On October 2, the Small Business Administration (SBA) released a Procedural Notice regarding PPP borrowers’ change of ownership.

SBA defines a change of ownership as occurring when:

• “… at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity,
• the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or
• a PPP borrower is merged with or into another entity.”

Borrowers undergoing a change of ownership must notify their lender in writing and provide the proposed agreement or other relevant documents before the change of ownership occurs. There are no restrictions if the loan has been paid in full or the forgiveness process has been completed, meaning SBA has remitted funds to the lender or the borrower has repaid any remaining balance.

Other considerations relating to change of ownership include:

No SBA approval will be required when:

• The sale or transfer is of common stock or other ownership interest or a merger where:
• The sale or transfer of common stock or other ownership transfer is less than 50 percent of the PPP borrower’s interest, where all sales and transfers occurring from the date the PPP loan is approved are considered, or
• The borrower submits a forgiveness application supporting use of all PPP loan proceeds and creates an interest-bearing escrow account controlled by the PPP lender with funds equal to the balance of the PPP loan. The funds may be disbursed to pay any loan balance plus interest after the forgiveness process and any appeals are completed.


• A sale of 50 percent or more of its assets if the borrower submits a forgiveness application supporting use of all PPP loan proceeds and creates an interest-bearing escrow account controlled by the PPP lender with funds equal to the balance of the PPP loan. The funds may be disbursed to pay any loan balance plus interest after the forgiveness process and any appeals are completed.

If the ownership change does not meet these criteria, borrowers will need SBA approval. Borrowers should work with their PPP lenders, who will be required to submit the following information to the SBA:

• The reason the borrower cannot fully satisfy the PPP note or escrow the funds
• Details of the ownership change transaction
• A copy of the PPP loan documents
• Any agreements or letters of intent
• SBA loan number
• A list of all individuals with a 20 percent or greater ownership stake in the purchasing entity

For sales of 50 percent or more of the assets, SBA approval will be based on the buyer assuming all PPP obligations, which must be reflected in the sale documents.

Whether or not SBA approval of the transfer of ownership is required, the PPP borrower will remain subject to all terms of the program. If the buyers or successor has a separate PPP loan, they will be responsible for segregating PPP funds and providing documentation supporting compliance of the use of funds by each borrower.

To read the Procedural Notice, visit https://home.treasury.gov/system/files/136/5000-20057.pdf. For questions or to discuss your PPP loan or its forgiveness, please contact your HBK advisor.

Many manufacturers are completing their Paycheck Protection Program (PPP) covered periods and seeing their lenders launch their PPP forgiveness portals. Much like the rush to apply for loan funding this spring, borrowers are now rushing to apply for forgiveness. Before joining the rush, consider the following:

1. The right time to apply for forgiveness:
   
   According to the Paycheck Protection Program Flexibility Act (PPPFA) passed on June 5, 2020, a borrower has ten months after the last day of their covered period to apply for forgiveness.
   
   Some manufacturers may find it advantageous to apply before the end of the ten months, for example, if they have a business situation that calls for it, such as a transition of ownership. Others may decide that waiting for additional guidance provides them with the highest level of confidence that their loan can be forgiven.
   
   Manufacturers who have spent all their funds also might be inclined to apply before the end of their 24-week covered period. But they should be sure they have all the necessary documentation. In addition, guidance remains cloudy on certain mechanics of the calculation when applying early, so consider waiting until you are sure all aspects of your forgiveness application will comply with SBA guidance.
   
   
2. Eligible costs for forgiveness:
   
   Some manufacturers prefer to reduce the burden of documenting their expenditures by using only payroll costs for their PPP loan forgiveness application. But think about your PPP loan as a part of your business strategy, not as a standalone tool. Will applying for forgiveness using only certain expenses reduce your access to benefits from other programs?
   
   For example, a tax credit is available to certain businesses that conduct R&D (research and development) activities. Given current guidance, it might be advisable to exclude costs from your PPP loan forgiveness application that you could use for the tax credit, thereby maximizing both PPP loan forgiveness and the tax credit. Other tax credits may interact with your PPP loan in a similar fashion.
   
   It is important to discuss your PPP loan forgiveness with your tax preparer and other key advisors to ensure you are considering all programs available to you.
   
   
3. Full-time equivalent (FTE) restoration:
   
   FTE Safe Harbor #2 indicates that if you had a reduction in full-time equivalents (or FTEs) between February 15 and April 26, 2020, you have until the earlier of the date of your forgiveness application or December 31, 2020 to restore your FTE level so that the reduction will not affect your forgiveness amount. Some manufacturers, however, have regularly scheduled layoffs at the end of the year for maintenance, physical inventory or other operational requirements. If you are applying for forgiveness after the end of the calendar year, remember that your reduction elimination will be evaluated based on your FTEs as of December 31, 2020. Think carefully about employees who will be on your active payroll at that time, regardless of whether you intend to rehire them. Based on the mechanics of the calculation and FTE Safe Harbor #2 guidance, if you cannot prove those FTEs have been restored (based on your December 31 active payroll), you might not qualify for the safe harbor option.
   
   
4. PPE eligibility for forgiveness:
   
   Currently, expenses eligible for forgiveness are payroll costs (including certain employer paid health insurance, retirement contributions, and state and local taxes), and rent, mortgage interest and utilities as defined by the program. Neither general manufacturing personal protective equipment (PPE) nor COVID-19-specific PPE and supplies are eligible for forgiveness.
   
   Like all program guidelines, the rule on PPE is subject to change. Proposals in Congress include allowing certain PPE costs as expenses eligible for forgiveness. However, because a borrower must follow all guidance available at the time of application, it is important to stay abreast of changes and understand what is current guidance versus what is only a proposal.
   
   
5. Forgiveness applications do not guarantee forgiveness:
   
   Economic Injury Disaster Loan (EIDL) emergency advances (or grants), issued by the SBA will reduce PPP loan forgiveness by the amount of the advance (or grant), even if the forgiveness application indicates full forgiveness of the PPP loan. Manufacturers who participated in both programs should understand their obligations under each program.
   
   In addition, the SBA reserves the right to review all PPP loan applications for eligibility and loan amounts, as well as the PPP forgiveness applications for the forgiveness amounts. If the SBA determines you were not eligible for the loan, or if they determine that your loan or forgiveness amount was improperly calculated, you might not be granted full forgiveness. Manufacturers should discuss their concerns as they arise with their legal advisors or CPAs.
   
   

To discuss your PPP loan, its interaction with other programs, or other concerns regarding your manufacturing business, contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or 330-758-8613.

July 21, 2020 UPDATE: The Federal Reserve announced that the Main Street Lending Program has been modified to allow participation from eligible nonprofit organizations including educational institutions, hospitals, and social service organizations. Eligible organizations must meet the following eligibility criteria:

• In operation at least 5 years
• Have at least 10 employees
• Have total non-donation revenues equal to or greater than 60% of expenses from 2017 through 2019
• Have 2% or more operating margin in 2019
• Have at least 60 days cash on hand
• Have a current debt repayment capacity of at least 55% measured by a ratio of cash, investments, and other resources to outstanding debt and certain other liabilities

  Learn more regarding the Main Street Lending Programs available to nonprofit organizations   Nonprofit organizations are among the organizations affected by the COVID-19 pandemic. While several relief programs are available through the federal government, determining when your organization is eligible for each program can be confusing, due to differing criteria. Here, we explore three loan programs offered through federal government programs or federal legislation due to the COVID-19 crisis and the eligibility of nonprofit organizations to apply. Economic Injury Disaster Loans The Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL) is a program, administered through the SBA, that is available to eligible organizations suffering economic injury due to a declared disaster. Because COVID-19 is considered a declared disaster, these loans are available in all 50 states as well as Washington D.C., Guam, the Virgin Islands, Puerto Rico, the Northern Mariana Islands, and American Samoa. Loans awarded to nonprofit organizations are up to $2 million, carry a 2.75 percent interest rate, and are amortized over a period of up to 30 years. Payments are deferred for the first year. The following nonprofit organizations are eligible to apply:

• Private nonprofit organizations that are non-governmental agencies or entities that currently have an effective ruling letter from the IRS granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954,
• Private nonprofit organizations that have satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law, or
• Faith-based organizations. (For more information regarding faith-based organizations, please visit the SBA’s Faith-Based Organizations FAQs page).

