PPP GUIDANCE ON CERTIFICATION OF NEED OF LOAN PROCEEDS

Earlier this week the SBA posted guidance to answer the question of businesses that obtained a loan through the Payroll Protection Program (PPP). When borrowers apply for PPP funds they must certify, as part of the application, among other things “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient”. This certification came under scrutiny after several larger companies received PPP money.

The purpose of PPP was mainly to assist small businesses with payroll costs and to provide some assistance on items such as rent and utilities. It was intended to allow businesses to retain workers and keep them off unemployment. The SBA warned on April 23, 2020 that larger companies with adequate sources of liquidity to support ongoing operations will not be eligible for PPP funds. Below is how the SBA addressed the question of whether businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

“In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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.”

The above answer comes from the Paycheck Protection Program Loans Frequently Asked Questions. That question was #31. This also left many businesses concerned over the criteria they would need to meet to qualify for PPP funds. Earlier this week in the same FAQ document Question # 46 was added and asked, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?” Their answer is provided below:

“When submitting a PPP application, all borrowers must certify in good faith that current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

The SBA response is because they believe smaller businesses are less likely to have access to adequate sources of liquidity. This, by the way, does not eliminate companies from applying for loans of $2 million or more, it only states that they are subject to more stricter rules of examination.

Additionally, Question 47 of the FAQs extends the May 7,2020 date from May 18th (it had previously been changed) to May 14th.  In it’s answer to question 46, the SBA states that if a company is informed by the SBA that they “lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” If the money is returned the SBA will not pursue administrative action.

POSSIBLE NEW STIMULUS PACKAGE

I am sure many have heard that Nancy Pelosi and the democrats have introduced a $3 trillion coronavirus relief bill. This bill is more than 1,800 pages. Everything I have read or heard about this bill, known as the Health and Economic Recovery Omnibus Emergency Solutions Act, or Heroes Act states the bill, even if passed in the House, is dead on arrival in the republican controlled Senate. For this reason, I am not going to perform an in-depth review until there is something more concrete. I do not want to waste my time, or yours as readers, explaining provisions that will never come into existence. When both sides stop playing politics (or at least calm it down a bit) and come to an agreement I will break down the provisions in detail.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation