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Evolution of the PPP: From Pass to Fail

May 29, 2020
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Early 2020 came in with a bang! The COVID-19 pandemic took the economy by storm, forcing mandatory closures of several businesses deemed non-essential, social distancing mandates created an added level of separation between sellers and buyers, and small business owners were thrust into a world of uncertainty and panic. Steep declines in revenues led many to start scaling back expenses any way they could. With sales rapidly declining or nonexistent in some cases, workforce reduction was at the forefront of scaling back Almost immediately, many of these companies began the hard road of laying off or furloughing employees. Enter the Payroll Protection Program (“PPP””) Loan – the Small Business Administration’s (SBA) program enacted under the CARES Act that would hopefully prevent them from more massive layoffs or closing their doors entirely. As this program has evolved and new guidance continues to emerge, a rise in questions and confusion has also emerged. 

Early Stages and the Application Programs

When the CARES Act was announced and the PPP loan provision came to light, business owners started to see a little bit of hope. Initially, it seemed to check all the boxes for the much needed relief to business owners and the plan to have banks facilitate the process of getting the needed funds distributed as quickly as possible seemed logical. As has been heard time and time again though from government, healthcare officials, and business leaders – we have never seen a crisis hit with such magnitude as COVID-19 – so while the intent of the SBA/PPP application and distribution process seemed workable on paper, when it hit the streets things got complicated very quickly.

Announcing that the program funds would be distributed on a first come, first serve basis created a frenzy that wasn’t forseen. Banks tried to prioritize to bring some order to the process, but without centralization, they were on their own and most put focus first to their customer base and larger loans and not necessarily where the greatest needs were. Additionally, there was confusion around the calculation of the maximum loan request amount. The SBA's definition of 'Qualified Payroll Costs' and the application of the SBA‘s affiliation rules changed frequently, up until the night before the program's launch. Business owners were faced with a very tough choice - getting the application in with the best information they had available, or to wait for further guidance at the risk of money “running out.”

Quest for Loan Forgiveness

As soon as applicants hit “submit,” their focus began to shift. Now, the question becomes how they can maximize the grant portion of the loan? The SBA and U.S. Treasury were supposed to provide guidance on the loan forgiveness calculation 30 days after the enactment of the CARES Act. Dissemination of the guidance has been delayed and timing on it’s release remains unclear. In it’s place, business owners and their advisors have been working off the information provided in the CARES Act itself, and the Interim Rule, along with FAQ’s put out periodically by the SBA. A new (or re-focused) issue came to the surface with the release of the SBA’s FAQ 31.

FAQ Question 31

Banks, politicians, and businesses had one thing in common. They all wanted the money out FAST. In order to achieve this, and to expedite the process, the application form transferred several risks directly to the applicant itself, including evaluating the company’s economic need for the money, requiring the applicant to certify under perjury of law that current economic uncertainty made this loan necessary to support business operations. Although this certification was not an addition to the form, it was there all along, it didn’t face much scrutiny during the application process. Economic uncertainly seemed like a foregone conclusion. Once some prominent names started making the news, forcing the public to question “economic need,” the SBA released FAQ 31, elevating the issue to the forefront of consideration for owners, accountants, attorneys, and the rest of the business world. It became critical to understand and business owners had a real need for guidance on how to utilize the funds given to them to ensure they would not be penalized. A new serious question of can they keep the funds arose and a response was needed quickly. The SBA answered, providing a “safe harbor” period for which applicants can reconsider their certifications and if they now believed they would not qualify, they could return the funds without repercussions. Initially they provided a window of about a week – since then the timeframe was extended to May 14th to try to give some breathing room for business owners to give serious consideration to this decision.

FAQ Question 46 and Interim Final Rule for Entities with Foreign Affiliates

May 13th, the day before the Safe Harbor period was set to expire, and those concerned about their eligibility were to repay the funds, FAQ 46 was released. Under 46, loans under $2million will be automatically deemed to have met the safe harbor. For loans over $2millionthe SBA and Treasury have indicated they will be reviewed, and in the event the SBA determines in the course of their review that they believe the applicant did in fact have adequate access to liquidity and lacked an adequate basis for the certification concerning the necessity of the loan, they would simply be required pay it back and not be eligible for forgiveness. If they do so after receiving this notification from the SBA, they will not pursue administrative enforcement – relaxing the more stringent penalities set forth earlier.

In addition, following a further extension of the safe harbor period, the SBA and Treasury released clarifying guidance through an interim final rule for entities with foreign affiliates that essentially grandfathered in entities that filed applications prior to May 5th, when the SBA issued an FAQ that specifically addressed the treatment of foreign affiliates and their impact on headcount eligability. For some companies though, it may have been too late, as many had already returned the funds.

At this point it is hard to predict when this rollercoaster will end, but a few things are certain:

  • Everyone is right in saying we have never seen anything hit us with the same magnitude and volatility as COVID-19.
  • There will be more changes to come.
  • Business owners will need to have advisors they can count on to stay in front of these changes who can help them in their pursuits to make the best business choices they can for their unique circumstances.

Now With the PPP Forgiveness Application being released as well as the Interim Final Rules surrounding it, many believe that although they do help to clarify some items we have all been speculating on, it still leaves a lot unanswered.

Citrin Cooperman has developed a dedicated SBA Task Force within our COVID-19 Response Unit (CRU) to stay on top of the SBA/PPP program and understand the nuances as they occur for our clients and markets. The impact of COVID-19 has hit hard turning “business as usual” into a foreign concept as business owners are now forced to evolve, transition, and in some cases re-invent themselves at a rapid rate to ensure their survival.

Preparation, planning, and strong leadership are crucial now more than ever to be the difference-maker between success and failure. Tomorrow’s business world will be anything but normal. Every business needs a comprehensive playbook to navigate the types of changes we face today and transition into tomorrow’s re-imagined normal.

The partners and professionals at Citrin Cooperman are trained to help. To that end, we have constructed the COVID-19 Response Unit for you to leverage as a resource center. For more thought leadership and up-to-date information on changes in guidance, please visit our CRU Resource Center.