  In addition to the loan, applicants may apply for an emergency advance (or emergency grant) of up to $10,000, based on the organization’s employee headcount. While this advance or grant awarded does not need to be repaid (even if the applicant declines the loan), it will reduce forgiveness on the Paycheck Protection Program loan, which is discussed further below. Currently, the EIDL program is only accepting new applications from agricultural enterprises due to funding limitations. It is unknown whether additional applications from other organizations, including nonprofit organizations, will be accepted in the future. Organizations who already applied for this program may check on the status of their application by contacting the SBA’s Customer Service Center at 1-800-659-2955 (TTY: 1-800-877-8339) or DisasterCustomerService@sba.gov. June 15, 2020 UPDATE: The SBA is once again accepting applications from all eligible organizations. It is unknown how much funding is still available, but applicants are awarded funds on a first-come, first-served basis. Interested organizations should visit sba.gov/disaster. Paycheck Protection Program The Paycheck Protection Program (PPP) is a loan program created through the CARES Act which was passed by Congress and signed into law on March 27, 2020. Unlike the EIDL program, the PPP is administered by lenders such as banks. The program offers eligible organizations loans equal to roughly 2.5 months of 2019 payroll costs (up to $10 million in total loan proceeds), to be used on specified payroll costs, rent, mortgage interest, and utilities. If borrowers spend the funds in accordance with the guidelines and maintain employee headcount and salaries and wages, the loan may be forgiven up to 100 percent. Loan proceeds not forgiven will be subject to a 1 percent interest rate and 2-year amortization period. Some nonprofit organizations are eligible to apply for PPP loans. Specifically, CARES allows 501(c)(3) nonprofit organizations, 501(c)(19) veterans organizations, and certain tribal business concerns to apply. Note that the organization must have under 500 employees (or otherwise meet the SBA Size Standard for its NAICS code), as well as agree to certifications that can be found on the PPP application and PPP forgiveness application. Funding is still available for this program and nonprofit organizations can still apply. Interested organizations should contact their lender to begin the application process. Note that guidance on this program continues to evolve, and the latest updates on both the loan process and the forgiveness process can be found at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses. In addition, as Congress continues to negotiate changes to the program applicants and borrowers should watch for changes or stay in touch with their advisors to ensure they are complying with the latest program guidelines. June 15, 2020 UPDATE: While funds remain, loans will only be issued through June 30, 2020. Interested organizations should contact their lender to begin the application process. Main Street Lending Program The Main Street Lending Program (MSLP) offers loans to eligible small and medium-size businesses affected by COVID-19. The program offers loans, starting at $500,000 based on the business’s debt structure and 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). According to the program’s Frequently Asked Questions, nonprofit organizations are currently not eligible for this program. The document states: “While non-profit organizations are not currently eligible under the Program, the Federal Reserve acknowledges the unique needs of non-profit organizations, many of which are on the front lines providing critical services and research to fight the pandemic. EBITDA is the key underwriting metric required for the [loan program]. The Federal Reserve recognizes that the credit risk of non-profit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA. The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.” For more information on this program, visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm. June 15, 2020 UPDATE: The Federal Reserve announced that it is seeking feedback through June 22 on its proposal to expand this program to small and medium-sized nonprofit organizations. If approved, eligible nonprofits may include organizations that:

• are considered a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code
• were in sound financial condition before the coronavirus pandemic and could benefit from additional liquidity to manage through this challenging period
• employee a minimum of 50 and maximum of 15,000 employees
• have operational history of at least five years
• have endowments of no more than $3 billion.

  Additional financial thresholds based on operating performance, liquidity, and ability to repay debt may apply. In addition, the Main Street Lending Program has also been expanded for all organizations with a new minimum loan size of $250,000. To learn more regarding the proposal to expand the program to nonprofits, visit the Federal Reserve’s press release at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615b.htm. For additional information about general program changes, visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.   For more information about relief options available to nonprofit organizations, contact your HBK Advisor.

On July 15, an updated FAQ document was released on the Main Street Lending Program (MSLP).

