SBA PPP LOAN FORGIVENESS RULES
By Scott Zickefoose, CPA, CM&AA, Tax Senior Manager
Note: This article was updated May 6, 2020 to reflect the new deadline for Paycheck Protection Program loan qualification and repayment.
Paycheck Protection Program Frequently Asked Questions and Interim Final Rules Bring Clarity to Loan Borrowers
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act” or “Act”) is a $2.2 trillion stimulus package that provided relief to small businesses and individuals. The Paycheck Protection Program (“PPP”), one of the most favored business focused programs, allocated funding to small businesses through new and enhanced loan programs administered by the Small Business Administration (“SBA”). The Paycheck Protection Program was designed specifically to provide eligible small businesses immediate relief if they believe that “current economic uncertainty” of the COVID-19 pandemic makes such a loan for their business “necessary to support their ongoing operations,” and were willing to certify to the lender to that affect.
The United States Department of the Treasury (“Treasury”) is authorized to issue additional regulations as it relates to the PPP and has been doing so by issuing Frequently Asked Questions (“FAQs”) and Interim Final Rules. This information, which is additive to the Act itself, is used to inform lenders and borrowers on technical issues left unresolved in the Act. Additional guidance, whether in the form of FAQs or Interim Final Rules, has been issued on a rolling basis and is not intended to cover all unanswered questions at one time. This approach has left borrowers having to learn as they go, resulting in confusion and uncertainty.
FAQ 31: Qualifying for a Paycheck Protection Program Loan
In a recent Frequently Asked Question (FAQ 31) issued on April 23, 2020, Treasury is asked, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
It is believed that this FAQ originates from several public companies, such as Shake Shack, that made headlines after the first round of PPP funds were exhausted. The question hinges on whether or not large companies can properly certify the need for the PPP. In its response to FAQ 31, Treasury again confirms the waiving of traditional “credit elsewhere” provisions, which require applicants to exhaust other avenues of credit prior to applying for specific loans. However, FAQ 31 indicates that borrowers must still review their current business activity and their ability to access other sources of liquidity sufficient to support their operations in making the requisite certifications for the PPP loan. These two comments seem to a large degree contradictory. If a business is not required to exhaust others avenues of credit, how and to what degree does it need to consider “adequate sources” of liquidity? Treasury indicates that 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.
On April 28, 2020, Treasury issued FAQ 37, which confirms that the standards set forth in FAQ 31 are applicable to businesses owned by private companies.
There are several things to note when analyzing Treasury’s response to FAQ 31:
- Treasury acknowledges that sources of liquidity which would be “significantly detrimental” to the business do not constitute liquidity for purposes of this attestation. As such, simply having access to sources of liquidity, would not preclude a business from being able to make the required certification.
- Treasury does not define “sources of liquidity”, specifically as it relates to private businesses. As such, borrowers are left to interpret whether or not this definition is specific to debt or if equity from existing (or new) shareholders should be considered. Given liquidity generally has a short-term view, it is difficult to believe that equity from new investors in a private company is what Treasury envisioned when crafting this response, but existing guidance is not clear.
- Although the CARES Act is often referenced as a job preservation Act, the required certification and Treasury’s subsequent discussion in FAQ 31 and FAQ 37, do not reference job preservation. The certification simply references that this loan is necessary to “support [the] ongoing operations of the business”. It is currently unclear whether this omission was an oversight or intentional.
- The question posed in FAQ 31 asks about businesses owned by large companies, without defining “large”. In its response, Treasury’s only example is a public company. However, in FAQ 37, Treasury confirms the standards outlined in FAQ 31 are applicable to private companies, without making a reference to the company’s size.
Treasury Secretary Steven Mnuchin has publicly stated that all loans in excess of $2 million will be reviewed by the SBA prior to receiving forgiveness. This position was further solidified in FAQ 39 (posted April 29th) when Treasury reiterated Secretary Mnuchin’s statement. Secretary Mnuchin has also indicated that all loans in excess of $2 million will be reviewed by the SBA prior to receiving forgiveness. He has also stated that those that have received funds, which are ultimately determined to not qualify for the PPP loan, will not have the loans forgiven and may be subject to criminal liability. This message, though lacking in guidance and detail, aligns with Treasury’s general posture that abuse in this program will not be tolerated.
Best practices for loan borrowers: Evaluation, documentation and preparation
Given the additional commentary provided by Treasury, through FAQs and public comment, what should borrowers do to support that their certification was made in good faith?
Until further guidance is released, we are recommending that borrowers document macro and micro level trends within their business and industry that support the economic uncertainty that is referenced in the certification. This analysis (and documentation) should be completed as soon as possible in relation to the request for the PPP loan and should include qualitative factors, but also specific quantitative analysis documenting the necessity of this loan. We are strongly recommending any borrower that analyzed these factors without maintaining substantive documentation to take time immediately to document their analysis and conclusions. A thorough analysis would document known risks within the business, such as decline in business due to COVID-19, projected decline in business given state mandated restrictions, uncertainty as to when such restrictions will be removed, customer concentrations, credit risks, pricing pressure, on-going fixed costs regardless of business level, etc., and document the business’ overall sensitivity to these variables. While payroll costs and employee count should be a consideration in this analysis, the analysis should not be limited to just these variables. The assessment of the current business environment should detail potential short term impacts to the business, but not be limited to the next eight weeks. A longer-term analysis can be used to support the certification, as the certification does not cover a specific time period.
For businesses with access to liquidity, such as an untapped line of credit, the business should evaluate and document the potential impact accessing such liquidity would have on the business. It is important to take a longer term approach in analyzing this and evaluate potential future needs of liquidity and the ability of the company to access additional liquidity in the future if all current options have been exhausted.
Further, it is advisable to prepare a contingency plan analysis, which outlines what the company’s actions would have been in the event it was unable to secure a PPP loan. It is our belief that this level of in-depth analysis, documented contemporaneously with the borrower’s certification, provides a stronger fact pattern for a good faith certification.
A high level cash forecast, that evaluates the company’s sensitivity to changes in certain variables, such as revenue and gross margin decline, is a great way to document the above-referenced content in a quantitative way.
The borrower’s certification should continually be evaluated as new guidance is released by Treasury.
What should I do if I no longer feel that my business is an eligible borrower based on this guidance?
Any borrower that applied for the PPP loan prior to April 23, 2020, that believes they no longer qualify as a result of this additional guidance may repay the loan in full by May 14, 2020 (as extended by FAQ 43). If repaid in full by May 14, 2020, the SBA will deem that the borrower made the required certification in good faith.
Every business’ situation is unique and nuanced. Should you have specific questions regarding the PPP loan eligibility of your business, the Keiter and Keiter Advisors team are here to discuss your situation. The definitive guidance is lacking, causing significant confusion among borrowers and their advisors.
Disclaimer: This content has been prepared for general guidance and informational purposes only based on the date published.
The FFCRA, CARES Act, and SBA Paycheck Protection Program (PPP) are continually releasing new guidance that may change the information provided within this content. Keiter recommends that you perform your own independent research and/or speak with a qualified accounting professional before making any financial business decisions. © 2021 Keiter, All Rights Reserved.
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