The Fallout of Financial Assistance

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The sudden advent of a deadly virus led Congress to create a relief program lacking oversight and clear-cut rules, creating financial, and possibly legal, jeopardy for Southwest Florida business owners.

The rush to get money to businesses under the March 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act allowed banks to suspend credit checks and other screening of Payroll Protection Plan loan applicants. The streamlined approvals helped get all $349 billion in nationwide PPP money out the door in just 13 days.

The Small Business Administration, which administers the loans, doesn’t require businesses to repay the money, as long as at least 60% of it was spent keeping workers employed. The rest had to be spent on rent, mortgage interest and utilities. The problem: Some banks did not ask business owners for the documentation normally required for a loan, which means businesses might struggle to certify loan forgiveness now.

R. Scott Oswald, managing principal of The Employment Law Group, takes PPP fraud whistleblower complaints to court.

“Under the old program, banks had an obligation to check the business owner’s creditworthiness, even on a local level—such as their bank information, deposit history, past payroll costs—things banks normally have to submit to the SBA,” he says.

The lack of bank oversight leaves businesses on their own when convincing investigators they haven’t exaggerated payroll costs or made other fraudulent claims on their applications. Documentation certainly makes a difference when applying for loan forgiveness.

“Now it’s the company’s responsibility to show they met the certification requirements,” Oswald says. “Under the old SBA loan program, the bank would help them, telling them, ‘Here are the requirements.’ None of that was done in most cases.”

 

People are watching

Other Department of Justice cases involve companies exaggerating their number of employees and salaries to obtain a larger loan, padding staff with family and cronies—a “Cousin Bob” making $90,000.

The fraud hurts honest Southwest Florida businesses, DOJ spokeswoman Andrea Clark said. “That money is intended for businesses that do have a need, that suffered legitimately. It’s very important to the DOJ that we ensure as much as we can that the money goes to who is entitled to it.”

If the loan documentation is acceptable, that may be the end of it, said Justin Keen, DOJ’s national coronavirus fraud coordinator in Tallahassee.

“Federal investigators may request an interview of business owners or their staff to determine if a crime was committed, or if there is an in- nocent explanation for what may have occurred,” Keen says. “Further, businesses may receive a federal grand jury subpoena for the production of records and documents.”

The list of allowable expenses and deductions was lengthened in the second relief bill, the Bipartisan Emergency COVID Relief Act of 2020 in December (See “To Relief of SWFL Businesses, Congress Relaxes PPP Rules” story below.)

 

The boat that launched a probe

U.S. Attorney Maria Chapa Lopez, whose offices are on the banks of the Caloosahatchee River in Fort Myers, is prosecuting Target Roofing & Sheet Metal owner Casey David Crowther, 35, of North Fort Myers.

He allegedly spent $689,417 in PPP funds on a 40-foot fishing boat.

The indictment alleges that Crowther, whose company received $2.1 million in PPP, falsely certified on his application that the funds would be used for proper business purposes, such as keeping employees on the payroll during a 24-week period covered by the CARES Act.

He faces one count of bank fraud, one count of making a false statement to a lending institution (SBA records list Sanibel Captiva Community Bank as his lender) and two counts of illegal monetary transactions. If convicted, Crowther faces at least 30 years in federal prison.

Not so fast, says Crowther’s lawyer, who believes the DOJ itself may be confused about the SBA’s regulations.

Nicole Waid of FisherBroyles says Crowther’s company not only spent PPP money as required, it spent $3.5 million on payroll—about $1.5 million more than it received in PPP money.

She blames shifting and ill-defined SBA regulations for putting companies in jeopardy.

“Businesses face the danger of being subjected to stricter interpretations of the regulations by the government,” Waid says. “The regulations do not contain any requirements to segregate the money in a separate bank account. There is no prohibition on commingling of PPP funds with the other operating funds of the business. Congress specifically omitted these requirements.”

 

Proving expenses for loan forgiveness

The DOJ also looks for evidence of ghost employees or family members with high salaries appearing suddenly at the company trough, which means payroll records— from before and after COVID—are vital.

Victoria Loyola, partner at Markham Norton Mosteller Wright & Company P.A. in Fort Myers, said businesses must have accurate payroll records for the weeks

covered under the loan. For instance, if you received your loan before June 5, 2020, you can choose between an eight-week or 24-week covered period. If you choose the eight-week covered period and would like to defer payments, you must apply for forgiveness within 10 months of the end of your covered period, as early as April 2021—which is also tax time.

“Auditors see the number of employees you had during the covered period and compare it to previous months to make sure you’re maintaining that level,” Loyola says.

If a company was unable to operate at the same level of business activity as before Feb. 15, 2020, due to COVID-19, it is exempt from a reduction of loan forgiveness based on FTE, she said.