Key updates include:

Revised Definition of Ineligible Businesses
A recently released definition of ineligibility provided by the SBA and Treasury for the Paycheck Protection Program has been adopted for the Main Street Lending program. Ineligible businesses include those where “an owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year”.

In addition, a sole proprietor who is not otherwise established as a “business” as defined by the program is not an eligible borrower under the Main Street program.

Borrowers are expected to review all criteria for eligibility and ensure they make a reasonable, good-faith effort to determine their eligibility.

Clarification on loan terms
Certain terms of the Main Street Loan have been updated, including:

• Lenders may charge certain fees to borrowers, and fees may be included in the principal amount of the loan.
• While the interest rate is calculated based on LIBOR, LIBOR floors are not permitted.
• Borrowers who were established before March 13, 2020, but who cannot produce sufficient financial history to establish their financial condition before the COVID-19 pandemic may not be eligible for a Main Street loan. However, those entities with clear predecessors or subsidiaries may be permitted to use the financial records of these predecessors or subsidiaries.
• The program generally prohibits using the funds for the benefit of the borrower’s foreign parents, affiliates, or subsidiaries, or to refinance or pay existing debt, nor can the loan funds (or any funds) be used to pay dividends, distribute capital, repurchase equity, pay compensation over certain thresholds or repay debt ahead of schedule, unless otherwise specified in the program terms. Borrowers or prospective borrowers are encouraged to review all loan terms and ensure compliance with the provisions for using the funds.

Clarifications to capital distribution restrictions
The CARES Act provides specific restrictions on compensation, stock repurchase, and capital distributions for borrowers of a Main Street Loan. However, these restrictions do not apply to “distributions made by an S Corporation or other tax pass-through entities to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings or distributions made by a tribal business to a tribal government owner.” Additional information pertaining to tribal businesses is provided in FAQ H.15.

To review the latest FAQ document as well as term sheets and other program information, please visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

If you have questions about the Main Street Lending Program or other COVID-19 relief options, please contact your HBK Advisor.

The Small Business Administration announced on July 11 that its Economic Injury Disaster Loan (EIDL) emergency advance funds, allocated through the CARES Act, and subsequently, the Paycheck Protection Program and Health Care Enhancement Act, have run out. EIDL funds to small businesses of $1,000 per employee up to $10,000, also referred to as emergency grants, do not need to be repaid, though they reduce forgiveness for borrowers with Paycheck Protection Program loans.

While emergency advance or grant funds have been expended, Economic Injury Disaster Loans remain available to eligible organizations to support working capital needs generated by the COVID-19 crisis. Loan terms include an amortization period of up to 30 years, and a low interest rate of 3.75 percent for small businesses and 2.75 percent for non-profit organizations.

For more information on eligibility and loan terms, visit sba.gov/disaster.

If you have questions about an Economic Injury Disaster Loan, the related emergency advance or other COVID-19 relief options, please contact your HBK Advisor.

On June 8, the Small Business Administration and U.S. Treasury issued a joint statement indicating that guidance and a new PPP Loan Forgiveness Application would be released “promptly.” While we wait, borrowers are confused and anxious. Some of their most frequent asked questions:

Should I choose the eight-week period or the 24-week period?
We believe this will be an individual business decision. No clarity has been forthcoming on the Paycheck Protection Program Flexibility Act (PPPFA) provision, including when or how a borrower must make this election. Similarly, because the revised PPP Loan Forgiveness Application has not been released, questions remain as to how the application and related guidance may affect a borrower’s decision to select the eight-week or 24-week period.

Will my loan be on my books at the end of the year?
It’s possible. While we expect guidance on when borrowers can apply for forgiveness, we know forgiveness will need to be approved. Borrowers may find their balance sheets reflect their PPP liability at the end of the calendar year.

Have any definitions been clarified?
Unfortunately, there has been no guidance that provides clarity on definitions such as “owner-employee,” “transportation” as an approved utility, or for other terminology that has not been defined. Further, there is no indication of which definitions might be clarified in the coming weeks.

Are borrowers previously charged with certain crimes eligible for PPP loans?
On June 12, a new Interim Final Rule was released to loosen the eligibility criteria for these borrowers. It states that borrowers are ineligible if “an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.”

