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Government Can’t Get Its Story Straight on PPP Loan Certification

Posted on May 14, 2020

Updated informal guidance on certification for the small business loans that are forgivable on a tax-free basis keeps rolling in, but even favorable changes to the rules are causing frustration for some companies.

The Small Business Administration updated its FAQ May 13 on the certification necessary for businesses to obtain Paycheck Protection Program (PPP) loans by adding a safe harbor for businesses that take loans for less than $2 million.

According to FAQ 46, any borrower that received PPP loans with an original principal amount of less than $2 million will be “deemed to have made the required certification concerning the necessity of the loan request in good faith.”

That safe harbor is meant to aid small businesses, but the change is too little, too late, according to some in the business community, and appears to be in contrast to the SBA and Treasury’s earlier FAQs on certification.

“Lots of companies took out the loans based on the first set of rules, gave the money back based on the second, and now at the very last minute the SBA says, oh, never mind?” Brian Reardon of the S Corporation Association told Tax Notes.  “It just comes across as arbitrary and inconsistent with the statute.”

The PPP, which was created by the by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), generally allows businesses with fewer than 500 employees to borrow up to $10 million in some cases. If a specified portion of the loan is used for payroll costs, the loan is forgivable on a tax-free basis.

But right after the PPP was enacted, it was revealed that major companies were receiving millions in loans. That prompted a tweak to the FAQ on certification to ensure that large companies, such as Shake Shack or Ruth’s Chris Steak House, weren’t taking advantage of the program when smaller businesses needed the cash.

FAQ Updates

But the warning left some smaller businesses wondering if they would meet the new, vague certification standards.

First, FAQ 31 was added April 23 and noted that all borrowers applying for a PPP loan must certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make the certification in good faith and should take into account their ability to access other forms of liquidity in making the certification, it said.

Large public companies with a substantial market value and access to capital markets probably can’t make that good-faith certification, according to FAQ 31. What’s more, FAQ 31 said that if companies repaid the loans in full by May 7, they would be deemed to have made the certification in good faith — that deadline was recently extended to May 14.

On April 28, FAQ 37 was added to clarify that not only were public companies unlikely to make good-faith certifications, but that businesses owned by private companies probably couldn’t either if they had adequate sources of liquidity.

A day later, FAQ 39 was added to note that the SBA 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 forgiveness application.

With all the warnings on certification and uncertainty about whether all loan certification standards were met, many companies rushed to give the money back. However, with FAQ 46, the SBA and Treasury have now created a safe harbor that says loans of less than $2 million will be deemed to have made the required certification in good faith.

Late May 13, the SBA also added FAQ 47, which extended the date for companies to pay back the loans in full from May 14 to May 18 in light of FAQ 46. Businesses don’t need to apply for the extension; the government plans to update its interim final rule to provide for it. 

But for many businesses, the guidance is too late.

“Some clients got really scared and already paid back their loans that might have been a few hundred thousand,” Christopher J. Wittich of Boyum & Barenscheer PLLP said. “Now the day before the deadline they change the rules again and say if you are under $2 million, it’s fine, that threatening FAQ doesn’t apply to you. It’s very disappointing they’ve gone back and forth on this, but ultimately it seems they arrived back where they started for the small loans under $2M.”

Thomas J. Nichols of Meissner Tierney Fisher & Nichols SC agreed that some borrowers who rushed to give back the proceeds may be frustrated.

“We had been advising our clients to not return these Paycheck Protection Program loans based on these developments with respect to the uncertainty certification,” Nichols said. “However, there may be others who did return their loans that are now sorry they did.” 

Practitioners have said banks are now asking whether borrowers that repaid the loans because they were worried about the earlier guidance can now reapply for the loans based on the updated guidance. So far, there’s been no answer.

Meaningful, or Not?

Questions have also been raised about formal guidance the SBA said it planned to release. In FAQ 43, released May 5, the SBA extended the deadline to repay PPP loans to May 14, a move welcomed by businesses. The FAQ said the SBA planned to issue a revision to its interim final rule providing the safe harbor.

On May 8 Treasury's PPP guidance website posted a link to an “Interim Final Rule on Extension of Limited Safe Harbor With Respect to Certification Concerning Need for PPP Loan Request.” On May 12 the Office of the Federal Register showed a link to that interim final rule, but when visitors clicked on it, they saw the following note:

“Editorial Note: An agency letter requesting withdraw of this document was received after placement on public inspection. The document will remain on public inspection through close of business May 13, 2020. A copy of the agency's withdrawal letter is available for inspection at the Office of the Federal Register.”

Practitioners said it’s unclear what the significance of that removal is, if any.

Updated May 14, 2020: This story has been updated from its original version to reflect the addition of FAQ 47 from the SBA late May 13.

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