Two aspects of the PPP loan program have made it extremely popular. First, the opportunity for most or possibly all of the loan to be forgiven and second, significantly less documentation and proof of need being required from the borrower supporting how they have been impacted by COVID-19. Personal guarantees, generally required on SBA loans, are not required under the PPP loan program. The borrower must certify in good faith that “current economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant” – a statement that arguably many, if not most, businesses would be able to support. Recent media attention has focused on some large companies that received PPP funds and has given the public a perception that some borrowers may be obtaining these loans without the prerequisite need. To address this perceived inequity, last week, the Treasury and SBA provided guidance that narrows the definition of “necessary” in the form of Frequently Asked Question 31. It states:
“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.”
Although FAQ 31 particularly addressed publicly traded companies, later in the document, the Treasury confirmed that the guidance applies equally to private companies. For any borrowers that determine, in retrospect, that the PPP loan may not have been necessary, the Treasury and the SBA are allowing the borrower to return the loan funds, without penalty, by May 7, 2020. We have read about several of these large loans being returned by companies like Ruth’s Chris Steak House, Shake Shack, and the L.A. Lakers to name a few.
In additional news, Secretary of the Treasury Steven Mnuchin announced that the SBA will conduct a full review of every PPP loan of $2,000,000 or more to determine if the borrower met the requirements to participate in the program prior to loan forgiveness.
This guidance reminds us of the importance of documenting the reasons your business needs the borrowed funds. This documentation can be a simple written memo retained in your files. If you, as a borrower, have any doubts about meeting the “necessary” standard, we recommend that you consult your legal advisor before SBA’s May 7th refund date.
If you need additional information about this topic or other PPP questions, please visit our COVID-19 Planning Page or contact Stephanie Smith, CPA at ssmith@granthampoole.com. We have a team of professionals ready to help with current solutions and sound advice.
Stephanie B. Smith, CPA, CFF
Stephanie B. Smith is a member of GranthamPoole PLLC and a recognized leader in the fields of business valuation and litigation support. She has also written, taught, and spoken on many topics in the area over the years and has served as a technical advisor and testifying expert in numerous cases. Please contact Stephanie at ssmith@granthampoole.com or 601-499-2400. CPA License # 3657
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.