As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7, #8, #9, #10
What if I Can’t Hire My Employees Back?
Given the generous unemployment provisions of the CARES Act, many businesses that obtained PPP loans are having difficulty rehiring employees that may now be collecting more on unemployment than their normal wages. This puts PPP loan recipients in a precarious position, as a business must maintain its workforce through the eight-week, post-loan period to receive full PPP forgiveness.
Fortunately, FAQ #40 issued by Treasury on April 29 addresses this issue and says if a borrower makes a good faith written offer to rehire an employee for the same salary/wages and same number of hours, the borrower will not be punished if the employee rejects the offer and the borrower documents the rejection. In these cases, borrowers should ensure their offers to rehire are in writing, meet the above requirements, and that the rejection is properly documented. The guidance is also very clear that both employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
While this provides some relief to businesses caught in this catch-22, it raises a secondary question: what is a business to do with PPP loan proceeds ear-marked for payroll, but no employees to pay? Despite no clear answer to this question, businesses should consider increasing hours/pay of returning employees or hire replacement employees. We also caution businesses in this situation that there are restrictions on what PPP proceeds can be used for and FAQ #40 has not changed those restrictions.
Should I Keep My PPP Money?
In the world of PPP, April 23 will forever go down in infamy. On that day, Treasury issued FAQ #31 reminding borrowers they must certify “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." The FAQ went on to mention considerations such as “taking into account current business activity” and a company’s “ability to access other sources of liquidity sufficient to support their ongoing operations." The FAQ also provided a safe harbor to return ineligible PPP funds with “no questions asked” by May 7 (though that date was subsequently extended twice; most recently late last night, to May 18, via FAQ #47).
The result: many borrowers were left wondering whether they qualified for the PPP loans they previously applied for and received. Between April 23 and today, various FAQs and statements from the Treasury and SBA added to the confusion (see our prior blog).
Yesterday, May 13, Treasury issued FAQ #46 providing unofficial guidance on how the SBA will review borrowers’ required good-faith certification concerning the necessity of their loan request. The FAQ breaks down borrowers into two categories:
- PPP Loans with a Principal Amount Under $2 million – Any borrower that, together with its affiliates, 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.
- PPP Loans with a Principal Amount of $2 million or more – Any borrower with loans of $2 million or more will be subject to automatic review by the SBA upon application for forgiveness consistent with prior guidance. Businesses falling into this category should continue working with their advisory team to establish contemporaneous documentation supporting the necessity of the loan.
In addition, the FAQ addresses steps borrowers must take if their application is later reviewed and determined to have been inappropriate. In these cases, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving such notification from the SBA, FAQ #46 states that the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.
CAUTION: FAQs are unofficial guidance and do not carry the force and effect of law independent of the statute and regulations on which they are based. Even if the SBA and Treasury promise they will follow FAQs they publish, they have the legal authority to revoke them retroactively. It would be wise for all PPP borrowers to establish contemporaneous documentation, such as in internal memorandum, supporting the basis of why the loan was necessary to support ongoing operations.
Can I Get More PPP Money?
The Treasury issued their 9th interim final rule (IFR) yesterday, May 13. The 9th IFR provides an opportunity for partnerships and seasonal employers to increase their PPP loans to account for guidance that may have been issued after the loans were applied for and received. However, in typical fashion, there is a catch.
The 9th IFR states that partnerships may increase their PPP loan if their original PPP application did not include the self-employment income of the partners as provided for in the 3rd IFR issued on April 14 and supplemented by the April 24 issuance of “How to Calculate Loan Amounts”.
Similarly, seasonal employers may increase their PPP loan if their original PPP application didn’t take advantage of the generous 5th IFR issued on April 28. The 5th IFR allowed seasonal employers to choose any 12-week period between 5/1/2019 and 9/15/2019 to maximize their loan amount. See our prior blogs on the 3rd IFR and the How to Calculate Loan Amounts/Seasonal Employers.
The catch is your bank must not have submitted SBA Form 1502 yet. SBA Form 1502 documents your loan with the SBA. If you are a partnership or a seasonal employer and your loan was funded within the last 20 days, there is a very high likelihood this has not occurred. Form 1502 was also not immediately available when loan applications began and the due date for many Form(s) 1502 is currently May 22, 2020. If you are a partnership or seasonal employer who did not take advantage of the guidance noted above and would like to increase your loan, you should contact your bank ASAP to determine whether or not SBA Form 1502 was submitted for your loan.
We will continue providing updates when relevant information becomes available. If you have questions about how to navigate the PPP loan process, or how other CARES Act incentives may apply to your business, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.
Topics: FAQs, employees, coronavirus, Relief Package, COVID-19, CARES Act, liquidity, loan forgiveness, Small Business Administration, Paycheck Protection Program Loans, PPP Loan, Eligibility, Need more PPP money, Seasonal Employees