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PPP Loans – Need to: Document, Document, Document briefing by Kimberly Ripberger, CPA

Written By: Kimberly Jessup Ripberger PARTNER, ASSURANCE PRACTICE AREA LEADER, CPA with Bernard Robinson & Company

On April 23, 2020, the U.S. Department of the Treasury issued Question 31 on its Frequently Asked Questions(“FAQ”) related to the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) Loan Program. Question 31 has been a “hot topic” from the recent media attention focusing on several public companies that received PPP Loans.

FAQ Question 31 and the corresponding answer is listed below, along with follow up Question 37 issued April 28, 2020.

#31.   Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.11

#37.   Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.14

Section 1102(a)(1)(G)(i)(I) of CARES Act, requires that a PPP loan applicant certify, in good faith, that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

In addition, the April 3, 2020 PPP loan application issued by the U.S. Department of the Treasury requires that a loan applicant certify that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Prudent business practices include documenting your next steps during any uncertain times with a narrative summary as it relates to your business’ strengths and weaknesses; but also, documenting some of the specific COVID-19 effects on your business as listed below.

  • Your business’s economic uncertainty that it has faced on a daily basis or will continue to face as a result of COVID-19. This includes your customer base or lack thereof; your product or service affordability in the market place; or any ongoing supply chain constraints or concerns that your business may have. Also consider documenting the uncertain economic long-term impacts as a result of COVID-19 (i.e. second wave of the virus and continuing CDC recommendations for social distancing).

  • Document any recent denied requests for loans or increases.

  • Document reasons why increasing business debt would cause harm to future operations.

  • Consider your business limitations as it relates to your existing debt/line of credit covenants. For example, does your business’s line of credit agreement dictate a time period that your business cannot use the line for ongoing operations in order to remain in compliance?

  • If you’re a cash basis tax payer, do you have any unfunded deferred compensation agreements that are legally required to be paid from operations?

  • Have your customers requested longer payment terms or discounts in fees or service charges?

  • Has your allowance for bad debts increased due to the economic uncertainty?

  • How is your business currently faring when compared with budgeted revenues?

  • Document plans on workforce and expense reduction or actual reductions that were alleviated due to the receipt of the PPP funding.

  • Document concerns regarding ability to retain staff/talent who might apply elsewhere if compensation or staff levels are reduced.

  • Document the decrease in your employees’ production and efficiencies due to remote working environment necessitated by COVID-19. Remember to consider with this calculation, the home-school education that is now required for your employees’ children.

  • Document any staff reductions and payroll reductions that have occurred by your industry peers who were not eligible for the PPP Loans.

  • Document your expense monitoring and reductions related to previously planned capital expenditures and hiring freezes.

Remember, no one knows your business and how it has been impacted by the economic uncertainty associated with COVID-19 better than you, the business owner.

In addition to dotting the “i’s” and crossing the “t’s” with your substantiating documentation, review the best practices article, Preparing for Forgiveness, authored by BRC Tax Partner, Tracey Flynn Martin, CPA.

We will be continually monitoring additional guidance as it is released and will provide updated information on this page as it becomes available, so please check back often. In addition, please reach out to your BRC advisor with any questions you may have.

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