The Department of Treasury has been updating its Frequently Asked Questions (FAQs) on the Paycheck Protection Program (PPP) on a regular basis. These FAQs may help you decide if you should return your PPP loan in full and still qualify for the Employee Retention Credit. The PPP loan must be repaid or returned by Monday, May 18th in order to qualify. We have highlighted the key FAQs below.
Several times, Treasury has re-iterated that borrowers should carefully review the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” They added, “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.” Because this guidance came after many businesses had applied for the loan, Treasury added that “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, will be deemed by SBA to have made the required certification in good faith.” This Safe Harbor has been extended twice, first to May 14th, and now May 18th.
Another question asked was, “Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020, [now May 18th]) eligible for the Employee Retention Credit?” The answer was, “Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020, [now May 18th]) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.”
KROST Insight: If you have received a PPP loan and you return it by May 18th, you will be eligible for the Employee Retention Credit (ERC). Of course, if you did not apply or did not qualify for a PPP loan, you were always eligible for ERC, assuming you meet the ERC criteria.
If you want guidance on whether to return your loan you should consider the most recent Q&A on the subject:
Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: 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.
SBA has determined that this safe harbor is appropriate because borrowers 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.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
KROST Insight: There are three important sections of the Q&A to focus on. Treasury has determined that anyone who applied for a loan of less than $2 million, will have,“deemed to have made the required certification concerning the necessity of the loan request in good faith and that”
“SBA has determined that this safe harbor is appropriate because borrowers 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.”
Also note the reference to an earlier guidance that “SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.”
The final question you may be asking is: Am I better off with a forgivable PPP loan or the ERC? Unfortunately, that is an impossible question to answer without analyzing your individual situation. Remember, though, that even if you meet all the ERC criteria, the maximum credit is, in effect, $5,000 per employee.
The full Treasury FAQs can be found here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
About the Author
Paren Knadjian, Practice Leader
Mergers & Acquisitions, Technology, PPP Forgiveness
Paren is the practice leader of the M&A and Capital Markets group at KROST. He comes with over 20 years of experience in mergers and acquisitions as well as equity and debt financings. In that time, Paren successfully completed over 200 M&A and Capital Markets transactions worth over $1 billion, acting as both a buy-side and sell-side advisor. » Full Bio