PPP good faith certifications

ALERT: PPP borrowers can return funds by May 7 without penalty

May 1, 2020

This alert summarizes the “good faith” certifications required by the PPP and addresses recent guidance from the Treasury Department and SBA.

During the last week, the Paycheck Protection Program (PPP) has been the focus of national media reports, the Secretary of the Treasury, the U.S. Small Business Administration (SBA) and even the President of the United States.

This alert summarizes the “good faith” certifications required by the PPP loan program and addresses and explains recent statements and guidance made and issued by the Secretary of the Treasury and the SBA. This includes the SBA’s supplemental interim final rule to support its supplemental guidance issued on April 23, 2020.


Key points

  • Authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) was set up to provide small businesses access to emergency capital in the form of low-interest private loans guaranteed by the U.S. Small Business Administration (SBA).
  • The primary feature of PPP is the ability to obtain repayment forgiveness of the amounts used by the recipient for qualifying expenses such as payroll costs to retain or rehire employees. The U.S. Department of the Treasury (Treasury) issued informal guidance and the SBA issued an interim final rule in early April.
  • PPP loans may be audited, and borrowers may face enforcement scrutiny. Main areas of risk include: 1) necessity for the loan, 2) size eligibility, 3) amount of loan requested and 4) use of loan proceeds.
  • SBA wants borrowers to seriously consider their certification that the loan was "necessary" to support ongoing operations. Companies with alternative access to capital may need to justify their determination that the loan was in fact necessary.
  • Borrowers can return funds, which in retrospect may not have been "needed" per the PPP rules, by May 7, 2020, without penalty. Past and future borrowers must also consider the impending wave of potential criminal investigations and civil proceedings under the False Claims Act.
  • According to the SBA supplemental guidance, PPP borrowers will likely be subject to audits and enforcement scrutiny, specifically in regard to PPP loans in excess of $2 million. Aside from the obvious offenders who provided false or misleading information in the application itself, enforcement will also focus on the need for the loan, amount of loan requested and use of loan proceeds.

Key area of enforcement: Does the business need the loan?

Loans under the PPP program are intended to keep struggling businesses afloat during the COVID 19 crisis. The PPP application thus requires a certification that the "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

While the PPP interim rule did not define necessity, it appears that Congress envisioned supporting companies that may not survive given their limited capital access. This does not mean that the business had to demonstrate likely foreclosure to qualify. Nor does the business need to demonstrate that the business had no other means of obtaining credit. Treasury expressly stated that it was waiving "the usual SBA requirement that [the applicant] try to obtain some or all of the loan funds from other sources."

Although applicants were not required to seek credit elsewhere or otherwise show likely closure before applying, SBA and enforcement agencies will likely be scrutinizing the perceived need for the funding. Post-issuance reviews seem likely to focus on whether the applicant had enough cash reserves, had access to capital from related sources, issued projections showing limited impact during the COVID-19 crisis, or was otherwise in a strong financial position prior to applying for the loan or loan forgiveness.

Whether a company had enough capital to weather the COVID-19 crisis does not necessarily turn on whether it is public or private, as each case must be assessed individually. That said, SBA's non-binding comment does provide insight into the enforcement mindset that is forthcoming.

In its supplemental FAQs issued on April 23 and April 28, SBA urged borrowers to "review carefully the required certification" regarding necessity of the loan. SBA's interim final rule provides borrowers a "limited safe harbor" window of opportunity until May 7, 2020, to return funds that in retrospect they should not have received. SBA indicated it would deem the original certification as made in good faith – in other words, ignore the mistaken certification and forego civil, or even criminal, enforcement down the road – if the funds are returned within that timeframe.

If borrowers ultimately elect to retain the funds, they should take affirmative steps now to document their need. Collecting and maintaining records of the company's employee count and hour requirements, pre-COVID-19 operations and subsequent decline, cost of and access to capital, cash on hand, budget forecasts and other metrics of financial performance will help to lessen the inevitable enforcement scrutiny down the road. It may make sense as a prudent practice to prepare an internal memorandum summarizing the nature of the current economic uncertainty – both current and foreseeable – that makes the PPP loan request necessary to support ongoing operations.

Such an analysis might consider the consistency of current and future revenue from business activity, net assets of the business and the availability of cash reserves, access to alternative sources of financing and capital markets, and how detrimental it would be to the company to access these alternative resources. This contemporaneous documentation of the company's justification for seeking a PPP loan – if current, accurate and complete – could provide helpful support for the company's good faith basis for making the "necessity" certification, if this is questioned in the future.


Congress recognized that fraud is an inescapable byproduct of rapidly deployed federal funding. It therefore included a new enforcement regime in the CARES Act consisting of three entities: Office of the Special Inspector General for Pandemic Recovery; Pandemic Response Accountability Committee; and a Congressional Oversight Commission. These entities will work in conjunction with the U.S. Department of Justice, agency inspector generals, audit entities such as the U.S. Government Accountability Office and even whistleblowers to identify fraudulently obtained PPP loans.

Companies that have obtained or that are considering a PPP loan or loan forgiveness should heed the forthcoming enforcement warnings and carefully assess their eligibility. Companies that run afoul of the PPP rules when seeking the loan or forgiveness may find themselves facing civil, or even criminal, enforcement.


Aside from cases of true criminal intent, most of the scrutiny on the PPP loans will be viewed through the lens of the False Claims Act. It may be used to pursue companies that improperly take advantage of loan forgiveness. It may be applied toward companies that did not need the loan financially and failed to return the funds.

To minimize exposure, borrowers need to document the purposes for which the loan was spent and provide a detailed accounting in order to obtain loan forgiveness. Entities should carefully track where they directed the money to be spent, their employee counts and compensation levels. Contemporaneously maintain receipts and logs of qualified expenditures. Retrospective records are viewed with scrutiny by enforcement entities. This not only makes good compliance sense; it also will help in any forthcoming audit or enforcement action.

Additional information

For additional information and applicability to your tax situation, we recommend consulting with your AGH tax advisor or Shawn Sullivan using the information below.

Shawn Sullivan

Executive Vice President
Tax Services

Shawn leads the firm’s tax group and serves on AGH’s board of directors. In addition to enhancing business performance to minimize tax consequences, he has extensive experience in mergers and acquisitions, international tax and business structuring. Shawn has public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, automotive, wholesale distribution, real estate development and construction industries.

A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.

NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.

Are you adjusting to the new normal?
Our playbook can help you weather the uncertainty.