Paycheck Protection Program - May 15 Update

Talk about a political football. The Paycheck Protection Program (PPP) has been a blessing and a curse for many businesses. To make matters worse, the program has been a moving target in that rules started coming out after the fact in way that seemed to be more strict. Fortunately, we've recently gotten some additional guidance.

You can read the gory details here if you'd like and I'll provide my comments below.

$2 Million Good Faith Certification - Question 46

Going back to the original application, businesses were supposed to certify in good faith that "current economic uncertainty make this loan request necessary to support the ongoing operations of the Applicant." Considering we're in the middle of a pandemic, most businesses went ahead and checked the box. And then came the bad press. Something about publicly traded businesses and certain NBA teams receiving funding, banks playing favorites, and smaller businesses getting shut out.

On April 23, Question 31 of the FAQs clarified that large companies with adequate sources of liquidity should be prepared to demonstrate to the SBA its basis for certification. While this was targeted largely to publicly traded businesses and probably certain basketball teams, less than a week later on April 28 the FAQs were updated with Question 37 and addressed private companies with adequate sources of liquidity. The SBA's response? See Question 31. Essentially, "you've been put on notice, small businesses."

That response didn't exactly instill a lot of confidence in small business nor in the accountants, attorneys, and advisors that support them. How are businesses going to certify? Were business owners going to need to tap emergency funds first? What about retirement accounts? No guidance. This uncertainty seemed to have resulted in fewer businesses applying for the program.

Fortunately, on May 13, the SBA updated the FAQs with Question 46 providing a safe harbor provision that states that businesses that took loans for less than $2 million will have automatically satisfied the certification. Huge win. By the way, that's going to be most business.

Self Assessment, Risk Management, Other Regulatory Bodies

So you received funds under PPP and the amount was under $2 million. Nothing to worry about, right? Well... You may have satisfied your requirement under the SBA but there are a few considerations.

Release of Information About Approved Loans

It is expected that certain information about the loans including the names of borrowers and their officers, directors, stockholders and partners as well the amount of the loans and its purpose may be released under the Freedom of Information Act or others. For many business, this doesn't much matter but it's at least something to be aware.

Third party and other governmental reviews

If you are in a regulated industry then it's a good idea to reach out to the regulatory body and understand what impact, if any, receiving PPP funding has on your business. For example, the state of Colorado's Department of Regulatory Agencies (DORA) recently issued guidance to investment advisors that because applicants receiving funds must certify that the loan is necessary to support the ongoing operations of the applicant that the Division's view is that disclosure may need to be made.

If you have contractual obligations that include financial restrictions or covenants then it's a good idea to review those in light of any PPP funding.

File Review

In light of the above, I highly recommend keeping contemporaneous records of your need just in case. What should you memorialize? Certain quantitative factors such as any lost clients or churn, lost prospects, extended accounts receivable balances are all good places to start. You could also put in some qualitative factors; perhaps your location has extended stay at home orders. It's going to be much easier to pull out the information if it has been timely documented rather than trying to recreate something later down the road.

A Quick Reminder About Forgiveness The PPP loans are meant to be forgiven but it isn't automatic. Forgiveness needs to be requested from your bank. We're still waiting for guidance (at least at the time of this writing) from Treasury on the specifics of the calculation. The AICPA has said in a press release that they plan to release their own calculation, which has been shared with the Treasury and SBA, in the case an official calculation isn't released today.

We know that the forgiveness amount isn't taxable income. But are the expenses still deductible? Well, the IRS released guidance (Notice 2020-32) stating that to prevent a double tax benefit, expenses paid for with forgiven PPP funding are not deductible. I'm hopeful for a legislative fix from Congress on this one (see below). Unless we hear otherwise, we'll be running tax projections under the two scenarios: tax deductible and not tax deductible.

HEROES Act In the Works

Yet another Act is in the works with many favorable elements. However, it's still a work in process so expect this to change. Some of the highlights including safe harbors to those that cannot rehire, clarifies that expenses paid with PPP funds would also be tax deductible (this would be huge), removing the requirement that not more than 25% of loan forgiveness can be for non-payroll costs, caving out funds for small businesses with 10 or fewer employees, and extending the maturity of the loans to 5 years. Stay tuned.

14,000' View

If you and your business were shut out in the first round or you were waiting for some additional guidance then now is a good time to reconsider and apply as there are still funds available. If you've already received funding but didn't like the direction things were going, then the $2 million bright line test helps bring confidence to process. Sure, there's a few items above that you should be cognizant but I wouldn't let it deter you from seeking funding or keeping the funds already received. Additionally, smaller lending institutions and fintech solutions are entering the market which provides easier funding access, especially to those that don't have a preexisting banking relationship.

More to come. Questions, comments? Let's chat.