Businesses who have borrowed through the Paycheck Protection Program (PPP), enacted by the CARES Act, are still anxiously waiting for the Small Business Administration (SBA) to provide further guidance explaining how the loan forgiveness amount will be calculated. On May 13, 2020, the SBA did issue additional guidance that will benefit certain employers.
Safe Harbor for Good Faith Certification
Borrowers of PPP loans are required to certify in good faith that their PPP loan request is necessary. The SBA updated its FAQs on May 13, 2020 by adding a safe harbor for businesses that take out loans for less than $2 million. According to FAQ #46, any borrower that received a PPP loan 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.” PPP loans below this threshold will not be reviewed in relation to this certification to enable the SBA to conserve its finite audit resources and focus its review on larger loans. FAQ #47 was also added to extend the safe harbor date for borrowers (who are unable to make the good faith certification) to repay their loan from May 14, 2020 to May 18, 2020, to give them an opportunity to review and consider FAQ #46.
To provide the background to these safe harbors, during the first round of PPP loan funding it was revealed that major companies, including Shake Shack, Ruth’s Chris Steak House and the privately-owned Los Angeles Lakers, were receiving millions of dollars in loans. This generated a public outcry that large companies were taking advantage of the program while countless small businesses were being left out. To curtail abuse of the program the SBA updated its guidance on April 23, 2020 by adding FAQ #31 instructing all borrowers to carefully review the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The guidance further states that it is unlikely that a public company with substantial market value and access to capital markets would be able to make the required certification in good faith. Finally, FAQ #31 provided a safe harbor for any employer that applied for a PPP loan prior to the issuance of the updated guidance, whereby the borrower would be deemed to have made the required certification in good faith by repaying the loan by May 7, 2020.
The SBA also added FAQ #37 on April 28, 2020 to clarify that not only were public companies unlikely to make good faith certifications, but also businesses owned by private companies would not be able to if they had adequate sources of liquidity to support their ongoing operations. On April 29, 2020 FAQ #39 was added to confirm that the SBA would review all loans exceeding $2 million in relation to the required certification.
Employers and their advisors have been frustrated by the piecemeal guidance issued by the SBA concerning the good faith certification. The new safe harbor is meant to assist small businesses, but the last-minute updated guidance in FAQs #46 and #47 may have arrived too late for those businesses with PPP loans of less than $2 million that rushed to pay back their loans based on the SBA’s previous guidance. However, note that a borrower can request the lender to “cancel” their PPP loan application to permit a new application to be submitted with a different lender.
Relief for Certain Partnerships and Seasonal Employers
The SBA also issued an Interim Final Rule on May 13, 2020 permitting specified employers to receive additional loan proceeds. On April 28, 2020 the SBA posted an Interim Final Rule requiring PPP loans to be disbursed in a single disbursement, which prevented businesses from subsequently requesting increased loan amounts. However, the SBA is now permitting lenders to make an additional disbursement of increased loan proceeds in the following two specific situations:
- If a partnership received a PPP loan that did not include compensation for its active partners in the calculation of its payroll costs, the partnership may request that the loan amount be increased to include partner compensation. Because the CARES Act provides that individuals with self-employment income are eligible to apply for PPP loans, initially there was some confusion regarding the treatment of partners active in a partnership, and some partners applied for PPP loans on their own behalf. The SBA issued an Interim Final Rule on April 14, 2020 to clarify that a partner may not submit a separate application as a self-employed individual. Instead, the self-employment income of active partners, up to $100,000 annualized, may be included in payroll costs on a PPP loan application filed by the partnership.
- If a seasonal employer received a PPP loan before the alternative criterion for determining the maximum amount for seasonal employers became available, the employer may request the loan amount to be increased based on a revised calculation using the alternative criterion. The CARES Act permits seasonal employers to calculate their maximum loan amount by using their monthly average payroll costs for the 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019. This disadvantaged businesses with seasons that occur later in the year, and therefore the SBA issued an Interim Final Rule on April 27, 2020 allowing a seasonal employer to alternatively use their average monthly payroll costs for any consecutive 12-week period between May 1, 2019 and September 15, 2019 to determine its maximum loan amount.
In either situation, the lender may electronically submit a request through SBA’s E-Tran Servicing to increase the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not yet been submitted. Lenders must submit the SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 22, 2020.
If you have any questions regarding your PPP loan and forgiveness requirements, please contact your Bennett Thrasher tax advisor by calling 770.396.2200.