U.S. Capital building at night

Authored by Paul Dillon, Michelle Hobbs, Pat Balthazor and Michael Wronsky

The Small Business Administration (SBA) extended the deadline for borrowers under the Paycheck Protection Program (PPP) to return their loans to May 14, 2020, from May 7, 2020. This extension was provided via a May 5 update to the Paycheck Protection Program Loans Frequently Asked Questions.

Included in the PPP, enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a provision that requires borrowers make a good faith certification that their loan is necessary to support their ongoing operations in the wake of the “uncertainty of current economic conditions.” The statutory language would appear to have broad application given the current economic climate; however, the matter of larger businesses with considerable market value receiving PPP loans has become a topic of controversy in recent weeks.

Eligibility is complicated because the CARES Act offers few guidelines for the loan program. It simply states a taxpayer must self-certify that current economic uncertainty makes the loan request necessary to support the ongoing operation of the business. No timeline has been provided related to the requirement for support of the ongoing operation of the business, leading to additional uncertainty. Does a business need to look at its capital requirements for a short time frame, such as a few months, or a longer time frame? The requirement for support is also not defined. Must a business prove it has suffered an economic downturn at the time of the loan? The Treasury Department has since suggested this concept of necessity blocks many public companies from applying because they can theoretically raise money in other ways, such as by selling new shares on a stock exchange. However, for many loan applicants that are not public companies, self-certifying that the loan request is necessary creates uncertainty for them since the requirements are not clearly defined.

Additionally, some lawmakers asserted that borrowers deemed to have received PPP loans without a critical need for them could be liable for penalties for making a false certification in response to the aforementioned requirement. In fact, FAQ No. 31 originally allowed recipients who took out their loans prior to April 24 and returned them by May 7 to have made their certification in good faith, and not be liable for penalties. This safe harbor was subsequently published in an interim final rule on April 28.

The guidance also notes that Treasury will review all loans in excess of $2 million “in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” Finally, the FAQ explains more guidance is forthcoming on how the SBA will review borrowers’ certifications.

We recommend that PPP recipients work with their advisors to document the need for the loan as well as assemble the necessary information to support the loan forgiveness portion of the program. Payroll records, including amount of wages and payroll taxes reported to the IRS, along with verification of other qualified expenses paid with PPP loan proceeds, should be retained to corroborate loan forgiveness eligibility.

Please connect with your Baker Tilly tax advisor to discuss how this may affect your situation.

Contact our COVID-19 support team

arrowCreated with Sketch.

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.

Next up

Uncommon Sense | Paycheck Protection Program Pandemonium