UPDATED _ PPP Loan Recipients Encouraged to Reassess Eligibility, Potentially Return Money by Joseph Leuchter, CPA

Posted on May 11, 2020 by Joseph Leuchter

Much of the news surrounding the first round of potentially forgivable Paycheck Protection Program (PPP) loans intended to provide emergency financial support to small businesses and nonprofits have focused on the surprising number of large, publicly traded companies that received funding. To avoid this scenario going forward, the Small Business Administration (SBA) and Treasury Department have updated their guidance to clarify the requirements potential borrowers must meet and the certifications they must make to qualify for PPP loans. Included in this directive are the steps borrowers must take to remedy any funding that they may have received erroneously.

Reaffirming Economic Necessity

The CARES Act requires eligible PPP loan applicants to certify in good faith that a loan is “necessary” to maintain their ongoing operations in the current uncertain economic environment. However, the language of the law does not define “economic necessity” nor does it specify whether the PPP loan must be borrowers’ only source of liquidity, or if they qualify for a loan even when they can obtain credit elsewhere. This, in addition to other ambiguities of the law, has left many PPP loan recipients to question their eligibility for both funding and future loan forgiveness and their exposure to legal and financial risks. On April 23, just one day before the federal government announced it would replenish the PPP, the SBA and U.S. Treasury addressed this issue via guidance in the form of frequently asked questions (FAQs).

FAQs 31 and 37 explain that businesses owned by larger entities, including private and publicly held companies, must determine economic necessity by considering their ability to access other sources of liquidity “to support their ongoing operations in a manner that is not significantly detrimental to the business.” The guidance goes on to state that “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 would therefore not qualify for funding.

To further support these requirements and ensure that PPP loans go to qualifying businesses with immediate economic need, the SBA and Treasury have announced that they will review all loans exceeding $2 million, and others, as needed, at the time that borrowers request loan forgiveness. Consequently, businesses that do not properly access and confirm economic necessity for loan proceeds from the start will find themselves subject to audit and penalties after they use those funds unless they take action to return the money.

Returning Loans to Avoid Future Risks and Liabilities

The U.S. Treasury is giving businesses that applied for the PPP loans before April 24 an opportunity to return those funds in full by May 18, 2020, and avoid the risk of legal liabilities and future audits and penalties.

Now is the time for borrowers to reevaluate and reaffirm their eligibility for PPP loans and their ability to tap into other sources of funding to support their ongoing operations through the coronavirus recovery period. Those businesses that confirm they meet the criteria for PPP funding should take special care to document both their original economic need and the way in which they use that money loan to demonstrate full compliance with the terms of the program and the maximum allowable amount for loan forgiveness.

Limiting PPP Loan Amounts for Corporate Groups

 On April 30, the IRS and U.S. Treasury issued PPP guidance placing a $20 million aggregate limit on loans granted to businesses that are part of single corporate groups that are majority owned, directly or indirectly, by a common parent company. The government makes it clear that it is the responsibility of borrowers to comply with this limitation and either notify lenders of any amounts above the threshold requested or received after April 30 or to withdraw or cancel any pending PPP application in which the loan requested exceeds this amount. Any borrower that fails to comply with this rule will be considered to have used PPP funds for unauthorized purposes and be subject to penalties and legal liabilities.

The Interaction of PPP Loans and Employee Retention Credits

Like PPP loans, the Employee Retention Credit created by the CARES Act aims to encourage and help businesses retain and continuing paying their workers through the COVID-19 crisis. However, the law specifies that PPP participants or recipients of any other small business loans will not be eligible for the Employee Retention Credit. That being said, the IRS on May 7 issued guidance allowing businesses that return PPP loans to their lenders by May 14, 2020, to be treated as never having received those loans and now qualifying for the Employee Retention Credit, provided they meet all other eligibility requirements. However, the guidance clarifies that employers treated as a single employer under the Employee Retention Credit aggregation rules may not receive that credit if any members of their aggregated groups receive a PPP loan.

Compliance with the PPP is an ongoing challenge for nonprofits, small businesses and independent contractors seeking financial assistance through this very difficult time in U.S. history. Because the onus to conform with the program’s evolving rules rests with borrowers, it is critical that loan applicants and recipients seek assistance for qualified tax advisors to keep up with changing guidance, reduce legal risks and maximize opportunities for loan forgiveness.

About the Author: Joseph C. Leuchter, CPA, is a senior manager in the Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs, where he helps individuals and businesses grow their wealth and profits while maintaining tax efficiency and compliance. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or at