Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provided funding to the Small Business Administration (SBA) totaling $349 billion for loans available to qualifying small businesses. These Paycheck Protection Program (PPP) loans have several favorable characteristics, including a low interest rate, no origination fees, no collateral requirements and the possibility of forgiveness. Since the program launched on April 3, overwhelming demand quickly depleted available funding and prompted Congress to add an additional $310 billion as part of the Paycheck Protection Program and Health Care Enhancement Act, enacted on April 24.
Not surprisingly, questions about this novel loan program abound. Primary among them are: (1) how does a potential qualifying applicant (or current recipient) assess or demonstrate “economic need”; and (2) how does the PPP loan recipient consider qualified expenses when seeking forgiveness?
Initial regulations issued by the SBA on April 15 require borrowers to certify in “good faith” on the PPP loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” The borrower also needs to certify that the funds “will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.” Apparently recognizing the ambiguity of the required certification, the Treasury Department updated its PPP loan FAQ on April 23 to provide some clarity, stating that:
“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”
After the PPP program launched, but before the regulations and guidance were issued, some public companies such as Ruth’s Chris Steak House, Shake Shack and Potbelly Sandwich Shop applied for and received PPP loans. The combination of public backlash, high-profile opinion, and the SBA’s later clarification of the law led to these three companies and others returning their PPP loan funds.
At least one bank recently sent an email to customers noting that businesses that do not adhere to the SBA’s guidelines may face criminal investigations as described in the PPP loan application and the SBA’s implementing regulations. Any borrower that applied for and received a PPP loan prior to the issuance of the regulation and repays the loan in full by May 7, 2020, however, will be deemed by the SBA to have made the required certification in good faith.
Small businesses that have received or are considering a PPP loan face a challenging dilemma: how to make the required certification with ambiguous and inconsistent information, and significant residual uncertainty regarding how the COVID-19 crisis may affect operations. It is unclear how long any business will be closed down, operate at less than full capacity, or experience unsustainable operational inefficiencies that bear directly on employment levels. Also, will the SBA call into question the legitimacy of a certification if a business has received a PPP loan that it has not yet used and may or may not need before May 7, but wishes to retain because it does not know whether future events will affect the viability of its operations? Under the SBA’s interim regulations, a business can only receive one PPP loan and, accordingly, the SBA encourages borrowers to “consider applying for the maximum loan amount.” So, if loan funds already disbursed, but not yet needed, are returned by May 7, a business cannot later reapply for a PPP loan even if an economic need emerges. We encourage the SBA and Treasury Department to resolve this uncertainty.
Unless the borrower can make a case, pursuant to its good faith certification that it needs a PPP loan to pay employees that it otherwise would furlough or lay off, and has no other source of funds for these expenses that “is not significantly detrimental to the business,” it runs the risk of further questioning by the SBA. To protect themselves from significant risks, we encourage PPP loan applicants and recipients to speak with their accounting and legal advisors about making disclosures to stakeholders regarding their economic need to keep employees employed, and the business in business.
A PPP borrower is eligible for loan forgiveness equal to the amount spent by the borrower on payroll costs, interest payment on any mortgage, rent and utilities, during an eight-week period after the origination date of the loan. Borrowers have expressed concern about how to determine the specific costs and expenses to be considered in determining potential forgiveness of the loans.
The April 15 SBA interim regulations require borrowers to provide documentation on payroll costs, covered mortgage interest payments, covered rent payments and covered utilities. Although the SBA has not yet issued regulations governing PPP loan forgiveness, it indicated that forgiveness will be based on the sum of these documented costs, as adjusted for changes in the number of employees or the amount of compensation provided to employees in comparison with the identified base period.
Businesses that receive PPP funds should record the loan and continue recording payroll and operating expenses in accordance with generally accepted accounting principles (GAAP). Potential forgiveness of some or all of the PPP loan is currently undefined and, thus, remains an uncertain future event. Expect to produce accounting records necessary to demonstrate eligibility and compliance with the program, including the statutory forgiveness certification that “the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.”
Initial funding for PPP loans was exhausted quickly. The new law provides more funds for loans and also makes it easier for smaller banks, credit unions and minority and community development financial institutions to process these loans. Businesses interested in tapping into this new round of funding should make sure they have the right documentation ready before approaching a lender. Check our resource for PPP borrowers. Give us a call – we can help!
For borrowers with a straightforward PPP loan compliance environment, we have developed a self-service, Excel-based loan forgiveness calculator. But if your situation is more complex, or you have limited staffing available to support the loan requirements, we can provide an automated approach to forecasting eligible spend, monitoring specific payroll exceptions, and managing compliance with final documentation requirements.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.