PPP Forgiveness Could Take Years for Your Business – Here's How to Prepare
December 10, 2020 - The Paycheck Protection Program (PPP) was created to help American businesses tide over the COVID-19 coronavirus, and businesses applied in droves: about 5 million businesses were approved for PPP loans by the Small Business Administration (SBA) before the August 8 application cutoff. But the specifics of the program – namely how businesses that received loans would be evaluated for forgiveness of those loans – was less clear.
Brian Sweeney, Audit Partner with Redpath and Company, says there's something of a grey area in the SBA's PPP loan forgiveness protocol, including terms that could turn your forgiveness decision into a six-year-long process with an uncertain outcome.
Here's what Brian says companies should be keeping in mind when preparing for PPP loan forgiveness.
PPP Loan Forgiveness Deadlines and Amount Considerations
Recipients of PPP loans have 10 months from the end of their covered period to request forgiveness before they need to begin making payments on the loan (that's sometime in 2021 for most companies). Any company that doesn't formally request forgiveness before that 10-month milestone will need to start making payments on the loan.
Furthermore, companies should allow up to 150 days after requesting forgiveness before finding out if their forgiveness request was approved or denied. That's because borrowers submit their forgiveness application to their lender, which has 60 days to approve or reject the application, which then sends it to the SBA for approval, a process which can take up to 90 days. Brian says that in his experience, banks are turning around PPP loan forgiveness applications more quickly than the SBA.
Additionally, Brian says companies should take note of additional steps expected for forgiveness of larger loans. Loans larger than $2 million require an additional questionnaire to further determine good faith loan necessity when applying for forgiveness. This form details elements like liquidity at the time of application, other sources of funding, and other subjective factors.
Brian says Redpath is "talking with clients every day about what makes sense in their circumstance" – which, given the SBA's clarifying statements, could be a years-long engagement.
The SBA's Initial Decision to Forgive Your PPP Loan Might Not Be Permanent
At the beginning of the pandemic, Brian says, "Many companies ultimately decided that there was enough uncertainty around the pandemic that they did in fact have a need for supporting funds, so they applied in good faith." But the quick onset of COVID-19's economic impact meant some aspects of the CARES Act and the PPP were "very vague," leaving lenders and borrowers alike unsure.
In May 2020, the SBA released guidance that clarified some elements of the PPP loan forgiveness process. Among them was the stipulation that the SBA reserves the right to review a business's eligibility for forgiveness for up to six years after the SBA has forgiven the loan.
For example, consider a fictional company that applied for financial assistance at the beginning of the PPP term.
- The company received a $300,000 loan as part of the CARES Act Paycheck Protection Program, using the funds to protect the income of its workforce.
- In December 2020, the company applies for forgiveness through its lender, who approves the application and sends it to the SBA.
- The SBA reviews the application, finds that the company meets forgiveness criteria, and approves the company's forgiveness application in February 2021.
- In 2023, after further reviewing the ways the company used PPP funds, the SBA decides they didn't meet all eligibility requirements after all, and requires the company to pay back a portion of the previously forgiven loan.
The stipulation exists because the SBA feels that some companies that received PPP funds may not have demonstrated a compelling need for the funds after they were awarded (for example, a company that fared well during the pandemic rather than experiencing the worst-case scenario they'd envisioned).
Your Accounting Firm Can Help Build Your Case
For that reason, Brian says that he and the Redpath team have recommended tight, accurate documentation of their loan needs "from the first day" of the program.
"The SBA is questioning companies with the benefit of hindsight," he says. "They're seeing companies that had a good year, and they're asking, 'Did you really need it?'" Building a body of evidence that stands up to that benefit of hindsight is essential to ensuring forgiveness in the short and long term.
While your legal counsel is best positioned to argue your actual eligibility for PPP forgiveness, your accounting firm can help interpret the financial vagaries and document your need for PPP funds. "It's not as clear-cut as once thought," Brian says. "The best way to increase your likelihood of forgiveness is to prepare."
Brian Sweeney, CPA
Brian Sweeney is a partner, the employee ownership (ESOP) team leader, and also a client manager specializing in financial statement audits, business and systems consulting, management and advisory services, and mergers and acquisitions. He works with closely-held businesses in a variety of industries, including manufacturing and wholesale distribution, with a specialty focus on employee-owned companies. As Redpath’s ESOP team leader focusing on client services, financial health, and cultural consulting to employee-owned companies. He works to protect S Corp ESOPs and stays up-to-date and knowledgeable on issues, changes, and legislation through involvement and committee leadership roles in the ESOP community. Brian was elected to and serves on the board of Directors for the National Center of Employee Ownership. He is an active member of the Finance Committee for the ESOP Association, the Government Relations Committee of the ESOP Association Minnesota/Dakotas Chapter, and Employee-Owned S Corporations of America. Brian is a regular presenter on employee ownership topics at local, regional, and national events. He has provided public accounting services at Redpath and Company since 1998.
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