New Important Guidelines Related to PPP Loans of $2M or Less
While both the implementation and governance of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program (PPP) remains influx, the Small Business Administration (SBA) is offering guidelines to ensure best business practices with respect to use of PPP proceeds and eligibility for forgiveness.
Pursuant to the rules of CARES Act, to be subject to forgiveness, PPP loan funds may be used for certain business purposes, such as to cover payroll costs, health care benefits, and certain other obligations. Seventy-five percent of the PPP loan proceeds must be spent towards payroll costs and the remaining 25% could be used for other eligible expenses, such as rent. Prior to submitting a PPP application, borrowers certified in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In short, every borrower that applied for PPP funds stated that the funds were necessary to continue business. So borrowers had a twofold concern. First, if questioned, would the borrower be able to prove that they had the necessity. Second, did the borrower use the loan proceeds in such a way as to have the loan forgiven.
As it concerns the first concern, being whether there was a necessity, the SBA has provided guidance as it concerns loans of $2 million dollars or less. On May 13, 2020, the SBA issued guidance indicating that “Any borrower that, together with its affiliates, received PPP loans with an original principal amount less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” So that means that, for loans of $2 million or less, that first issue is resolved in favor of the borrower.
As for PPP loans in excess of $2 million, they will remain subject to review for compliance with the rules. The guidance states that “[i]f SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” In such an event, penalties may apply. The guidance is available here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
As for forgiveness, borrowing businesses will be eligible for loan forgiveness when PPP loan proceeds are used towards “qualified expenses” within the eight-week covered period, which begins at the time the PPP loan is funded, and at least 75% of the funds are applied to payroll costs. Payroll costs are payments to employees that are (i) salary, wages, commissions, or similar compensation (up to an annualized $100,000); (ii) cash tips or equivalent; (iii) vacation, parental, family medical, or sick leave; (iv) separation or dismissal pay; (v) group health insurance; (vi) retirement benefits; or (vii) state or local, but not federal, payroll tax. Any funds above $100,000 per employee wage is not eligible for forgiveness. The other 25% must be used for other eligible expenses, including rent and utilities.