“The calculations for loan forgiveness can be complex,” says Loyola, whose firm set up a task force to keep up with the PPP tax changes. “We’re helping a lot of clients work through the FTE and Wage Reductions calculations.”

 

What if a company made a profit after all?

Scores of country clubs in Southwest Florida received between $350,000 and $5 million in PPP, SBA records show. Grey Oaks Country Club, which received $2.87 million, is being sued by William Verhelle, a member who claims the club fraudulently applied for a PPP loan it didn’t need.

He told WINK News he believes the club received a PPP loan from the government even though it shouldn’t have, and the case is heading to court.

“I guess we’re still trying to understand why they would need a million-dollar PPP loan,” Verhelle told WINK.

The general manager at Grey Oaks told reporters the loan allowed the club to bring back roughly 60 employees and argues they met PPP requirements. Like other country clubs, they had to shutter restaurants and banquet halls and cancel other events that were banned as a result of COVID.

So, what about country clubs that collect monthly membership dues regardless, project management firms that collect residents’ homeowner association fees anyway or companies that made a profit after receiving the loans? Should they return their money?

Businesses can argue that the government assumes country clubs and other profitable companies could not predict how badly their bottom line would be harmed by COVID-19, said Charles A. Massie, of Massie & Reilly CPAs in Fort Myers.

“I have no clients returning their PPP loans,” Massie says. “All are requesting forgiveness, even the large companies. Remember that the concept was based upon a company not being sure what was going to happen to them financially. In reference to country clubs, as long as they, too, kept the employees hired, they could request forgiveness.”

The SBA has tightened the rules there, too.

 

Government has ‘benefit of hindsight’

On Dec. 31, 2020—some nine months after the CARES Act passed— the SBA released a new form for companies that borrowed more than $2 million. The purpose of the form (OMB Control Number: 3245-0407) is to collect supplemental information that will be used by SBA loan reviewers to double-check business owners who stated that economic uncertainty surrounding COVID-19 made the loan request necessary.

The nine-page form includes this question: “As of the last day of the calendar quarter immediately before the date of borrower’s PPP loan application, how much did borrower own in cash and cash equivalents? Provide supporting documentation.”

“This is ridiculous,” Waid says. “The government now has the benefit of hindsight, but at the time that businesses were applying for the PPP funds, the outcome looked grim and every business was concerned about its ability to survive.”

“The first thing businesses had to determine at that time was how to survive,” says Steve Phillips, managing partner at Capital Care Group Inc., whose clients include hair salons, restaurants and larger businesses. “My fear is that some people won’t be forgiven because they didn’t know what to do. I spent all of April on the phone with my clients.”

 

TO RELIEF OF SWFL BUSINESSES, CONGRESS RELAXES PPP RULES

If you asked a Southwest Florida CPA in early December whether businesses could deduct expenses under the COVID-19 Payroll Protection Plan, you could hear their frustration. Without those deductions, businesses were looking at a big hit to their bottom lines—and business owners looked to their accountants for answers as end-of-year tax deadlines neared.

“Go call Congress and find out what they’re going to pass,” Steve Phillips, managing partner at Capital Care Group Inc., told Gulfshore Business in December. “The tax issue isn’t clear, is it? No, it’s not.”

Charles A. Massie, of Massie & Reilly CPAs in Fort Myers, says, “Depending
on the size of the loan, it will be a big deduction you can’t have. They’ve talked about changing it, but Congress has not gotten back together to get it fixed.”

The two are among the many CPAs helping the 56,114 businesses in SWFL who quickly applied for, and received, $2.34 billion in Coronavirus Aid, Relief and Economic Security (CARES) Act money. The act, passed in March 2020, offered forgivable SBA loans to companies with fewer than 500 employees.

Under the original act, the companies—including restaurants, marinas, RV sales lots, car dealerships, country clubs, hair stylists, nail salons and, yes, CPAs—don’t have to pay the money back as long as they spent at least 60% of the money keeping workers on the payroll and the rest on rent, mortgage interest and utilities.

The act stated that businesses could deduct expenses paid for with PPP money, but Secretary of the Treasury Steve Mnuchin rejected that on April 30, 2020.

“The IRS said if the loan doesn’t have to be paid back, it’s not income, therefore you can’t deduct corresponding expenses,” Phillips says.

The American Institute of Certified Public Accountants lobbied Congress for relief, calling Mnuchin’s ruling a “surprise tax increase of up to 37% on small businesses when they file their taxes for 2020.” Local accounting firms tracked developments. “Back when everything started, we formed a task force to stay on top of everything,” says Victoria Loyola, partner at Markham Norton Mosteller Wright and Company in Fort Myers. “Everything was changing constantly over the summer and now, a lot of business clients wonder if they can deduct expenses under PPP.”

