Updated PPP Guidance Brings Welcome News and Opportunities for Additional PPP Funds

The Paycheck Protection Program was created to provide relief for small businesses during the economic crisis brought on by the novel COVID-19 virus.  Restaurants that received PPP loans continue to wait for clarity around key components of the program while they work to maintain operations. In our latest blog, learn how new guidance brings encouraging news and opportunities for additional PPP funds.

Good-Faith Certifications Concerning the Necessity of Loan Requests

The SBA previously issued guidance urging borrowers to review the certification made on their loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. This certification must have been made in good faith, taking into account a borrower’s current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The SBA provides a safe harbor for borrowers that may have misunderstood or misapplied the required certification standard. Under the safe harbor, borrowers that repay their loans in full by May 18, 2020 are deemed to have made their certification in good faith.

Note that May 18th reflects an extension from the prior repayment dates of May 7th and May 14th, respectively.
 
In guidance issued on May 13th, the SBA clarified that borrowers who do not repay their loans by May 18, 2020 will be subject to review of their good faith certifications as follows:
  • Borrowers that, together with their affiliates, received PPP loans with an original principal amount of less than $2mm will fall under a safe harbor and will be deemed to have made the required certification regarding the necessity of the loan request in good faith. The rationale behind this safe harbor is that companies that accepted loans of less than $2mm are less likely to have access to other financial resources.
  • As stated in prior guidance, borrowers with loans that are greater than $2mm will be subject to mandatory SBA review. If the SBA determines during the course of this review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the loan and the loan will not be eligible for loan forgiveness. If the loan is not repaid, the SBA can pursue administrative enforcement or referrals to other agencies based on its findings.

BDO Insight:

This new guidance is welcome news for borrowers awaiting clarity. Prior to May 13th, restaurants were uncertain what criteria the SBA would use to determine if a borrower used good faith when applying for a loan.   Additionally, fears brought on by the threat of criminal charges against borrowers that took loans unnecessarily created anxiety and led many restaurants to contemplate repaying their loans despite their belief that the loans were obtained in good faith. As a result of the new guidance:
  • Restaurants with existing loans of less than $2mm can rest easy, knowing that they fall under the new safe harbor and will be deemed to have acted in good faith. Restaurants that didn’t previously apply for a PPP loan can utilize the safe harbor and, depending on payroll size, obtain a loan of up to $2mm.
  • Restaurant operators who obtained loans in excess of $2mm can now shift their focus to their operations, instead of worrying about whether they should repay their loans. 

Partnership Loan Increases for Partner Compensation

Partnerships that received PPP loans without including partner self-employment income in their computation of “payroll costs” can now receive additional PPP funds to account for this missed compensation. The rationale behind this guidance, issued on May 13, 2020, is that the SBA didn’t issue clear guidance on the inclusion of partner self-employment income in “payroll costs” until April 14, 2020. As a result, partnerships that applied for loans prior to that date may have received less in PPP proceeds than they were otherwise entitled to. The May 13th guidance evens the playing field by allowing all partnerships to include partner self-employment income (up to $100,000 annualized) in “payroll costs.”

Notes:
  • Partnerships can receive additional loan amounts to include partner compensation even if the original PPP loan has been fully disbursed, provided that the lender’s first SBA Form 1502 has not been submitted with respect to the loan.
  • The total loan limits remain unchanged:  $10mm for an individual borrower and $20mm for a corporate group. Increases for partner compensation that cause these limits to be exceeded will be capped.
  • Supporting documentation must be provided to the lender.
  • Question 4 in the SBA’s April 24th guidance provides a good example of how to compute maximum partnership loans, including partner compensation.

BDO Insight:

Restaurants that operate as partnerships or LLCs should review the “payroll costs” used to determine the maximum amount of their PPP loan. To the extent they relied on early guidance and did not include partner self-employment income, they should take advantage of the opportunity to obtain a 1-time additional disbursement. Restaurants must still be mindful of the maximum loan caps and must be able to support their computations.
 
While every day brings change, our goal is to help you stay abreast of the latest developments and mitigate risk during this time of uncertainty. For more information on how BDO can assist you with PPP loan issues, contact one of our Restaurant Practice Leaders

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