The Paycheck Protection Program (PPP) was quickly executed, and with new FAQ’s and Interim Final Rules out on a regular basis, it feels as though the rules are still being written. Many of you that have applied for or received PPP loans are now moving into the documentation and forgiveness portions of the process.
Though some parts of the application and forgiveness processes have been clarified, others remain unclear. More recently, there’s been confusion about whether businesses should return the funds to avoid fraud charges—and what fraud even means for businesses with PPP loans.
All PPP loan applicants are required to make a “necessity certification,” certifying in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
After the approval of additional funds for the PPP program, the SBA and Treasury added further guidance to their FAQ document. FAQ 31 and FAQ 37 retroactively modify the above certification. This guidance added the following factors:
- “…their current business activity…”
- “…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.”
Many PPP applicants, who had already made the certification, now must take the above guidance into account when deciding to move forward with a PPP loan. It is unclear what impact potential access to other forms of liquidity, such as debt or savings, has on this updated guidance.
Treasury Secretary Mnuchin has announced that all PPP loans over $2M will be audited. In addition, he has threatened to “impose criminal and civil liability against PPP loan recipients for making a false certification as to loan necessity.”
Recent guidance, which may be a reaction to both swiftly running out of funds, as well as negative news coverage of public firms receiving PPP loans, seems to contradict the guidance from May 31:
- “Do I need to first look for other funds before applying to this program? The short answer is: No. “We are waiving the usual SBA requirement that you try to obtain some or all of the loan funds from other sources (i.e., we are waiving the Credit Elsewhere requirement)”
Because of the opacity of the current situation, The CPA Journal provided the following recommendation: “Entities accepting PPP funds would be wise to prepare at least a brief written analysis, possibly including Excel projections, covering their reasons for meeting the FAQ 31 tests, as subjective as such an analysis might need to be. One approach is to prepare three scenarios—one best-case, one worst-case, and one in-between—for the economic recovery and project how using an entity’s other sources of liquidity would or would not be “detrimental to the business.”
Recent FAQ’s provided a “Safe Harbor,” which allows PPP borrowers to repay the loan in full by May 18th, 2020. Those who comply “will be deemed by SBA to have made the required certification in good faith.”
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower 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 borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
You can review other FAQs regarding PPP Loan Forgiveness here. Please follow-up with our experts if you have questions on this topic.