So I Have the PPP Loan Proceeds…
Should I keep the money?
When applying for a Paycheck Protection Plan (PPP) loan, the applicant is required to make a “good faith” certification that current economic uncertainty makes the loan request necessary to support its ongoing operations. However, Section 1102 (a)(2)(I) of the CARES Act also provides:
- (I) Credit elsewhere.—During the covered period, the requirement that a small business concern is unable to obtain credit elsewhere, as defined in section 3(h), shall not apply to a covered loan.
Over the last few weeks we have followed news of large, well-funded organizations such as the Los Angeles Lakers, Shake Shack, and Ruth’s Chris having received PPP loans coupled with the Treasury and SBA’s efforts to get them to return loan proceeds.
On March 27, the Treasury issued
. In its response, the Treasury indicated that borrowers need to take 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.
On April 29, the Treasury indicated in its response to
, partially in follow-up to FAQ #31 and to further ensure PPP loans are
limited to eligible borrowers in need
, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.
The SBA has established a relatively short “no questions asked” deadline to return funds without subjecting borrowers to liability. This change creates a limited safe harbor for any applicants that repay the loan in full by May 7, 2020. Borrowers who do so will be deemed to have made their certification regarding economic uncertainty in good faith.
The SBA’s guidance as to certifying economic uncertainty likely created more questions than answers leaving many businesses wondering whether they should retain the funds. It should be noted that the SBA has not said what the consequences of not returning funds would be.
Arnett Carbis Toothman LLP will not make a determination as to whether loan proceeds should be returned to the SBA. Our clients are best able to assess their individual circumstances and tolerance for risk. The responsibility for this decision rests solely with our clients.
Suggestions if Retaining the Loan Proceeds
- We discourage commingling loan proceeds with other funds. Rather, we recommend that loan proceeds be placed in a separate bank account from which disbursements are made/reimbursed for “forgivable” expenditures. Doing so demonstrates the entity’s permissible use of loan proceeds and helps the business track its progress toward loan forgiveness.
- We do not believe payroll and other disbursement systems need to be modified to take funds directly from the PPP account. Rather, the PPP account may be used to reimburse the entity’s payroll or operating account. Be sure to retain good documentation in support of amounts transferred.
- Payroll “reimbursements” should exclude annualized salary costs in excess of $100,000. Also while waiting on further guidance from the Treasury/SBA, consideration should be given to paying “payroll costs” (including health insurance, retirement, and state unemployment) prior to reimbursing other costs (e.g., utilities, rent, mortgage payments) to maximize the percentage for the 75% threshold test.
- We strongly encourage borrowers to contemporaneously document their reasons surrounding the economic uncertainty that supports their belief that the loan request is/was necessary. For example, we would encourage drafting board minutes and/or resolutions that:
- Acknowledge the current economic uncertainty related to the COVID-19 pandemic
- Forecast how the business’s ongoing operations have or will reasonably be impacted by the pandemic
- Express the business’s intention to use the PPP loan proceeds to continue its ongoing operations and retain personnel