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SBA Explains Use of Questionnaire for PPP Borrowers of Millions

Posted on Dec. 11, 2020

The Small Business Administration said a new questionnaire for borrowers of more than $2 million doesn’t necessarily mean it’s challenging a company’s word that it needed the loan, but that doesn’t ease concerns for many.

The SBA said in updated FAQs that it will assess whether recipients of Paycheck Protection Program loans had an adequate basis for making a good-faith certification, as required under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), at the time of application, even if later developments resulted in the loans no longer being necessary.

“I suppose the good news is that it appears that borrowers who the SBA finds are potentially at risk of being found to have not certified their need for a loan in good faith will have some opportunity to explain their justification before the call is made,” Edward K. Zollars of Thomas, Zollars & Lynch Ltd. told Tax Notes.

FAQ 53 states that the SBA’s review “may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.”

The FAQ is in response to outcry over the release of forms for for-profit and nonprofit borrowers of PPP loans that received amounts over $2 million. The forms were circulating among practitioners in early November, and the SBA indicated it wanted input on them. The forms are now available on Treasury’s PPP website, but practitioners said it is odd that they were posted under the lender’s section of the site.

When the questionnaires started floating around, borrowers and practitioners were disquieted. The forms asked several questions that practitioners argued weren’t relevant for businesses when they applied for the loans. The American Institute of CPAs in a November 25 letter to the SBA and Treasury criticized the question on the forms comparing gross revenue during the second quarter of 2020 with revenue from that same quarter in 2019.

The PPP 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 tax free. The program’s time frame was expanded in June.

Problems have plagued the loans since their enactment. Guidance on the program has been haphazard and often leads to more questions, according to practitioners. And Treasury has now twice released guidance saying that expenses funded with forgiven PPP loans cannot be deducted, even though lawmakers in both parties vow to overturn that result in the next round of coronavirus relief legislation.

And because the certification standards under the CARES Act were so vague, some large public companies took loans when the law was first enacted. That sparked complaints from some who claimed public companies and others that had access to liquidity didn’t really need the loans, so the SBA and Treasury said those businesses should give the money back.

Changing the Rules

Aside from claims that some big businesses really didn’t need the loans, several reports of outright fraud have also raised eyebrows among lawmakers and the SBA. That has prompted a tightening of the rules on the PPP along the way, but after the borrowers have already applied for, and spent, the money.

Now, with the questionnaires, some practitioners have said the SBA and Treasury are changing the rules late in the game.

According to FAQ 53, after a borrower submits its completed questionnaire, the SBA may request more information to complete its review.

“When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification,” the FAQ said. The SBA will then make a final determination that a borrower lacked an adequate basis for certifying it needed the loan after reviewing the additional information a borrower chooses to submit.

That targeted, multistep approach aids the integrity of the evaluation process and expedites processing, the SBA said.

Zollars said it’s still unclear how the SBA plans to use the initial information submitted to identify those who the agency believes may not have made that certification in good faith.

“And the questions being asked certainly don’t seem to go directly to the question of whether there was a good-faith belief that there was a need for the loan when the application was made,” Zollars said. “Rather, the SBA appears to be trying to use what happened after the fact to then do some Monday-morning quarterbacking on whether the application now appears to have been made in good faith.”

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