May 13, 2020

One of the signature provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law by President Donald J. Trump on March 27, 2020, was the Paycheck Protection Program (“PPP”), which was designed to incentivize small businesses to keep employees on their payroll during the COVID-19 pandemic when businesses might otherwise be forced to furlough or lay off employees.  Subsequent developments from the Small Business Administration and the Secretary of the Treasury, Steven Mnuchin, have put businesses on alert that that may, or perhaps even will, be audited to verify that they met all of the qualifications for the PPP.


The PPP is a new program being administered through the Small Business Administration to provide continuity of income for employees of small businesses throughout the coronavirus crisis.  Qualifying businesses can receive loans from the Small Business Administration in order to keep their employees on the payroll.  The loans will be forgiven if employees remain on the payroll for 8 weeks, and the amounts loaned are used for payroll, rent, mortgage interest, or utilities, with at least 75% being used for payroll. 

Who is eligible?  Small businesses with less than 500 employees.  This may include sole proprietorships.  Restaurants and other food service entities qualify if they employ fewer than 500 employees at a single location.

How can a business apply?  Through an existing SBA 7(a) lender or through any federally-insured depository institution or credit union.  Other lenders may be available to make loans after submitting for approval and being enrolled in the program through the Small Business Administration.

How large of a loan can these businesses receive?  2.5 times the business’s average monthly payroll based on the 12 prior months, with a cap of $10 million.

What terms apply to these loans?  Payments on these loans will be deferred for 6 months.  The loans are unsecured, so businesses need not give any collateral in order to receive them.  No fees apply.  The loans have a maturity of 2 years and an interest rate of 0.5%.  Forgiveness is based on the businesses either maintaining or quickly rehiring employees and maintaining salary levels.  The amount of the loans to be forgiven will be reduced if the number of full-time employees decreases, or if their salaries or wages decrease.  Businesses will generally not incur a tax liability on the forgiven amount of loans.

Can businesses receive tax credits under the CARES Act, or those that defer certain payroll taxes, and also receive these loans?  No.  These benefits are mutually exclusive under the CARES Act.  The tax credits available for businesses and provisions for deferral of certain payroll taxes are described in further detail below.

Later Updates

The $349 billion of funds designated for the PPP as part of the CARES Act on March 27 were extinguished by April 16, which left many businesses that qualify for the program unable to obtain funds.  In response, Congress provided an additional $310 billion in funding for the PPP on April 24.  Businesses that previously qualified for a PPP loan are unable to obtain a second loan.

The program has had its share of controversy.  Some small businesses objected to larger organizations such as Ruth’s Chris Steak House, Potbelly Sandwich Shop, and Shake Shack obtaining PPP loans for their individual restaurants that had fewer than 500 employees. 

Later comments in April by Secretary of the Treasury Steven Mnuchin gave some borrowers pause about requirements for PPP loans that were seemingly changing as time went on.  Among these comments were “it’s the borrowers who have criminal liability” for false certifications, and his announcement that all loans over $2 million will be audited by the Small Business Administration.

The Small Business Administration eventually published a FAQ sheet about the PPP.  Of note was Question and Answer 31, which was published on April 23, providing as follows:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.  Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.  Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent 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.  For example, 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 such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request.  Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020[1] will be deemed by SBA to have made the required certification in good faith.[2]

Understandably, many business owners are now concerned that, given these updates to the PPP, which may have been announced only after the businesses obtained their funding, they may be subject to potential penalties for failure to make a proper certification.  Making matters worse is that the Small Business Administration has not, to date, defined “liquidity” or “significantly detrimental” in these contexts.

We recommend that businesses that obtained, or plan to obtain PPP loans maintain a detailed record of its reasons for applying for the loans.  In light of the guidance from the government that only was released after many businesses obtained PPP loans, however, any borrower who pays its PPP loan in full by Thursday, May 14, 2020 will be deemed to have made its certification in good faith, and no criminal liability will arise. 

It is unclear what a PPP audit will entail as of this writing, but it is reasonable to forecast that borrowers will need to submit their financial information as of the time of the PPP application to the Small Business Administration’s Office of Inspector General.

Rees Broome’s Summary

The rules have been changing for loans under the Paycheck Protection Program, likely a result of the CARES Act having been rushed through in order to provide taxpayers with much-needed relief as soon as possible.  Businesses finding themselves subject to a PPP audit should secure capable counsel to represent them.  Although businesses that received over $2,000,000 in loan proceeds will certainly be audited, the government’s statements will enable such businesses to prepare early for their audits.


[1] This deadline has since been extended until May 14, 2020.


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