And that’s where things remained, into the fall, to Dec. 22, when Congress clarified the situation just as CPAs hoped. The December bill overturned the IRS rule, which means businesses that received PPP loans can now deduct expenses paid with that money.

The relief was palpable.

“Most of my clients were having a heart attack,” Massie says.

“This is what everyone was holding their breath on,” Loyola says.

The Bipartisan Emergency COVID Relief Act of 2020 not only allows the deductions, it lengthened the list of what the SBA considered forgivable expenses. In addition to payroll, rent and utilities, it now forgives spending for, and allows deductions for, costs associated with damage from rioting and looting, software and cloud computing services and accounting needs, sneeze guards, masks and personal protective equipment, as well as business or office modifications to prevent the spread of COVID-19.

The new rules are retroactive for all PPP borrowers—whether forgiveness has or has not been granted.

 

LOAN FORGIVENESS SIMPLIFIED

The second act also introduced a simplified forgiveness application for loans of $150,000 or less (the average PPP loan in Florida’s 19th congressional district was $81,954). Such borrowers need only to execute a one-page certification as

to the number of employees the company was able to retain, an estimate of what was spent on covered payroll costs and the total loan amount. It does not require borrowers to document how their answers to certain questions were determined.

But be advised: PPP borrowers will remain obligated to comply with certain record-keeping requirements, including retaining employment and payroll records for four years.

The SBA reserves the right to audit the forgiveness certification. If a PPP loan is more than $150,000, records must be kept for six years.

 

DOUBLE-DIPPING SOLVED

“The new act also settles the question of double-dipping by companies that took PPP money and Economic Injury Disaster Loans,” says Rob Anstett of Anstett CPA in Naples.

Before the second bill, if a business owner received a $10,000 PPP loan and an EIDL grant of $1,000, the SBA would subtract the EIDL grant from the PPP loan amount, leaving $9,000 in possible PPP forgiveness.

“Unfortunately, I had some clients who did both, so when they apply for forgiveness of the PPP loan, they had to subtract what they received in EIDL grant, in effect, paying it back. You weren’t supposed to double up.”

The new act allows businesses to take both without being punished. If a company has already been penalized for the EIDL, the SBA said it

will issue a ruling that compensates companies or lets them apply the money elsewhere in their ledger.

 

SAMPLING OF PPP LOAN RECIPIENTS IN SOUTHWEST FLORIDA

In response to media lawsuits, the Small Business Administration in July released a list of Paycheck Protection Plan loan recipients nationwide. The searchable database (covidbailouttracker.com) allows the public to use various search criteria to determine who received PPP money and how much. The database also lists the number of recipients by industry, average amount of each loan and participating lending institution.

Gulfshore Business searched the recipients in Florida’s 19th congressional district, which had more than 18,000 recipients of PPP loans totaling more than $1.5 billion. The district stretches from Fort Myers to Marco Island, including Captiva, Cape Coral, Sanibel, Estero, Bonita Springs, North Naples, Naples and communities east of I-75.

 

COUNTRY CLUBS

Bailout subtotal: $15.26 million

Number of recipients: 26

Average bailout: $586,931

Top recipients:

$2.87 million: Grey Oaks Country Club, Naples — Trustar Bank

$2.74 million: Naples Golf and Beach Club Inc., Naples — Synovus Bank

$1.33 million: Heritage Palms & Country Club, Fort Myers — Branch Banking & Trust Co.

$1.28 million: Gulf Harbour Golf & Country Club Inc., Fort Myers — National Bank and Trust

 

RV SALES

Bailout subtotal: $2.94 million

Number of recipients: 3

Average bailout: $980,154

Top recipients:

$2.87 million: Lee County RV Sales, Fort Myers —Bank of America

$191,682: Southern Marine & RV Sales, Fort Myers — Bank of America

$24,451: Southwest Florida RV Rentals & Sales — Suncoast Credit Union

 

PROPERTY MANAGEMENT COMPANIES

Bailout subtotal: $5.2 million

Number of recipients: 125

Average bailout: $41,625

Top recipients:

$941,300: Alliant Property Management LLC, Fort Myers — Branch Banking & Trust Co

$384,000: RAL Resort Property Management Inc., Fort Myers — First Citizens Bank & Trust

$265,683: Guardian Property Management, Naples — First Horizon Bank

$245,678: American Property Management Services LLC, Naples — First Florida Integrity Bank

 

Photo Credit: Getty; Courtesy Victoria Loyola; Courtesy Rob Anstett; Courtesy Massie & Reilly

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