owner who has taken advantage of PPP and/or EIDL, or are you considering it? Listen to this episode first! Rachel sits down with her own CPA, Andrew Jordan, to discuss updates and some of the pitfalls to using these services that you may not be aware of.  

 

What you will learn:

  • why the most important thing you can do this year is spend time learning about these programs
  • how the EIDL affects distributions and who the effects may apply to
  • why it’s a good idea to wait before applying for loan forgiveness
  • what loophole the IRS found in the CARES Act and how it can affect you
  • and more!

Expand To Read Episode Transcripts

Rachel Brenke:
Here we are again, another episode regarding COVID, PPP, EIDL, but I promise it’s good quick information that you need to know to the point action items that you can take. If you are a business owner that has taken PPP and or EIDL or you’re considering doing it, we’re coming up against some tight deadlines, there’s some pitfalls you need to know. So come on and keep listening.

Speaker 2:
Welcome to The Business Bites Podcast, the podcast for busy entrepreneurs. Whether you’re an online entrepreneur or seeking after brick and mortar success, this podcast brings you quick bites of content so you can learn and grow anywhere you are. Now here’s your host, Rachel Brenke.

Rachel Brenke:
Hey friends, Rachel Brenke. Before I get into the episode, wanted to give a heads up on a trademark promotion that we’re doing over at Eden Law. Eden Law is my law firm. We do a lot of work protecting your brands, their trademark registration, copyright registration, anything related to that. So FYI, in the month of August through August 31st, we are offering $500 off our flat rate trademark application packages. Just when you go over, submit through the contact form, let them know that you came from The Business Bites Podcast and we’ll get that $500 taken off for you and get your brand protected.

Hey guys, welcome to another episode of The Business Bites Podcast. I am your host Rachel Brenke and I am joined today with my own CPA, Andrew Jordan of Andrew Jordan CPA Services. As always, we’re going to have everything linked on the show notes page, but I’m excited for us to chit chat today about PPP and EIDL. Andrew has done a phenomenal job of keeping me up to date since I have also partook in these programs, but he contacted me to let me know that there’s been some big changes and some pitfalls we had to look for. So I yanked him onto this podcast. Andrew, thank you for coming on.

Andrew Jordan:
Thanks for having me, Rachel.

Rachel Brenke:
I know you’re super busy dealing with people like me, but let’s go ahead and dig in first and talk a little bit about the EIDL, just a tidbit of what it is and what we’re looking for.

Andrew Jordan:
Yeah, so the Economic Injury Disaster Loan is what that stands for. And it’s important to know that this program has actually been around for years. Anytime there’s a big national disaster, the government will make these loans available. And so they just blanket made them available to businesses during coronavirus. But this is important to know because they bolted onto this existing program. It’s not something they designed specifically for the CARES Act, and so that’s that gotcha that we talked about, you and I before, which is this, the EIDL program is designed to help businesses get back after a tornado or a flood or some natural disaster. So it’s a 30 year fixed interest rate loan. It’s really low interest rate. So a lot of people saw this and said, “Man, this is great. I have 30 years to pay it back.”

But the gotcha here is you cannot take any distributions until you have repaid the entire thing. And that this is pretty locked down, no bonuses, no loans to owners, nothing that could benefit an owner, can’t distribute any assets until you fully pay the thing back. So a lot of people got this loan and they didn’t read the fine print, because this was when everything was going crazy, no one was talking about this and they thought they had 30 years to pay back this loan. And for a lot of businesses, they survive on some of those distributions. And so not being able to take distributions can be a really big deal. Now, if you’re a sole proprietorship, we think you’ll be able to take out distributions. But if you’re any other kind of business, if you’re a corporation, for example, we have a lot of S-corporations, small businesses in America, if you tried taking out distributions because you’ve always done that, you could run afoul of these rules and you could potentially be in big trouble.

Rachel Brenke:
So what does that mean? If you didn’t realize all that and you’re sitting here and you’re going, “Oh my gosh, how does one navigate that? Because what I’m hearing is I can’t pay myself.”

Andrew Jordan:
Yeah. So if you’re saying S-corporation, you can still pay yourself your normal wages. So you can still do that. But a lot of S-corporations, you try and keep your wages pretty low and then you pay distributions and that’s an important part of your family’s income. Well, all of a sudden those distributions, you can’t do them and you can’t just get around it again by paying a bonus, for example. So it’s pretty well locked down. That is a big deal for a lot of people, especially because a lot of people weren’t aware of it.

Rachel Brenke:
So the public policy reason for that would be so people aren’t just pulling these loans and paying themselves and going buying Porsches, right?

