PPP Loan Forgiveness – Confusion!

Many of our clients received a PPP Loan in the first round of disbursements and many are expecting to receive a loan in this second round.

Over the past several weeks, the questions we received were all about “how do we get the loan”, “how does the application process work”. And, we worked through those processes.

Over the past few days, however, the questions have pivoted to:

WHAT ABOUT LOAN FORGIVENESS?

? What are the rules?

? How may we spend the money?

? How do we document the expenditures?

The answer: WE DO NOT KNOW YET.

I spend a significant part of each day, during COVID and non-COVID times, reading about tax matters.

Trust me, there’s never a lack of new stuff to know in the tax world.

Whereas the PPP Loan is not necessarily a “tax matter”, those who write and think about tax matters are exactly the ones who are thought leading in this area.

The truth is: there is an almost complete lack of guidance around this topic.

On April 28, Treasury Secretary Steven Mnuchin in an interview on CNBC alluded to some new rules, namely that loans in excess of $2 million would be audited by the SBA.

However, there was NO additional guidance from Treasury as to what an audit would look like, what the rules of the audit would be, how to proactively prepare for it.

The statement sowed confusion, but at the same time gave everyone a heads up that there is going to some scrutiny down the road.

One guru among tax thinkers wrote “uncertainty shrouds the loan program” and another wrote “key information on requirements for the loans to be forgiven remains elusive”, and finally another wrote “borrowers are entering into a program with unknown rules”.

The uncertainty and confusion are in two major areas:

1. Was the borrower eligible to have received the loan in the first place?

2. How must the funds be spent in order to secure forgiveness?

The “body of guidance” is largely a series of FAQs that the SBA and Treasury are continually updating; it’s up to 37 questions at this time and runs about 12 pages, you can find it here:

https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-

Questions.pdf

While Mnuchin indicated that loans over $2 million would be reviewed by the SBA, Question #31 in the FAQs, added on April 23, says “all borrowers should review carefully the required certification” language. This is referring to the certification that all borrowers had to make that:

Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.

This language was in a series of assertions on page two of the official application form, which were, for the most part, checked off very quickly (i.e. – without a lot of thought) by most applicants.

The SBA and Treasury are now giving fair warning to go back and think through the language.

Yet, no guidance is given on how to measure the “uncertainty” that would make the loan request “necessary”.

If you have received the loan and now feel that you cannot in “good faith” certify that it was

necessary to support the ongoing operations of your business, you may repay the loan in full by May 7, 2020 and you will be “deemed by SBA to have made the required certification in good faith”. Seems to be “no harm, no foul”. (Think Ruth’s Chris Steak House, Shake Shack, LA Lakers.)

Assuming you feel you can certify in good faith you needed the loan, then you still have the looming task in front of you of figuring out how, with no guidance at this point other than the FAQs, to navigate forgiveness.

I would offer that making prudent decisions with regard to spending the funds that fulfill the spirit of the legislation, to keep your business viable and employees employed so that the doors can once again open, is your best course of action.

You do the best you can with the information you have.

We’ll continue to monitor this, but you can also click back to the link of FAQs from time to time to see if it is continuing to grow.