While we wait for more guidance, or with any of your questions or concerns about the Paycheck Protection Program, the Paycheck Protection Program Flexibility Act, or your business’s loan, please contact your HBK Advisor.

On June 15, the Small Business Administration announced it was again accepting applications from small businesses for its Economic Injury Disaster Loan (EIDL) and EIDL Advance. The program was closed to new applications in mid-April due to a lack of funding, but the Paycheck Protection Program and Health Care Enhancement Act passed on April 24 appropriated an additional $60 billion to the program. In late April, the SBA began accepting applications again, but only from agricultural businesses, which had been excluded from eligibility in the initial round of funding.

The program provides loans of up to $2 million for recovery from economic injury resulting from COVID-19. The loans support working capital and may be used to pay fixed debts, payroll, accounts payable, and other bills that would otherwise have been paid if the COVID-19 crisis had not occurred. Loans are awarded on a first-come, first-served basis.

The loans come with an amortization period of up to 30 years. Loans to small businesses carry a 3.75 percent interest rate; for non-profit organizations, the rate is 2.75 percent. An emergency advance or grant of up to $10,000 will be provided to borrowers who request it. While the advance does not need to be repaid, it will reduce forgiveness on the borrower’s Paycheck Protection Program loan if the borrower is using both programs. Loans over $25,000 may require collateral, and loans over $200,000 may require personal guarantees.

To apply for an EIDL or learn more about eligibility criteria and program terms, visit sba.gov/disaster. To discuss relief options for your business, please contact your HBK Advisor.

One week after releasing the Paycheck Protection Program (PPP) Loan Forgiveness application, the Small Business Administration (SBA) posted additional guidance on loan forgiveness rules. On May 22, SBA released its Interim Final Rule on Forgiveness. While most guidance supported the instructions within the Loan Forgiveness Application, additional information was provided to Borrowers.

• Treatment of Bonuses and Hazard Pay: SBA clarified that these payments are considered payroll costs and are eligible for forgiveness. The Interim Final Rule says, “The CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation.” It goes on to state, that “The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.”
• Prorated Non-Payroll Costs: The Interim Final Rule confirms that both non-payroll costs paid and also non-payroll costs incurred during the covered period and paid on or before the next regular billing date are eligible for forgiveness. For those costs incurred, only the portion of the bill incurred will be eligible for forgiveness. The Interim Final Rule provides the following example:

  “Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date. The Administrator, in consultation with the Secretary, has determined that this interpretation provides an appropriate degree of borrower flexibility while remaining consistent with the text of section 1106(b). The Administrator believes that this simplified approach to calculation of forgivable nonpayroll costs is also supported by considerations of administrative convenience for borrowers, and the Administrator notes that the 25 percent cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs.”



• No Double Penalty: The Interim Final Rule clarified that SBA’s intention is to not double penalize a Borrower who has an employee(s) that could be included in both the FTE reduction calculation and the salarywage reduction calculations. The rule states, “The [CARES] Act does not address the intersection between the FTE employee reduction provision in section 1106(d)(2) and the salary/wage reduction provision in section 1106(d)(3). To help ensure uniformity across all borrowers in applying the FTE reduction provision and the salary/wage reduction provision, the Administrator, in consultation with the Secretary, has determined that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.”
• Reporting to Unemployment: Previously, question #40 in the Frequently Asked Questions (FAQ) document stated that borrowers would not be penalized in their loan forgiveness reduction calculation if those borrowers made a good faith, written offer of rehire (for the same salary/wage and the same number of hours) to a laid-off employee if that employee rejects that offer. The FAQ also noted that employees who rejected offers of pre-employment may forfeit their eligibility for continued unemployment compensation. The Interim Final Rule on Loan Forgiveness also states that the borrower must inform “the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.” SBA noted that it would provide additional guidance on this matter.

In addition to this guidance, a second Interim Final Rule covering SBA Loan Review Procedures and Related Borrower and Lender Responsibilities was also released on May 22. Highlights of this rule include the following:

• SBA may review any PPP loan (regardless of size), where reviews may include borrower eligibility, loan amounts and use of proceeds, and loan forgiveness amounts. Reviews may occur at any time in SBA’s discretion.
• If SBA determines that a borrower is ineligible for a PPP loan, the loan will not be forgiven. Further, “SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.”
• For loan forgiveness, lenders will confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form, confirm receipt of applicable documentation, and confirm borrowers’ calculations. Borrowers are responsible for providing an accurate calculation of loan forgiveness, and borrowers will attest to the accuracy of the calculation on the Loan Forgiveness Application.
• Lenders must issue a decision on loan forgiveness within 60 days of receipt of a loan forgiveness application to the SBA.

