• Skip to content
  • Skip to primary sidebar

  • Home
  • About
  • Contact

The Paycheck Protection Program — What’s Next? Part I: Loan Eligibility

May 5, 2020 by Nick Magone, CPA, CGMA, CFP®

As one of the largest loan programs in American history was rolled out to help small businesses, it’s not unexpected to see many questions and responses by the U.S. Treasury in the form of FAQs to help clarify the government’s intent with respect to PPP funds eligibility and usage. But are they leaving businesses with more questions than answers?

Eligibility and usage are cornerstones as to whether a company will have its loan forgiven, or whether its owners, officers and directors will be subject to penalties and criminal prosecution for making an application when their company has alternative access to capital, such as the cases involving Ruth’s Chris Steakhouse and Shake Shack.

In a recent tweet, Zachary Warmbrodt of Politico stated, “Marco Rubio says the names of business that received PPP loans will be made public. ‘Treasury, SBA is eventually going to have to release that. I always thought they were going to have to, and if they don’t, we’ll make them do it.’”

The message being sent by the government? All companies need to be prepared to justify eligibility and forgiveness. Let’s start with a look at eligibility.

Eligibility: As simple as it looks?
At first glance of the CARES Act, the only eligibility requirements were that a business had to have no more than 500 employees. For companies with a NAICS code beginning with 72 (hospitality and restaurants), their employee count was based on a per-location basis. In addition, there had to be economic uncertainty resulting from COVID-19 impacting the business — a rather broad statement.

The SBA, in consultation with the Department of the Treasury, has issued guidance in the form of FAQs 31 and 37 as it applies to large companies (publicly held) and private companies (the rest of us).

Here’s what FAQ31 for public companies states in part: “Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current 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.”

Translation: It’s important to keep in mind that this is your certification, meaning banks may rely on a borrower’s certification regarding the necessity of the loan. In other words, just because your bank processes your loan application, that doesn’t mean you’re necessarily eligible for the funds.

FAQ 37 for private companies simply states see FAQ 31. So, what does this mean for the rest of us? To avoid problems, every business needs to document how it arrived at needing the funds based on the economic uncertainty surrounding COVID-19. Sounds simple, but consider these real-life examples:

  1. If a business doesn’t experience a significant revenue decline, but has a decline year over year of cash, does it qualify?
  2. Does a business where the business owner has some financial means qualify? Should this small business owner be required to liquidate investments or a 401(k) to infuse capital into their business?
  3. What about a small business with an established line of credit with a personal guarantee by the business owner? Should the small business owner be required to access these funds with a personal guarantee without regard to the PPP funds and jeopardize the small business owner’s personal financial well-being as well the well-being of the business?

I recently attended a webinar with some SBA representatives, where responses to most questions were referred to the Department of Treasury for additional guidance. However, there was much discussion regarding the above fact patterns.  In substance, the representatives continued to mention “good faith representation” regarding economic uncertainty.  At no time did anyone state that having a line of credit or a high net worth owner(s) would be a detriment to seeking the funds and being eligible. All stated it’s based on facts and circumstances and all factors should be considered in determining eligibility.

Economic uncertainty doesn’t only pertain to current conditions, but also the future economic impact on small business — meaning no one really knows how the economy will behave once the country is reopened. Receiving these funds may be the difference between survival, bankruptcy, or reduced work force.

In anticipation of being asked to justify your PPP application, have the following information ready:

  1. Business factors you were seeing which led you to change your business model from salary cuts to headcount reductions to overall expense reduction. One page is enough for a summary.
  2. Current and future impact on revenue/order cancellations.
  3. Impact on accounts receivable collections.
  4. Factors which led you to retain your employees.
  5. Concerns about the future which led you to apply for funding.
  6. Inability to access capital and liquidity
  7. Unwillingness or inability of a business owner to put funds into the business

[Important update 5.6 — Repayment date has now been extended to May 14, 2020. Borrowers do not need to apply for this extension.]
Although not all-inclusive, this should you give something to consider if and when the question is asked.  Keep in mind if a business is ineligible, it has until May 7, 2020 to return the funds with no repercussions. One thing the representatives on the webinar agreed upon is there will be more guidance, so stay tuned.

Filed Under: Paycheck Protection Program, Small Business

Primary Sidebar

Search

Archives

  • July 2025
  • June 2025
  • May 2025
  • April 2025
  • March 2025
  • February 2025
  • January 2025
  • December 2024
  • November 2024
  • October 2024
  • September 2024
  • August 2024
  • July 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018

Categories

  • Business Taxes
  • Business Technology
  • CFO Roundup
  • Company Culture
  • Coronavirus
  • Finances
  • Firm News
  • IRS woes
  • Nonprofits
  • Paycheck Protection Program
  • Small Business
  • Tax Tips for Individuals
  • Uncategorized

Copyright © 2020 · https://www.magonecpas.com/blog