by Scott Lewis, CPA, MSA
The PPP loan program was signed into law to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, back in March of 2020. It was designed as an assistance measure in times of unprecedented economic uncertainties in the United States.
On October 26, 2020, the Small Business Administration (SBA) issued a notice seeking approval from the Office of Management and Budget (OMB) to release two new forms related to the forgiveness process as part of the Paycheck Protection Program (PPP). In their draft format, the SBA is requiring lenders to collect questionnaires from borrowers, together with their affiliates, that received PPP loans with original principal amounts of more than $2 million using Form 3509 for for-profit businesses and Form 3510 for nonprofit entities. Please note that these forms have not been officially released by the SBA, and they are subject to a 30-day public comment period, which expires on November 25, 2020.
The affiliation rules are applied identically as they were under the CARES Act. As an example, a group of auto dealerships comprised of multiple legal entities may not fall under the affiliation rules. A dealership with a separate tax ID number, that had been issued a Franchise Identifier Code by the SBA and obtained a loan under $2 million should not fall under this requirement, even if their other legal entities collectively borrowed over $2 million.
The purpose of these forms is to collect supplemental information that will be used in conjunction with the good-faith certification that was filed with the original loan applications; and as noted on FAQ # 46 from the PPP Loans guidance issued by the Department of the Treasury and the SBA. The certification, signed the borrower, stated that the facts and circumstances surrounding economic uncertainty made these loans necessary. This stems back to early March of 2020 and April of 2020 when national and state governments were deciding on courses of actions to curb the spread of COVID-1, including partial/limited and/or full shutdowns of all businesses.
From a topline approach, the form and questionnaire consist of two parts, the business activity assessment and the liquidity assessment. The draft form goes through 21 questions to fill out which includes sub-sections under each question.
The business activity assessment requires borrowers to disclose:
- Their gross revenue in the second quarter of 2020, compared to the second quarter of 2019;
- Whether borrowers were under mandatory limited or full time shutdown of their business operations starting on March 13, 2020 due to COVID-19, had to significantly alter their methodology of business operations, or if they voluntarily reduced or ceased operations through the loan covered period, and;
- Whether any new capital improvements not related to COVID-19 were started from March 13, 2020 through the covered period.
The liquidity assessment requires borrowers to disclose:
- Cash and cash equivalents as of the last day of the calendar quarter before the date of the PPP loan application;
- Whether any dividends or distributions were paid (other than for estimated tax payments) between March 13, 2020 and the covered period or any prepayment of outstanding debt obligations;
- Any employee, including owner’s compensation that exceeded $250,000 on an annualized basis during the covered period, and;
- Any other CARES funds received.
These questionnaire drafts and questions imply that the SBA will look at the borrower’s subsequent revenues and other income resulting after receiving PPP monies; to make their own determination of whether a good faith certification was warranted, despite the uncertainty of current economic conditions at the time of the loans. Commentary notes that the SBA appears to be replacing uncertainty about what will happen in the future with the 20/20 hindsight we have now. We are sure there will be many further developments over the next upcoming weeks, and we will update as we know.