For more information on PPP loan forgiveness or complying with program guidelines, please contact your HBK Advisor.

You’re not alone if you’re confused about the rules for getting your Small Business Administration Paycheck Protection Program loan forgiven. Rules and guidelines for completing the Forgiveness Application were released Friday, May 15, but discussions regarding changes or updates to those rules are ongoing in the U.S. Congress. There appears to be bipartisan support for extending the “covered period” for calculating loan forgiveness beyond the current eight weeks to at least 10 and perhaps longer, and for greater flexibility in terms of how the loan proceeds can be spent to qualify for forgiveness.

HBK is staying on top of the talks and we will keep you informed about changes as they are released. In the meantime, we are advising our clients to follow the current rules and guidelines as published in the May 15 SBA Forgiveness Application release.

For a thorough review of the requirements and procedures for completing the Application as of May 15, link to the recording of our May 18 webinar on the subject at: http://hbkcpa.com/ppp-loan-forgiveness/

The Paycheck Protection Program (PPP) was created to provide funds to qualified small businesses negatively impacted by the COVID-19 pandemic. The loans are for specified uses, including payroll costs, rent, utilities, and mortgage interest, and may be forgiven if they are used in accordance with PPP terms and conditions. However, in efforts to disseminate money to struggling small businesses quickly, several requirements of the program were not initially clarified, leaving the SBA to provide additional guidance.

Recent news reports identified large companies that received PPP funds, then, in some cases, returned the money. These businesses were deemed to have adequate liquidity from other sources or to have violated the requirement that the money was “necessary” to their operations due to the “current economic uncertainty.” The companies were criticized—their ethics and integrity questioned— by the media and by small businesses that were unable to get loan funds they applied for.

On April 23, the SBA released an update to its FAQ document with the following:

• All applicants must certify in good faith that, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The economic uncertainty must be due to the COVID-19 pandemic.
• Per FAQ #31, “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. For example, it is unlikely that a public company with a substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”  To read the entire FAQ, visit https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
• The same FAQ goes on to state that, “any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in fully by May 7, 2020 will be deemed by SBA to have made the required certification [on the loan application] in good faith.”

The SBA also released an interim rule on April 24 that reiterated this information. The interim rule can be found at https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Requirements-for-Promissory-Notes-Authorizations-Affiliation-and-Eligibility.pdf.

As well, guidance warned that businesses qualifying for funds and later found to be ineligible and business that didn’t use the funds according to the terms of the program would be subject to legal or regulatory consequences. Then on April 28, Treasury Secretary Steve Mnuchin announced that the government would audit all companies receiving over $2 million in PPP loans. Such increased government scrutiny could eventuate in investigations for fraud and abuse. We also anticipate heightened public scrutiny as Employer Identification Numbers of loan recipients are revealed to the public.

As such, we recommend the following:

• Management and the board of directors of an organization that has applied for or received PPP funds should review their financial situation and consider whether their business is eligible in accordance with the spirit and intent of the PPP program.
• Any organization that has received funds and determines that it does not demonstrate necessity in accordance with the new guidance should repay the loan in full by May 7, 2020.
• An organization that has received funding and is eligible according to the guidance must keep comprehensive and accurate documentation on its eligibility, on how it is using the funds, and on complying with the forgiveness terms of the program.

As we expect additional guidance on the PPP program, we recommend that all PPP loan applicants and recipients monitor www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program and home.treasury.gov for more details.

If you have questions about PPP funds, or other economic relief programs, please contact your HBK Advisor.

Update: On May 5, 2020, the SBA released an FAQ indicating that the safe harbor date was extended to May 14, 2020. The SBA also indicated that it intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

Updated guidance regarding the SBA’s interpretation of this provision and the safe harbor date may be found at http://hbkcpa.com/sba-releases-additional-guidance-on-ppp-certification/.