COVID Financial Management
Uncertain About “Economic Uncertainty”? You May or May Not be Forgiven
This article was originally published on May 1, 2020. It was updated on May 5, 2020, to reflect Treasury FAQ #43, which extends the repayment date for the safe harbor from May 7, 2020 to May 14, 2020. It has been updated again to reflect Treasury FAQ #46, which provides guidance regarding PPP loan certification requirements and again on May 14, 2020, to reflect Treasury FAQ #47, which extends the repayment date for the safe harbor from May 14, 2020 to May 18, 2020.
- As PPP relief funds come in, concern about eligibility, forgiveness, and government scrutiny is growing.
- Treasury has extended the safe harbor date from May 14, 2020 to May 18, 2020.
- Treasury released additional guidance on the economic necessity certification for PPP loans on May 13, 2020.
Consider the following scenario. Your organization is facing challenging times due to the COVID-19 pandemic and you find yourself asking, “How do I keep my employees on the payroll and my business operational?”
What constitutes economic uncertainty? We are here to help.
Good news! The government created a loan program within the new CARES Act called the Paycheck Protection Program (PPP). It provides qualifying organizations access to loans with a 1% interest rate, of which some or all may be eligible for forgiveness. You applied and just received your funds to pay payroll, rent, utilities, and interest on mortgages and existing debt.
Fantastic, right? Maybe not.
As PPP funding ran short and public opinion shifted, important new developments have emerged.
- On April 23, the Treasury issued FAQ #31, which states: “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. … Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘[c]urrent 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.” FAQ 31 further states, “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 [now May 18 per FAQ #47 below] will be deemed by SBA to have made the required certification in good faith.”
- On April 28, Treasury Secretary Mnuchin announced that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate …”
- On April 28, Treasury issued FAQ #37, which makes it clear that the above-quoted statements in FAQ #31 apply to all organizations.
- On May 5, Treasury issued FAQ #43, extending the repayment date for the safe harbor discussed in FAQ #31 from May 7, 2020 to May 14, 2020 [now May 18 per FAQ #47 below]. Borrowers do not need to apply for the extension.
- On May 13, Treasury issued FAQ #46, which clarifies how the SBA will review the required “necessity” certification. The FAQ states: “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.” As for borrowers with PPP loans over $2 million, the FAQ indicates that the SBA will not pursue administrative enforcement or referrals to other agencies with regard to a borrower that repays a PPP loan after receiving notification from the SBA that the SBA has determined that the borrower lacked an adequate basis for the required certification concerning the necessity of the loan request. This new guidance should assist borrowers that are struggling with the question of whether they should return their PPP loans prior to the May 18, 2020 safe harbor date.
- On May 13, Treasury issued FAQ #47, further extending the repayment date for the safe harbor discussed in FAQ #31 from May 14, 2020 to May 18, 2020. Borrowers do not need to apply for the extension.
Based on these developments, you may have concerns about PPP eligibility, forgiveness, and government scrutiny.
Where are these concerns coming from?
The PPP loan application includes two critical certifications that the authorized representative of the loan applicant must make. Specifically, the representative of the applicant is required to certify that:
- “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
- “The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”
Source: PPP loan application, page 2 (emphasis added)
As the application states, the risk of making an inaccurate certification includes potential criminal liability for fraud.
Unfortunately, current guidance does not provide clear direction on the conditions for eligibility and forgiveness. This poses a big challenge as borrowers hear threats of SBA audits, fraud charges, and bad publicity, but lack clear rules to aid decisions.
What should you do now?
Although we don’t know much, we do know that documentation of the rationale for the loan is likely to be critical. The newly issued guidance indicates the authorized representative of the borrower should be able to assert, in good faith, that the PPP loan was needed after considering at least these factors:
- The borrower’s current activity;
- The borrower’s access to other sources of liquidity sufficient to support its ongoing operations; and
- An evaluation of whether these other options, if any, could be implemented in a way that was not significantly detrimental to the borrower’s business.
Ideally, borrowers will want to have documentation that shows they considered each factor.
Keep in mind that your loan may be subject to review. The U.S. Treasury Secretary has announced that all PPP loans of more than $2 million will be reviewed, and spot checks will be made of PPP loans for lesser amounts. The loan reviewer will have the benefit of hindsight, so be thoughtful in your needs assessment. If you have concerns about the loan application certifications and your eligibility to receive a PPP loan, you should consult an attorney to help you evaluate your options and the corresponding legal implications. Under the direction of your attorney, CLA can assist you and your attorney with assembling documents and data in support of the certifications that you made in the loan application.
Don’t delay taking action, as the May 18, 2020 date to make a decision as to whether to keep or return the funds will be here before you know it.
How we can help
As you face challenges now and in the months ahead, CLA is here to assist you, from helping you and your attorney support your PPP loan certifications to helping you properly account for the loan proceeds and their use. Please contact us today.