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Paycheck Protection Program (PPP): Week in Review

It has been a big week in PPP developments.  Probably of greatest interest to a majority of borrowers is the guidance issued by the Department of the Treasury and the SBA (the “Department”), on Wednesday, regarding necessity and PPP loan eligibility.  Other updates may also be important to certain business sectors.

1. Necessity Certification and Repayment

The guidance issued on Wednesday, regarding necessity, may come as a relief for many small businesses, who have spent the past few weeks in uncertainty on whether they would be able to properly retain PPP loan proceeds, based on updated guidance.  Borrowers receiving PPP loan proceeds must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Additional guidance, issued in late April, brought into question the precise meaning of the certification.  Borrowers who had previously believed that they were eligible for a PPP loan and had in good faith applied for loan proceeds began to receive warnings from their bankers, accountants and attorneys informing them that funds might need to be returned.

On Wednesday, the Department indicated that it has created a safe harbor for a borrower that, together with its affiliates, obtained a PPP loan with a principle amount of less than $2 million stating that:

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.

The Department reasoned that a $2 million safe harbor is proper because:

[B]orrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Borrowers with loans of greater than $2 million will be subject to SBA audits and will need to carefully evaluate their basis for making the required certification of necessity.   

The Department also extended the window to repay PPP loan proceeds from May 14, 2020 to May 18, 2020.  Borrowers do not need to apply for the extension, which will be incorporated into the Department’s final rule regarding the repayment period safe harbor.

2. Loan Increases

The Department also issued an interim final rule regarding increases to loans granted to partnerships and seasonal employers.  Many partnerships initially applied for a PPP loan amount that did not include any compensation for their partners, because they applied for the PPP loan prior to the issuance of the April 14, 2020 interim rule, which discusses the inclusion of partners in payroll costs.  The interim final rule issued on Wednesday provided that the original PPP loan amount may be increased to include partner compensation.

Seasonal employers also have the opportunity to apply for loan increases.  On April 27, 2020, the Department issued additional guidance to establish alternative means of calculating the maximum loan amount for seasonal employers.  Seasonal employers who applied for PPP loans, prior to the issuance of the additional guidance regarding calculations, issued on April 27, 2020, may have applied for lower sums than may be permitted under the updated guidance.   Seasonal employers, pursuant to the interim rule issued Wednesday, are permitted to apply for additional sums, based on the alternative calculation contained in the interim final rule.

3. Electric Cooperatives

On Thursday, the Department issued an additional rule regarding eligibility of certain electric cooperatives for PPP loan funds.  The Department has determined that electric cooperatives, that are exempt from federal income taxation under Section 501(c)(12), will be deemed “a business entity organized for profit” and will be eligible to apply for PPP loans, provided that other eligibility requirements are met.

Should you have any additional questions or concerns, please do not hesitate to contact a Carson LLP attorney.

Liesl Muehlhauser



This advisory has been prepared by Carson LLP for informational purposes only and does not constitute legal advice. Copyright 2020, Carson LLP, 301 W. Jefferson Blvd. STE 200, Fort Wayne, Indiana, 46802. All rights reserved. Date of Advisory 5/15/2020.