As you may know, Congress established the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide emergency funding to small businesses that have been affected by the coronavirus outbreak. (Businesses with more than 500 employees may also receive funding in certain circumstances.) Since the CARES Act was signed into law, the Small Business Administration (SBA) and the Department of the Treasury have issued a steady stream of guidance on a host of issues from general program eligibility to technical requirements for SBA lenders.
Self-Certification for Borrowers
The Department of the Treasury, which oversees the SBA, has compiled a list of Frequently Asked Questions (FAQs) on the PPP, which it has updated from time to time. On May 13, Question #46 was added, which created a safe harbor for PPP borrowers of less than $2 million. Under the safe harbor, the SBA will accept the self-certification of the borrower that the current economic uncertainty makes the loan request necessary to support the ongoing operations of the PPP applicant.
This new guidance means PPP loans with an original principal amount of less than $2 million will be automatically categorized as having made the required certification concerning the necessity of the loan request.
The reasoning behind this safe harbor, according to the FAQs, is that borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity than borrowers who obtained larger loans. Additionally, borrowers with loans below this threshold are considered more likely to have had limited resources when seeking to retain and/or rehire employees. The SBA instead will focus its audit resources and reviews on larger loans, given the large volume of overall PPP loans.
Earlier in May, the SBA released an interim final rule that provides guidance on nondiscrimination obligations and additional eligibility requirements for loans. This interim final rule states that even though SBA loan rules generally require full compliance with federal discrimination laws, entities such as single-sex schools, single-sex emergency shelters or faith-based organizations (which operate under other federal discrimination law limitations and/or exemptions) can still be eligible for a PPP loan. As such, these types of organizations can benefit from the safe harbor established in the recent FAQ.
On May 22, the SBA issued two more interim final regulations on PPP loan forgiveness under the CARES Act. The first clarified several aspects of the loan forgiveness provisions of the PPP, including permissible uses of PPP loan proceeds when such proceeds must be used in order to qualify for loan forgiveness and the ways in which loan forgiveness must be reduced or eliminated based on the borrower's reduction of payroll or workforce. The second interim final regulation outlines the procedures associated with reviewing a loan or loan forgiveness application to ensure that only appropriate loan amounts are forgiven. This second regulation also indicates that borrowers can appeal an SBA determination that a loan was not allowed or should not be forgiven (in whole or in part).
In addition, on June 6, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA), which amended certain provisions of the PPP program. Among other amendments, the PPPFA extended the minimum amount of time for loan repayments to five years, extended to the end of the year the time borrowers have to use PPP loans, revised the amount of the PPP loan that must be used for payroll costs to 60% (down from 75%) and clarified that loan forgiveness will not be reduced by a reduction in force if an employer unsuccessfully attempts to rehire workers. As of July 4, additional legislation extended the application deadline for new PPP loans to August 8, or until the remaining funds already appropriated by Congress—about $130 billion—are expended.
If you have any questions on this or other aspects of the CARES Act, please contact your local Mutual of America representative. The rules governing this new federal loan program are complex and continue to evolve. This is being provided as general educational information and is not intended to be direct legal or tax advice.