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SBA Provides Safe Harbor for Returning PPP Funds

Joseph Most, J.D.

5.6.20 | Client Alert – COVID-19 Update

In the latest version of the Small Business Administration’s (SBA) frequently asked questions (FAQs), the SBA reminded borrowers to carefully review the required certification on the borrower application form that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  The SBA’s previous guidance provided that any borrower who applied for a Paycheck Protection Program (PPP) loan prior to April 24, 2020 and repays the loan by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.

A new FAQ now extends the repayment date for this safe harbor to May 14, 2020 for companies to return loan proceeds without violating the certification.

Initially set at May 7th, and now extended to May 14th, the SBA has provided that if a company returns its loan during this period it will be considered to have initially made the certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” in good faith. The SBA has further indicated that  when making this certification, borrowers must, “ tak[e] 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.”

It is unclear at this point whether and how this directive applies to private companies without access to public markets. Whether would be applicants are required to draw down on available credit lines or solicit capital from existing owners before applying for PPP funds is uncertain and would appear to be at odds with the program’s initial mandate; to focus on employee retention and maintenance of compensation levels.

SBA Issues First Guidance on PPP Forgiveness

The SBA has answered the first of many outstanding questions relating to the calculation of PPP loan forgiveness. In an FAQ, the SBA has indicated that an IFR will be issued which provides that if a borrower laid off an employee, offered to rehire that same employee, but the employee declined the offer, that its loan forgiveness amount will not be reduced with respect to that employee. To qualify for this exception, the borrower must make a good faith, written offer to rehire the employee and must document the rejection of the offer. The SBA further warns that such a rejection of re-employment may impact the previous employee’s continued eligibility for unemployment benefits.

For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.

Berdon LLP New York Accountants