Hot Topic Tuesday — What Happens when a PPP Recipient Goes Out of Business?

July 14, 2020

By Caity Witucki
Contributing Editor, Hot Topic Tuesday

Hot Topic Tuesday — What Happens when a PPP Recipient Goes Out of Business?

Although over 172,786 jobs have been retained as a direct result of PPP, some small businesses have still had to close their doors permanently. According to Yelp’s most recent Economic Impact Report, 140,000 small businesses remain closed due to the pandemic and 41% have shuttered permanently. Among those with the highest rate of permanent closures are shopping and retail (9,682 businesses), restaurants (12,709 businesses), beauty (3,683 businesses) and fitness (1453 businesses). As a result of the alarming number of permanent closures, many people are wondering what happens when a small business PPP recipient closes permanently.

Although the industry is still waiting for more guidance, we know that if the PPP recipient spent all of the money within eight weeks (or twenty-four weeks for those who received an extension after the PPP Flexibility Act was adopted) and they used at least 60% on payroll, their PPP loan will be completely forgiven. 

However, if the small business recipient has unused PPP dollars that they cannot pay off, they may need to seek bankruptcy protection.  According to Sharon King, the Boulder Small Business Development Center executive director, “Most or all of the loan is likely to be discharged as part of the process as long as the borrower has acted in good faith.” However, we still do not have clear guidance on what would happen in that situation.

If the small business misused its PPP funds and then closed permanently, the SBA and Treasury have indicated their intent to follow the money. Nevertheless, some experts are questioning whether the SBA has the manpower to investigate all of these loans. “I’ve got to believe that the SBA just doesn’t have enough people to go after the smaller loans,” says Paul Mueller, an accountant and partner with Loveland’s Mueller Pye & Associates CPA LLC. “Treasury has announced their intent to audit all loans above $2 million, but we’ll see if they actually do that.” 

The SBA still intends to provide additional guidance on PPP loan forgiveness. Once more guidance is issued, the industry should have a better idea of how PPP loans to permanently closed businesses will be handed. 

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