Andrew Jordan:
Exactly. Right. Yeah, that’s what they’re trying to avoid. And so you have a couple of options of what you can do, you can always repay the money, because as soon as you repay the money, then you can go back to normal. But another option, and this is what I’d encourage people to do if you can, hold off on distributions for sure. If you’ve already done some, stop doing them. There’s definitely a chance and there’s talk of Congress fixing this or SBA fixing, or someone in the government fixing this and making it so you can do those normal distributions you’re used to doing, because this wasn’t an intended effect, again, this is just a bolt on… The government looked around and said, “We have this existing program, let’s use it to get money to people.” This is an unintended consequence so they could fix it but there’s no guarantees of that.

Rachel Brenke:
So what if you’re someone sitting here and I think you’ve already addressed this, but they’re an LLC. So obviously they don’t necessarily identify as sole prop, even though IRS sees them that way. And they’re obviously not an S-Corp. So they’re either not an LLC that’s taken S-corp election or they’re not a corporation that has elected to be taxed as an S-Corp. Those people sitting there with that LLC are thinking, “What do I do? I don’t normally W2 myself.” So is that all distribution, how do they navigate this?

Andrew Jordan:
Yeah. So it’s a really good question. If you’re a sole proprietorship, so you’re not paying wages, then all you can take from your business is distributions. It is my understanding, and I’ve checked with other CPAs about that, that those people are probably fine to take distributions because even though their distributions that the government is going to view them differently. Now that being said, you better check with your own tax advisor and in some cases, possibly your attorney, because this thing could get dicey pretty quickly. Again, this wasn’t anyone’s intention and the government who set this up, it just a matter of how it comes down to enforcement.

Rachel Brenke:
Which is a good side note. If you need a CPA, Andrew Jordan. If you need an attorney, Rachel Brenke.

Andrew Jordan:
It’s good to remember, and I want to start out too, because we’re going to talk about PPP and EIDL. Guys, if you’re listening to this, I know if you have a business you’ve already been through the ringer and the last thing you needed was trying to keep up with these multiple government programs that change all the time and it’s exhausting. But the minutes you will spend on these programs and learning about them are probably some of the most important things you’ll do for your business this year. So this EIDL, if you remember back in February or March, it was like every business was going to get a $10,000 grant, just like every American got $1,200. You remember that?

Rachel Brenke:
I’m laughing because I’m still a little salty about the change.

Andrew Jordan:
Yeah, no, I am too because it hurt a lot of people who were thinking they would get $10,000 really quickly. The program ran out of money. It was totally suspended for about a month over the spring. So it’s been a roller coaster ride. A lot of people ended up getting $1,000 per employee. So if you’re sole proprietorship, maybe $1,000. So the other thing these two programs interplay, so if you got even say that $1,000 and you also got a PPP, people didn’t necessarily realize you don’t technically have to repay that $1,000, that’s true. But it will reduce the amount of forgiveness you’ll get on PPP by $1,000. So in effect, you don’t get to double dip is what they’re trying to keep you from doing. But it wasn’t necessarily clear to people you’re probably going to have to basically repay that.

Rachel Brenke:
Yeah. And I’m glad you brought that up because that’s one of those things is I had submitted for the EIDL grant when they were 10,000, but by the time they got through applications, it was like scraping the barrel. And many people were in my inbox going, “But I applied.” I’m like, “I don’t know what to tell you.” And then there was a whole host of issues with PPP. As many of you all probably saw, there was round one and then there was round two. And so let’s talk a little bit about PPP here because this recording is in August, and so all the PPP stuff was roughly, I know my distribution was about beginning of May. So we’re talking March, April timeframe. We still have a little bit to go in the time period until we have to apply for forgiveness.

Andrew Jordan:
Yeah. And what I would tell people, and we’re recording this early August and things will change I’m sure by the time this gets published, but don’t rush to do the forgiveness piece. And there’s a couple of reasons for that. One is they’re not actually ready as of when we’re recording this to process forgiveness in the first place.

Rachel Brenke:
Surprise.

Andrew Jordan:
I’ve gotten a surprising number of people are chomping at the bit. If you’ve got even a 50,000 PPP loan, that’s hanging over your head at this point and you want to get the forgiveness and I get it. But what the government’s talking about right now, and they’ve been talking about this for a long time, but it’s gaining traction is automatic forgiveness under certain dollar amounts. So the most popular I’ve heard is 100,000 or 150,000 because that only represents a small percentage of the dollars given out in the program but it’s a disproportionate number of the people who got the program. And so they would just eliminate so much headache, especially for small businesses and just blanket forgive it.

