Paycheck Protection Program

PPP Loan Significant Updates

May 4, 2020 -

Small Business Administration Update:

Eligibility

On March 27, 2020 President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which included the Paycheck Protection Program (PPP) loan provisions designed to help small businesses pay their employees during the COVID-19 pandemic. Since passage of the bill, the Treasury Department and the Small Business Administration have published numerous guidelines and posted numerous Frequently Asked Questions (FAQ’s).  Many of the guidelines and FAQ’s contained provisions that were not directly addressed in the bill itself and have caused some confusion and concern.

One such area of concern was included in the SBA’s Frequently Asked Questions Document update on April 23rd.  In that update the SBA added FAQ 31 which reads –

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: 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 review carefully 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 the 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 the SBA to have made the required certification in good faith.

Although the FAQ was directed towards "large companies with adequate sources of liquidity…" the reference to "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…" has raised some concern as to eligibility for the loan.  Unfortunately, the SBA did not provide specific guidance on what they would consider when determining if a business had access to other sources of liquidity. Additionally, on April 28th the SBA released FAQ 37 that made it clear the provisions of FAQ 31 are applicable to all businesses, regardless of size.

Additionally, loan recipients will not remain anonymous as EINs will be made public. We anticipate heightened government scrutiny will be forthcoming to investigate potential fraud and abuse. Businesses who have received PPP loans and are later found to have not qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences. Further, businesses may experience reputational damage for having pursued these loans.

Given the revised guidance issued by the SBA and the pending May 7, 2020 deadline for returning loan proceeds, we strongly encourage you, your organization’s management, and board of directors to carefully and immediately review your company’s financial situation and reconsider the relief you may have already received with a PPP loan. Specifically, consider whether your circumstances fall within the spirit and intent of this economic relief program and if your business had other sources of liquidity to support ongoing operations.  We encourage you to consult with legal counsel if you have questions regarding your organization’s eligibility to receive funds.

If you do receive and keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. This documentation will be crucial were your business to be audited and/or investigated. This defensive documentation will greatly minimize your potential exposure to fraud and abuse allegations related to your participation in this loan program.

Loan forgiveness

Although the Treasury Department was given 30 days from the signing of the bill to issue guidance on the calculation of loan forgiveness, they have yet to provide such guidance.  We will continue to monitor the situation and share the guidance as it becomes available.

SBA Review

On April 28Treasury Secretary Mnuchin announced the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”

Internal Revenue Service PPP loan update –

The IRS released guidance on April 30th (Notice 2020-32) to explain that a taxpayer that receives a loan through the Paycheck Protection Program (PPP) is not permitted to deduct expenses that are normally deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was then forgiven. Under Section 1106(b) of the CARES Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the eight-week covered period beginning on the covered loan’s origination date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP. 

The notice explains that the expenses are not allowed because the forgiveness of the loan will not be included in income - this follows the provisions of IRS code section 265. This code section disallows the deduction of expense related to tax exempt income.   

The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses. Since the CARES Act did not address this in the bill, the deductibility of the expenses will follow code section 265 and will not be deductible. 

Many believe that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to the intent of Congress. Dermody, Burke, & Brown will be monitoring for further developments on this issue.

Please call your CPA if you have questions regarding the content of this update.

 

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.