Used PPP Funds for Unapproved Expenses: Am I in Trouble?

OK so lets talk about something that keeps a lot of small business owners up at night.

You got a PPP loan in 2020 or 2021. You used the money. Your business survived. And now, looking back, your realizing that some of what you spent it on might not have been... strictly what the program intended.

Maybe you used some for inventory when you shouldve focused on payroll. Maybe you paid a contractor when the rules said employees. Maybe you bought equipment thinking it was allowed. Or maybe - and we see this alot - you used some of it for things that definitely werent covered, becuase at the time you were just trying to keep everything from falling apart.

And now your wondering: am I going to prison?

Heres the thing. At Spodek Law Group, we've talked to hundreds of people in exactly this situation. Todd Spodek and our team understand the fear. We understand the sleepless nights.

But we also understand something important that most people dont: using PPP funds for unapproved expenses and committing PPP fraud are not the same thing.

Let me explain what were actually dealing with here.

The Critical Distinction Most People Miss

Theres a difference between two questions:

Question 1: Can your PPP loan be forgiven?

Question 2: Did you commit criminal fraud?

These are seperate issues. And the answer to Question 1 can be "no" while the answer to Question 2 is also "no."

If you spent PPP funds on things that werent eligible, your forgiveness might be denied. You might have to repay part or all of the loan. Thats a financial problem.

Criminal fraud is different. To prosecute you criminally, the government needs to prove you intentionally deceived them. That you knew what you were doing was wrong. That you made false statements with the intent to get money you werent entitled to.

Just spending money on the wrong things - especially when you were trying to keep your business alive and the rules were confusing - isnt automatically fraud.

This is hugely important. So let me say it again: not everyone who misused PPP funds is a criminal. Not even close.

What The Government Is Actually Looking For

When prosecutors decide whether to charge someone with PPP fraud, theyre not looking for people who made honest mistakes or had imperfect understanding of complicated rules.

Theyre looking for:

• People who applied for loans they knew they didnt qualify for
• People who inflated their employee counts or payroll
• People who submitted fake documents
• People who spent money on obviously personal things - luxury cars, jewelry, vacations, personal mortgages
• People who never intended to use the money for their business at all

The guy who used $10,000 of his PPP loan on equipment instead of payroll becuase he thought his business needed equipment to survive? Thats probably not a criminal case.

The person who got a $150,000 PPP loan and immediately bought a Range Rover and a Rolex? Thats a criminal case.

See the difference?

The Intent Question That Changes Everything

Federal fraud requires proof of intent. Specifically, the government has to prove you intended to deceive them when you applied for the loan.

Here's the certification you made when you applied for PPP:

"The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments."

If you intended to use the funds that way when you applied, and then things changed - you faced different challenges, you misunderstood what was covered, you made decisions that seemed right at the time - thats very different from knowing when you applied that you planned to use the money improperly.

Intent at the time of application is what matters for fraud. Not decisions made weeks or months later.

This is why we always ask clients: what did you actually intend when you applied? What was your business situation? What did you think you would use the money for?

If you genuinely intended to use funds for payroll and eligible expenses, but then made some different choices as your situation evolved, thats going to be much harder for prosecutors to characterize as fraud.

The Eligible Expenses Gray Area Nobody Talks About

Heres something that makes these cases even more complicated: the list of eligible PPP expenses changed multiple times.

When the program first launched in April 2020, the rules were pretty narrow. Payroll, rent, utilities, mortgage interest. Thats basicly it.

But then Congress passed additional legislation. The SBA issued new guidance. The covered period got extended. New categories of eligible expenses were added.

By the time the program wound down, you could use PPP for things like:

• Supplier costs
• Worker protection expenses (like PPE)
• Property damage from civil unrest
• Operations expenditures (software, cloud services)

Something that was "unapproved" in April 2020 might have become "approved" by September 2020.

So when we look at your case, we need to understand not just what you spent money on, but when you spent it and what the rules were at that time. Becuase what you think was improper might have actually been allowed.

The Amount and Pattern Reality

Prosecutors have limited resources. They prioritize cases based on egregiousness.

If you got a $75,000 PPP loan and $70,000 went to legitimate payroll while $5,000 went to something questionable... thats very different from someone who got $500,000 and spent the entire amount on personal items.

The pattern of spending matters too. Did you generally try to use funds appropriately with some mistakes? Or was there a clear pattern of diverting money to personal use?

Prosecutors look for cases they can win. Cases where the fraud is obvious. Cases where juries wont have sympathy for the defendant. Cases with big numbers and clear bad intent.

The small business owner who made some mistakes while trying to survive COVID? Thats not a case most prosecutors want to take to trial.

What Forgiveness Denial Actually Means

A lot of people panic when they think about forgiveness denial. They assume denial = criminal prosecution.

Not true.

If your forgiveness is denied, it means your loan converts from forgivable to repayable. You owe the money back. With interest.

Thats a financial problem. Its not nothing. But its very different from prison.

