New Guidance Issued by SBA/IRS Changes the Landscape on Paycheck Protection Program Eligibility Requirements

04.30.2020

On April 28, the Small Business Administration (“SBA”), in conjunction with the Internal Revenue Service (“IRS”), published additional guidance aimed at eliminating the misuse of the Paycheck Protection Program (“PPP”) by businesses which do not have an economic need for PPP funds.

This new guidance was initiated due to the considerable public outcry in recent weeks regarding large companies with significant assets which had applied for and received loans under the PPP.  Critics particularly focused on the fact that a number of publicly held companies such as Shake Shack and Ruth’s Chris Steak House received significant funds under the PPP.  The issue of misuse of the PPP was magnified after the initial $349 billion allocated to the PPP under the CARES Act was exhausted in only 13 days. 

In an effort to prevent companies which have adequate resources from accessing the PPP, the SBA on April 23 issued frequently asked question (“FAQ”) Number 31, which clarified that borrowers under the PPP must not be large companies with adequate sources of liquidity.  In imposing this arguably new eligibility requirement, the SBA focused on the hardship certification required to be made in connection with the PPP loan application, which states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” 

In its response to FAQ 31, the SBA stated that “before submitting a PPP application, all borrowers should review carefully the required certification . . . [and] 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.” 

Even after this guidance, however, there was some ambiguity as to the scope of the eligibility requirement articulated in FAQ 31, in that the SBA used as an example a publicly held company with substantial market value, stating that it is unlikely that such a company will be able to make the required certification of need in good faith. 

Due to the questions which had arisen as to whether the requirement was simply focused on publicly held companies, on April 28^th the SBA published FAQ 37 which clarified that the guidance in FAQ 31 is not limited to publicly held companies.  FAQ 37 states “[d]o businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  In response to this FAQ, the SBA simply refers us to FAQ 31, in essence clarifying that private companies will be held to the same standard as was articulated in FAQ 31.    

Notably, the SBA has given companies which are not deemed eligible for a PPP loan under this new guidance until May 7, 2020 to repay the loan in full.  If full repayment is made by that date, the borrower will be considered to have made its certification in good faith.

In recent comments, U.S. Treasury Secretary Steven Mnuchin has stated that any business receiving a PPP loan in excess of $2 million can expect to be audited for compliance with the terms of the program, including eligibility under the newly issued FAQ guidance, before the loan will be forgiven. 

In addition to audits of businesses obtaining PPP loans in excess of $2 million, we do expect that the SBA will aggressively audit PPP recipients to confirm that they meet the eligibility conditions for the loan, that the calculations for the loan requested and obtained are accurate, that the loan proceeds were used for eligible purposes, and that the forgiveness calculations are accurate. 

To prepare for these audits, companies should keep sufficient documentation to support:  (i) the need for the loan and the ability to access alternative funding that is not “significantly detrimental” to the business, (ii) calculations regarding the permissible loan amount, (iii) full time equivalent headcount and the amount of any reduction in compensation paid during the requisite periods to support the calculations regarding the amount of loan forgiveness, and (iv) the use of the PPP loan proceeds during the eight week period following the origination of the loan. 

We do expect more guidance to be issued in the coming weeks on these issues, as well as on loan forgiveness.  However, in the meantime, any business which may have obtained a PPP loan and has alternate sources of liquidity should consider whether it is advisable to return the loan proceeds on or before May 7^th. 

If you have questions on the Paycheck Protection Program, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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