Is the SBA Changing Course Regarding Paycheck Protection Program Loan Forgiveness?
New questionnaire around economic need for Paycheck Protection Program (PPP) loans over $2,000,000 may lead to further reporting for all loans.
In a style similar to that of the Pennsylvania Legislatures’ midnight pay raise vote in 2005, the Small Business Administration (SBA), under the cloak of darkness, has begun circulating two forms to be completed by borrowers with PPP loans in excess of $2 million. The purpose of these forms is to provide the SBA information for determining the necessity of your PPP loan. Forms 3509 Loan Necessity Questionnaire (For-Profit Borrowers) and 3510 Loan Necessity Questionnaire (Non-Profit Borrowers) are for borrowers with loans in excess of $2 million to clarify their need to support liquidity and business activity during the pandemic. These forms will not be posted to the SBA website but will be provided and made available directly through lenders to borrowers for completion. The information provided within the questionnaire will not require lenders to verify or validate any of the borrower’s responses or supporting documents according to the SBA.
From the information that is available, we’ve been able to gather the following:
“The purpose of this form is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application (SBA form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary. Each for-profit and non-profit Borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater is required to complete this form and submit it, along with the required supporting documents, to the Lender servicing Borrower’s PPP loan. The completed form is due to the Lender servicing your PPP loan within ten business days of receipt from your Lender.”
The SBA goes on to say that the information they are requesting will provide taxpayers a demonstration of maximum program integrity and a show of the good-faith certification that economic uncertainty made the need for the loan request necessary to support ongoing operations. Furthermore, failure of any for-profit or non-profit to provide this information may deem the loan ineligible and require repayment of the loan.
Both Forms 3509 and 3510 ask a number of questions broken out in two distinct categories:
Business Activity Assessment
- Borrower’s gross revenue for the second calendar quarter of 2020 and the same quarter in 2019.
- Was the business ordered to shut down at some time after the declaration of the COVID-19 National Emergency on March 13, 2020, by a state or local government order?
- Did the business have to significantly alter its operations due to a state or local government entity? If so, disclose the modifications taken and dates involved with the modifications.
- Any voluntary modifications or changes in business operations without a government order.
- Were any capital improvement projects not related to COVID-19 undertaken between March 13, 2020, and the end of the forgiveness period?
Liquidity Assessment
- Amount of cash and cash equivalents on hand on the last day of the calendar quarter immediately before the date of the borrower’s PPP Loan application, as well as provide supporting documentation.
- Any dividends or other capital distributions (other than for pass-through estimated tax payments) to its owners during the period from March 13, 2020, to the end of the PPP loan forgiveness period.
- Any prepayment of outstanding debts during the period from March 13, 2020, to the end of the PPP loan forgiveness period.
- Any employees or owners who were compensated in excess of $250,000 on an annualized basis during the forgiveness covered period.
- Any equity securities listed on a national securities exchange and, if so, borrower’s market capitalization at the date of the borrower’s loan application.
- If any public company owned more than 20% of any class of the borrower’s outstanding equity securities.
- Was the borrower a subsidiary of another company at the date of the borrower’s PPP loan application?
- Was 20% or more of any class of the borrower’s outstanding equity securities held by a private equity firm?
- On the date of the loan application, was the borrower an affiliate or a subsidiary of a foreign, state-owned enterprise or of a department agency or instrumentality of a foreign state?
- Did borrower receive funds from another CARES act program (EIDL)?
The final pages of the questionnaires provide similar certifications that are already on the current loan applications, as well as a list of items that are to be provided with the questionnaire such as:
- Available cash and cash equivalent balances,
- Amounts distributed to owners,
- Payment of debts and compensation to employees and owners greater than $250,000 annualized during the PPP loan period.
So What Does this Mean?
As of this time, no further guidance has been provided by the SBA regarding its impact on loan forgiveness applications. It is strongly believed that this information will be used by the SBA to support its audit procedures for loans greater than $2 million. The question now is, what does this mean for loans of less than $2 million? A few weeks ago, the SBA issued form 3508S which basically gives a pass to borrowers of loans of less than $50,000, and exempts these loans from any FTE or salary reduction measures. When this form was issued, many believed that further loan forgiveness “easing” would occur in order to expedite the loan forgiveness process, and to provide business relief of this debt, making it much like a government grant. However, with this new questionnaire, concerns are mounting around whether the SBA is changing course and will require borrowers of less than $2 million to also provide similar information. It would not be unusual for the SBA to do this as we have seen many back and forth changes to this program from day one. As the late great Rowdy Roddy Piper once said, “Just when you think you have all the answers, I change the questions.” This saying cannot be truer than when reviewing the history of the SBA PPP lending program.
Please join Mark Heath, Partner & Director of Tax Services and David Blain, Partner & Director of Entrepreneurial Services at McKonly & Asbury as they further discuss this as well as other matters relating to the Paycheck Protection Program during a complimentary webinar on Thursday, November 12th at 2:00 p.m. EST. You can learn more and register by clicking here.
As always, if you have any questions or concerns, please contact our team and we’ll be happy to assist.
Questions on submitting your PPP loan application or the forgiveness process?
Our team stands ready to assist you through the PPP loan application and forgiveness process. Do not go at it alone. Ensure you are submitting the right information and receiving the highest forgiveness amount possible. Visit our PPP Loan Consulting webpage by clicking here to request assistance or support.