And so we don’t know what that would mean or exactly how that would work. But the last thing you want to do is rush to do the forgiveness. So also as far as timeline goes on this, originally this was eight weeks. They extended it to 24 weeks from when you got the money. So you got your money, let’s say early May, you got 24 weeks. That’s almost six months. That’s the forgiveness period to spend the money. And then after that, you have a further 10 months to do your forgiveness piece. Not that I’m encouraging you to wait that long, but you have almost a year and a half plus from when you get the money until you have to do the forgiveness piece. And some banks are already sending out emails and it’s kind of freaking people out because they’re starting to get their stuff together. Just because your bank sends you an email doesn’t mean you have to do this right now. Wait and see if you would qualify for the automatic forgiveness.

Rachel Brenke:
Yeah. I was actually just talking to my own clients in the firm yesterday based on your advice here. And I always say talk to your CPA, but this is what mine had told me, just from a practical standpoint of just waiting to do the application because my fear would be if you rush and do it now, and because they’re not prepared, it ends up entangled in this denial of forgiveness. It’s harder to unpack and unravel all of that than just sitting and waiting. And I’m one of those you all, Andrew’s talking to me and he’s like, “You wait, just wait just wait,” because I’m chomping at the bit because I don’t like that kind of stuff hanging over me. But to me it would be just better in the end to wait to see what happens with the automatic forgiveness, it would save you time and money and you just don’t want to get caught in a sense… Who knows, if you get a rejection for forgiveness and then you try to appeal, it just becomes a whole thing.

Andrew Jordan:
Yeah. It becomes a whole thing. And Rachel, you sound a little bit like my therapist there. You have to sit with the discomfort. Sit with the discomfort for a little bit here and that’s the best thing you can do, for sure. Because of the way they’ve changed this, your forgiveness is either going to be really, really easy in which case that’s going to be most people, or it’s going to be really hard. And if it’s really hard, you should not even attempt to do it yourself. You need to get with a professional, but it’ll be one of the two.

Rachel Brenke:
And you know what we say that a lot on this podcast, but this is one of those areas also in addition like contract drafting that I would not do on your own, this is why I have this man right here, just because… I’m smart enough to figure it out but also I don’t want to deal with it. And it’s his job to stay on the up and up with all of that. So definitely just find somebody and I will be linking FYI, all of this information as well as updates as things come out. The show notes page for this episode is rachelbrenke.com/epi128. And so I’ll also be linking to some other episodes that we’ve done in the past on this subject matter if you want to go back.

Most of those are kind of out of date now since things have been changing so much but there’s still some good nuggets and like I said, updates as well. Cool.

Andrew Jordan:
Sounds awesome.

Rachel Brenke:
All right. Did we cover everything? What else do we have left? So PPP forgiveness, wait on that. Don’t freak out. EIDL, obviously don’t take distributions until you’re able to pay it back in full. That’s the two big takeaways I’ve gotten so far. Do you have anything [crosstalk 00:12:42].

Andrew Jordan:
That’s it. Those are the big things and I’m glad we covered them both.

Rachel Brenke:
Yeah. Good. Well, nice, quick and easy episode. You guys know that I try to get in and get out on it. I definitely encourage you, especially since this is August time period. You’re probably not going to be listening to this later on since it might be still information later, but get your stuff set up for next year… Oh, because, and this is a question to you, Andrew, how is all of this going to impact our taxes next year?

Andrew Jordan:
That is a super good question. So one of the gotchas that happened is Congress actually wrote into the CARES Act, it’s plain as day in the CARES Act this money for PPP specifically, if you get it forgiven, it will not be taxable to you. And that’s in the law, but the IRS came along and they found a loophole and they said, “Okay, well we won’t tax the forgiveness, but we won’t allow you to deduct as an expense, any expense you paid for with the forgivable money or forgiven money, therefore if you got a $50,000 PPP loan, you spend some on business expenses, you got a forgiven, your net income for taxes just went up $50,000.”

And Congress is pretty annoyed about this honestly, there’s been some really great soundbites you can listen to because this is exactly what they wrote into the law they did not want to have happen. It’s not the intent at all, but it’s the position IRS has taken and it’s IRS’s is official position as of beginning of August. I think it has a pretty good chance of getting fixed because people on both sides of the aisle are pretty unhappy about it. And it’s going to be a big problem for a lot of businesses. You get $100,000 PPP loan, plan on a $30,000 extra tax bill next April, that sucks. It sucks for people.

Rachel Brenke:
You’ll be hearing me crying about that time.

Andrew Jordan:
It’s bad. So I think there’s a really good chance it gets fixed, but you should know when we’re doing estimates for all of our clients, we’re calculating them. We’re telling them, “Here’s what we calculated if you get a forgiven and IRS fixes it, and here’s if IRS doesn’t fix it. And you need to know both numbers.”

