California Wine Country firms cautious about pandemic payroll loan forgiveness pitfalls

Illustrating one of the benefits of stimulus, Hospice By the Bay said it saved jobs of 399 employees by getting a $5 million loan on the Paycheck Protection Program.

But as the nonprofit and other financial leaders of North Bay companies ponder how to have that loan forgiven, it’s time to be cautious during the COVID-19 crisis.

“We’re taking the wait-and-see approach and still working out the rules,” said Denis Viscek, chief financial officer of Hospice By the Bay, a health care organization in Larkspur. “We’ve been hurt before, so we’ve pledged to ourselves to take the cautious approach.”

Under federal rules dictated by the U.S. Small Business Administration, organizations have 10 months to ask for forgiveness from banks, and Viscek wants the federal government to be clear with its procedures and rules. Otherwise, a poor financial move may place a business — even if it runs as a nonprofit — in a world of hurt.

Luckily, Petaluma’s Spurgeon Painting owner Boyd Meacham said he’s relying on the current surge in construction jobs to carry him through the year with his 18 employees.

“I’m waiting for advice from my accountant,” he said.

Kevin Bradley of W. Bradley Electric in Novato is also deferring to his chief financial officer to decide how to move forward with the forgiveness program on the $5 million he borrowed.

“It’s like they put the program in place, then attached all these strings,” he said of the $660 billion PPP program.

A steady flow of construction jobs has also helped Bradley keep his 274 employees busy, but he’s wondering how long the consistency will last.

“My concern is what’s the first quarter of next year going to look like. I think January to April will be telling. It’s a fluid situation,” he said.

In its wait-a-minute fashion, the Internal Revenue Service has warned business borrowers filing to have the 1%-interest loans waived that they cannot use the loan as a business expense. The practice is what is commonly referred to as double dipping. The IRS has negated tax deductions for wages and rent paid with forgivable PPP loans labeled as a federal grant instead.

The denial is written in the tax Notice 2020-32: “no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.”

The U.S. Treasury Department has entertained the idea of “blanket forgiveness,” but the legal maneuver would literally take an act of Congress.

And there lies a challenge given the nation’s political climate.

The Small Business Expense Protection Act of 2020 was introduced in May to combat the denial. It changes the $2.2 trillion CARES Act passed in March to provide tax deductions for ordinary business expenses on a company’s return.

“We’re in the middle of a pandemic. We feel the government made a lot of claims, then threw water on the fire,” said Santa Rosa accountant Jon Dal Poggetto. “I don’t see this as double-dipping. It doesn’t seem quite right. Why not payroll expenses? It’s like any ordinary expense in the business code.”

Still, Dal Poggetto would advise more businesses to go ahead and file for loan forgiveness as he believes most would come out ahead in their tax returns because the amount of the loan should be greater than the tax advantages. Simply put, the accountant would like the feds to provide clarity and flexibility for companies. For example, would the business expenses land on the year the loan was received or forgiven?

More than 4,100 federally supported, low-interest loans totaling $1.4 billion were processed in Sonoma, Napa, Marin, Mendocino and Solano counties. From that, businesses pledged to maintain at least three quarters of their staffs. The SBA had calculated 169,532 jobs saved from the endeavor.

Out of 1,800 loans processed, Exchange Bank has completed and submitted 35 applications to forgive the loans for their borrowers.

The Santa Rosa community bank recently opened a portal to test out the program’s application process on 10 customers. It also put on a Webinar last Friday to iron out the kinks on the topic and got 500 customers to attend.

Customers are trickling in with their questions, but no evidence of a flood of applications is expected yet as extensions have been granted, Executive Vice President Michael Sullivan told the Business Journal.

It’s all new territory.

“We’ve never gone through anything like this before,” Sullivan said. “This program is far from perfect, but it’s kept a lot of businesses afloat.”

Other local financial institutions such as Bank of Marin and Summit State Bank declined to comment on the matter.

Business after business has come forward to tout the saving grace of the PPP program. But already, many admit a second round of fiscal assistance is necessary.

Tom Sullivan, U.S. Chamber of Commerce vice president of small business policy, couldn’t agree more. The nation’s largest business advocacy organization is lobbying Congress for more help and business-favorable rules attached to the loan program.

He calls the tax code requirement from the IRS “insanity.”

“The idea the federal government freed up capital so small business can survive should tell you something,” he said.

Sullivan contends the Goldman Sachs’ recent survey shows that 84% of the nation’s borrowers have already gone through their loans — with almost half admitting to “needing a second round” to survive.

He cited a dire prediction from the survey that 40% to 66% of business closures will become permanent.

Although his home base is located across the continent, Sullivan especially sympathized with the plights associated with California’s business climate.

“How can you expect a small business owner dealing with COVID, avoiding wildfires, navigating around power outages and getting their kids on line to school to then have to fill out a bunch of red tape? It absolutely makes no sense,” he said.