PPP Loan Certification and Forgiveness

PPP loans are meant for small businesses, which are generally defined for the purposes of the program as having 500 or fewer employees. The purpose of the loans is to allow businesses to continue to pay their employees and keep their operations up and running in the midst of economic hardship brought on by the COVID-19 pandemic.

PPP loans are eligible for loan forgiveness if certain conditions are met. The proceeds of the loan must be spent on qualifying expenses in the eight-week period after the funds are received by the borrower. Additionally, 75% must be used for payroll purposes. The remaining 25% can be used for other qualifying expenses such as utility payments, rent, or mortgage interest. Borrowers should verify with their lenders regarding which expenses will qualify.

In addition to the spending requirements, businesses that receive PPP funding are expected to maintain employment and compensation levels. Loan forgiveness may be reduced if employee or compensation levels decline. Businesses may have an opportunity to rehire employees by no later than June 30, 2020 to avoid decreases forgiveness eligibility based on employee reduction. The Treasury FAQ on PPP Loans addresses whether forgiveness will be reduced if an employer laid off an employee and offered to rehire the same employee, but the employee declined the offer. According to the answer to Question 40 in the FAQ: 

SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

To qualify for forgiveness, applicants need to prove they need the funds and certify they don’t have access to additional sources of capital. Additionally, they must certify that the current economic uncertainty (which has been created by the COVID-19 pandemic) makes the loan request necessary in order for the applicant’s operations to continue.

Because businesses must certify they have no access to other sources of capital and the current economic situation has made the loan necessary, the SBA warned on April 23rd that businesses with substantial access to capital would not qualify for the PPP loans. Subsequently, some larger companies returned their PPP funds. Additionally, some small companies are also concerned that this warning and disqualification may apply to them. However, guidance from the Treasury’s FAQs on PPP Loans states: “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.”

If you borrowed less than $2 Million, your certification will be deemed to have been made in good faith according to the guidance from the Treasury.

If you borrowed $2 Million or more, it will not necessarily disqualify you. You may still have adequate basis for making the good-faith certification based on your individual circumstances. However, if the SBA determines a business that borrowed $2 Million or more did not have adequate basis, they will seek repayment of the funds and the borrower will not be eligible for forgiveness of the loan.

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