Since the Paycheck Protection Program (PPP) went live on April 3, 2020, over four million businesses across the country have been approved for PPP loans across two rounds of federal funding. Through May 8, 2020, the United States Small Business Administration (SBA) approved over $530B in PPP loans, which are administered through SBA approved lenders.
The PPP loan program has been the subject of significant public scrutiny amid concerns that it benefitted larger companies with questionable need to the exclusion of small business concerns with significant need. In response, Congress approved a second round of funding for the PPP loan program with an emphasis on smaller lending institutions, and the Treasury Department indicated that it will exercise heightened auditing and oversight over the loans. In late April, Treasury issued guidance recommending that borrowers revisit their PPP loan certifications of need based on “[c]urrent economic uncertainty” to determine if they were truly eligible to receive the PPP loan. Specifically, Treasury’s responses to FAQ’s 31 and 39 in late April, 2020 “reminded all borrowers” of the need certification requirements and indicated that the SBA will review all loans over $2 million, “in addition to other loans as appropriate.” These comments, in conjunction with the lack of criteria concerning how need and certifications will be evaluated, has caused uneasiness among borrowers that received PPP loans and began spending those funds weeks ago.
May 13, 2020 Guidance
On May 13, 2020, the Treasury Department issued updated guidance that clarified its position on the above issues and created additional safe harbors to PPP loan recipients. This guidance should provide meaningful comfort to PPP loan recipients both under and over the $2 million loan threshold.
Loans under $2 million
The first safe harbor benefits small businesses that received a PPP loan under $2 million. Specifically, Treasury indicated that “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.” (FAQ 46). Essentially, the guidance suggests that 1) small businesses receiving smaller PPP loans were less likely to abuse the program, compelling less scrutiny by the SBA over loan compliance, and 2) the SBA does not wish to expend its “finite audit resources” on smaller balance loans.
Loans over $2 million
While the May 13th guidance confirms that the SBA will review all loans over the $2 million threshold without affording those borrowers a presumption of good faith, the Treasury Department’s guidance offers some latitude to borrowers receiving larger loans. The guidance appears to soften the Treasury’s prior comments targeted towards larger loan recipients, implying that a borrower’s “individual circumstances” and the language in the SBA guidance and the good faith certification may have created an “adequate basis” for the borrower to seek a PPP loan. Importantly, where the SBA deems borrowers of these larger PPP loans ultimately lacked an adequate basis to claim a need for the loan, 1) the loan will not be subject to forgiveness and must be paid back, and 2) upon repayment, the borrower will not be subject to “administrative enforcement or referrals to other agencies”.
Safe Harbor to Return PPP Funds
In addition, the updated guidance extended the safe harbor for a borrower to return improperly received PPP loan funds to May 18, 2020. (FAQ 47). The date was extended from the initial May 7, 2020 deadline due to the timing of the updated guidance.
Most importantly, the May 13, 2020 guidance failed to clarify a number of outstanding questions regarding borrowers’ real time PPP loan spending or the mechanics of how loan forgiveness will work. Borrowers and industry trade groups continue awaiting clarification from the SBA concerning issues of how payroll cycles and non-payroll expenses may be adjusted in the eight week (56 day) covered period. Since the covered period begins on the date the PPP loan is funded by the lender, the timing of the loan often does not coincide with a borrower’s payroll cycle or its ability to meaningfully reopen the business in light of government restrictions. Additional questions that remain unanswered surround the borrower’s payment of bonuses, pre-payment of rent, and whether cellular phone and internet plans classify as eligible non-payroll utilities eligible for PPP loan spending.
Until specific guidance is issued on these topics, we suggest borrowers continue maintaining meticulous records of PPP loan spending and closely monitoring their compliance with the “75/25 ratio” of payroll to non-payroll expenses during the covered period.