Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic and Dispute Advisory Services

The application form for the Paycheck Protection Program (PPP) loans requires that companies make a good faith certification that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” After the original $349 billion of PPP loans was disbursed, there was media coverage about public companies that received PPP loans, presumed in the media coverage to be at the expense of smaller companies. In response, on Thursday, April 23rd, the Treasury issued an additional Frequently Asked Questions (FAQ) document, which was then subsequently updated on April 29th with additional guidance around this issue for private companies, as discussed below.

Question #31 asks, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  The answer from the Treasury is (emphasis added):

  • In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.
  • Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.
  • Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • 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 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.

Public companies were highlighted in FAQ 31, which was then further confirmed and expanded upon by Treasury Secretary Steve Mnuchin’s statement to CNBC on Tuesday, April 28th.  Mr. Mnuchin stated that the government will “audit any company taking out more than $2 million from the small business loan program.” He further stated that for “any loan over $2 million, the Small Business Administration will be doing a full review of that loan before there is full forgiveness.”

However, after the original publication of this article, FAQ 37 was published which said: “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  The answer said, “See FAQ #31,” suggesting that this is not just limited to public companies. Private companies will also need to be comfortable that they made the certification in good faith and could be audited as well.

We recommend that recipients of PPP loans reassess their situation in light of the new guidance and document the analysis supporting that the company’s PPP loan is “necessary to support ongoing operations.” The type of analysis and documentation will vary by company, but could include:

  • Projections of various scenarios of what business will be for the next several months demonstrating that without the PPP loan funds the company would have needed to lay off employees or be unable to pay certain expenses.
  • Projections that demonstrate that even if employees were not laid off, that without the PPP loan funds, the company would have had to borrow against a line of credit, dip into reserves that may be needed in the upcoming months or tap into other resources that are necessary to support the ongoing operations of the business over the longer term.
  • Evidence of uncertainty regarding operations and cash flows, such as accounts receivable collection issues that could affect cash flow.
  • Correspondence from clients, customers, and vendors about changes in projects, payment cycles, or access to supplies, etc.
  • Evidence of the difficulty in hiring workers resulting in increased labor costs including retention or signing bonuses and shift premiums to attract workers from unemployment back to work.

If this analysis results in a determination that your company does not qualify for a PPP loan based on this new guidance, the Treasury has provided a provision for borrowers to cure the situation without penalty.  A borrower that applied for a PPP loan prior to the issuance of this guidance, who concludes that it does not meet the expanded criteria and repays the loan in full by May 14, 2020, will not be penalized. The repayment date was previously May 7, 2020; however, on May 5, the Treasury and SBA announced that the date was extended to May 14, 2020, and guidance would be issued prior to May 14th as to how the SBA will assess the “good faith” certification.

If you do not take advantage of the repayment provision – and it is subsequently determined that your PPP loan was not “necessary” – you may be found to be in violation of the False Claims Act (FCA). The FCA provides that any person who “knowingly submits false claims” to the government is liable for double the government’s damages plus a penalty of $2,000 for each false claim.

If you have a loan over $2 million, it is important that you are keeping meticulous records of all qualified expenses, which may include:

  • Canceled checks, payment receipts
  • Transcripts of accounts or other documents verifying payments
  • Payroll reports
  • Copies of leases
  • Copies of utility bills (including bills prior to 2/15/2020 in order to establish that the service was in place prior to that date), and
  • Any other relevant documentation including documentation detailing the business rationale for any changes in pay rates, retention or hiring bonuses, etc.

There are still many unanswered questions regarding this Treasury FAQ and the newly announced “audit” process. Right now, it is important to reevaluate the certification you made around uncertainty and necessity by documenting your thought process. If you determine the PPP loan was not a necessity, you have until May 7th to return the loan without penalty.

If you have questions, please reach out to your GBQ advisor or attorney on how best to approach your PPP loan certification.

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