Now, can a forgiveness denial lead to criminal referral? Yes, it can. If the SBA discovers something during the forgiveness review that looks like fraud - fake documents, obviously false certifications, egregious misuse - they can refer your case for criminal investigation.

But many, many forgiveness denials dont result in criminal charges. They result in people owing money.

Understanding this distinction is crucial for knowing what your actually dealing with.

The Repayment Solution Most People Dont Consider

Heres something we discuss with clients regularly: voluntary repayment.

If you used some PPP funds for things that werent eligible, one option is to simply repay that portion. Proactively. Before anyone asks.

Why would you do this?

First, it addresses any forgiveness issues. If you've already repaid the questionable portion, theres nothing left to deny.

Second, it demonstrates good faith. You recognized a problem and fixed it. Thats very different from someone who tried to hide their spending.

Third, it makes criminal prosecution much less likely. Prosecutors focus on people who defrauded the program, not people who made mistakes and corrected them.

This isnt the right approach for everyone. If you genuinely believe your spending was eligible, if the amounts are small relative to your overall loan, if you have other defenses - you might not need to repay anything.

But for many people, addressing the issue proactively through repayment is the smartest path forward.

The Documentation Defense You Should Know About

Heres something that can really help in these situations.

PPP loans were supposed to cover payroll and certain other expenses during a "covered period." If your total eligible expenses during that period exceeded your loan amount, you may be able to argue that the funds - however you technically spent them - effectively went to eligible purposes.

Let me give you an example.

Say you got a $50,000 PPP loan. During your covered period, you had:

• $60,000 in payroll
• $15,000 in rent
• $5,000 in utilities

Thats $80,000 in eligible expenses. You only got $50,000.

So even if you technically spent some of the PPP money on something else - your bank account is all mixed together, after all - you can argue that your eligible expenses "absorbed" all of the PPP funds, and you covered the questionable stuff from your other revenue.

This is called the "total eligible expenses" defense, and its saved a lot of people from serious problems.

We help clients gather documentation to support this kind of analysis. Bank records. Payroll records. Lease agreements. Utility bills. Everything that shows your eligible expenses during the covered period.

The Commingled Funds Complexity

Most small businesses dont have separate accounts for every funding source. PPP money went into your regular business checking account, where it mixed with revenue, other loans, savings, everything.

This creates complexity for everyone - including prosecutors.

Can they actually prove that THIS specific dollar went to THAT specific purchase? In many cases, they cant. Money is fungible. Once its in your account, tracing becomes an exercise in assumptions.

This dosent mean you can do whatever you want. If you got $100,000 in PPP and immediately wrote yourself a $100,000 check labeled "bonus," thats pretty clear.

But for normal business spending, where money flowed in and out over weeks or months, the picture is much murkier.

What You Should Do Right Now

If your worried about how you used PPP funds, heres what we recommend:

Step 1: Document everything. Gather all your records from the covered period. Payroll. Bank statements. Invoices. Receipts. Everything.

Step 2: Calculate your eligible expenses. Add up everything you spent on payroll, rent, utilities, and other covered categories during the covered period. Compare this to your loan amount.

Step 3: Identify the specific concerns. What exactly did you spend that you think might be problematic? How much? When?

Step 4: Get legal advice before taking action. Dont repay anything, dont make statements, dont file anything with the SBA until you've talked to someone who understands these cases.

At Spodek Law Group, we help clients work through this analysis. We assess the actual risk level based on the specifics - not the fear level based on headlines.

Call us at 212-300-5196 if you want to understand where you actually stand.

The Reality Check You Need

Look, I'm not going to tell you that using PPP funds for unapproved expenses was fine. It wasnt. The program had rules, and you were supposed to follow them.

But I am going to tell you that not every mistake is a crime. Not every improper use is fraud. And not everyone who made questionable choices is going to prison.

The government is prosecuting PPP fraud. Theyre prosecuting people who lied on applications, who submitted fake documents, who took money they clearly werent entitled to and spent it on luxury goods.

Theyre not prioritizing cases against small business owners who were trying to survive and made imperfect choices about a program that was confusing, rushed, and constantly changing.

Could you still face consequences? Maybe. Forgiveness denial. Repayment obligations. In some cases, civil penalties.

But prison? For most people in your situation? Unlikely.

The Call You Should Make

If your losing sleep over how you used PPP funds, you dont have to keep wondering. You can get answers.

Todd Spodek and our team at Spodek Law Group have been helping people navigate PPP issues since the program started. We understand the rules - and how they changed. We understand what prosecutors are looking for. We understand how to assess your actual exposure.

And we treat every client like family. No judgment. No lectures. Just practical help with a difficult situation.

Call us at 212-300-5196. Tell us what happened. Let us help you figure out whether you have a real problem or just understandable fear.

Becuase right now, the uncertainty is probably worse than the actual situation. Once you know where you stand, you can make smart decisions about what to do next.

We're here. Were experienced. And were ready to help.

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Spodek Law Group represents clients nationwide in PPP and EIDL matters, including forgiveness disputes and federal fraud investigations. Contact us at 212-300-5196 for a confidential consultation about your situation.