Rachel Brenke:
So where we’re sitting right now is PPP ship basically has sailed as far as being able to take a bite of that apple. EIDL is still active, correct? So those listening can still get that.

Andrew Jordan:
Yeah. And even PPP, as of when we’re recording this, there are a few days left to apply for it. It still has a hundred plus billion dollars in it. So politicians are talking about extending it, maybe making it available, doing another round of it and making it with different rules, whole different set of rules, so it’s possible some more PPP comes along. EIDL though, yeah, is still active through the end of the year, although it’s entirely possible that goes away if they run out of funding again.

Rachel Brenke:
Right. So those were the big two things that we’ve seen this year to help small businesses. What are some other recommendations? I have one business in a city and then have another business in a County over here, and I’ve seen they’re vastly operating differently with this. The city is pumping out grants, the County is like, “I’m not giving you a dime.” It’s been this whirlwind of all these smaller jurisdictions are left to do what they want. Obviously it’s because it’s their money. What would you recommend though if some people are standing there going, “My County, my city, my state is not helping me at all. Where else can we look?”

Andrew Jordan:
Well, the thing I would say is it’s hard to find those programs and there are a lot of States that are doing programs. They’re not very well advertised. So it’s worth spending a few minutes and looking up in your state, especially if we’re talking about businesses that are completely shut down, gyms, theaters, those kinds of ones, even restaurants are impacted a lot. Those are the ones that the grants and things are mainly available too. So if you’ve been significantly impacted, definitely check your state, city and County and do some digging, because they’re hard to find. But beyond that, depending on your situation, if your business has really been tanked, there are some nonprofits that have grants and funding specifically available. I know our local community foundation, they have a bunch of money they’re giving out to help, not nonprofits even necessarily, but in some cases, businesses.

Rachel Brenke:
I know our local chamber of commerce has been doing a lot. The city was trying to do it as well, but some of the required criteria was how much business have you lost? How much revenue have you lost? And so that’s good. I think it’s good that they have qualifiers that way as well. So you all listening, just make sure, don’t feel like you’ve missed the boat, a couple more days on PPP, EIDL, perhaps for the end of the year. But if you’re really thinking about doing it, don’t delay and then check with your local jurisdictions to see what’s available. I’ll try to see if I can source some other sources, just give you guys some examples of what to poke around for. I’ll stick that onto the show notes page. Andrew, anything else you can think of that business owners should keep in mind right now? I guess we’re just in a holding pattern, really.

Andrew Jordan:
I have some clients that were completely shut down for several months and they’re doing awesome now. I have some clients that weren’t effected a lot and they’re having maybe their best year ever. So I know for a lot of people it’s been really, really tough and some people are still shut down. And so I don’t want to make light of that, but the things that you talk about on this podcast all the time, by applying those… Those good pieces of advice work in any economy. And so when the economy is down and when things are tough, there are still a lot of opportunities to be had. Maybe it’s by pivoting, maybe it’s by changing something, but from what it’s worth, from my vantage point, and we work exclusively with businesses, there’s a lot of businesses that have found ways to not just survive and not just float it along, but to turn it into a good thing for their business. It really is happening in a lot of places.

Rachel Brenke:
I’ve been super excited to see that, especially in the legal industry. Most of my attorney friends are running around like chickens with their heads cut off and we’re over here like, “We’ve had these systems in place. I’m happy to help you.” But one thing that did just come to my mind when you said that was, I’ve talked in the episode previously about becoming an LLC, should you have a new LLC for every brand? And I’ve shared that the way my structure is except for the law firm, I have the main one LLC and then I have DBAs is below that. Well, I noticed when I was going to submit for the EIDL grant and PPP, I guess, but I could only get one 1000 because I only had one employee for that one LLC.

Whereas if I had had multiple LLCs, there would have potential for more. It just was like a structure advantage that I saw that maybe in the future, even I would probably go to the forefront and really encourage my clients to go. No, maybe we need to have separate LLCs here as opposed to keeping it all under one.

Andrew Jordan:
Makes sense.

Rachel Brenke:
Yep. Yep. All right. Well, thank you Andrew. I appreciate it. We’ll have you back as soon as the government gets their stuff together and decides to tell us what we should do. Again, everyone makes sure you go to the show notes page rachelbrenke.com/epi128. Show note’s going to link to Andrew’s stuff and also past episodes. And I will talk to you guys next week.

Speaker 2:
Thanks for joining Rachel on this episode of The Business Bites. For show notes, a list of recommended tools or referenced episodes, you can find them at businessbitespodcast.com. Until next time.

Tool and Resources:

Featured Guest & Resources

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About the author

Hi, I’m Rachel Brenke

Rachel Brenke

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