Many small businesses are going to be breathing a huge sigh of relief with the new Small Business Administration FAQ that was released on May 13. The US Treasury in coordination with the SBA has answered a key question for those Paycheck Protection Program loan recipients whose loans are under $2 million. These borrowers will be deemed to have made in good faith the required certification concerning the necessity of this loan.
The reasoning behind creating this safe harbor is quite logical. The FAQs specifically spell out that most businesses with loans below this level are “less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”
This announcement is a positive one as the good faith certification rules made many borrowers nervous. When making a PPP application, the CARES Act requires that borrowers certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” But if the borrower lacked certification, there was the chance they could lose out on loan forgiveness.
“There was a lot of ‘uncertainty’ amongst small businesses on whether they ‘necessarily’ needed the loan. This was creating confusion and a bit of panic,” says Eric Hjerpe, CPA and Managing Partner, Hjerpe & Tennison CPAs in Bloomington, Illinois who helped his clients apply for the loans. “This should help alleviate fear for 99% of businesses that took this loan.”
Uncertainty Was Not Clear
Uncertainty is a tough term to define. While all small business and self-employed individuals face uncertainty in the normal course of business, uncertainty during the Covid-19 pandemic is not as clear. While some businesses and individuals are completely shut down, many are still open and generating revenue. But if the pandemic continues, many have been wondering if the threat of potential uncertainty is enough to qualify.
Further, commentary from Secretary Steve Mnuchin and Senator Marco Rubio (R-FL) made many borrowers believe that the certification might become problematic if they could not prove that the loan was necessary. In fact, this concern caused many to consider returning the loan by the SBA’s safe harbor repayment date of May 14.
Until this guidance came out, CPAs and other tax professionals were navigating in the dark when helping clients. In alleviating client concerns, Hjerpe said, “I tried to calm fears by assuring them we were following the guidelines put forth in the CARES Act and this was more about scaring the ‘big’ companies into returning the funds.”
That is why this guidance will also be seen as a warning shot to businesses that took loans in excess of $2 million. It is now clear that the SBA wants to focus its resources on making sure those businesses really had a necessity in taking the funds.
What Must Happen Next
However, this guidance will not be enough to make all borrowers feel less apprehensive about their PPP loan.
Hjerpe agrees. “More are concerned about forgiveness and don’t want to be stuck with a loan and no money to pay the loan.”
As many small businesses and self-employed individuals are now into their eight-week period of using their PPP loans, forgiveness guidance needs to happen as soon as possible. It is causing frustration for borrowers as well as the tax professionals who want to help their clients.
“This [guidance] was due 30 days after the passing of the CARES Act and here we sit,” says Hjerpe. “Businesses and advisors are in the dark about how forgiveness will be calculated, and some are five weeks into their eight weeks. This is one of the most important pieces to this PPP puzzle and we don’t have answers.”
But with the recent FAQs, at least some guidance is available to help many move forward in using the funds.
This article originally appeared on Forbes.
