SBA scrutiny of PPP loan forgiveness

ALERT: SBA scrutiny of larger PPP loans before forgiveness

November 3, 2020

The Small Business Administration is seeking information from an estimated 52,000 Paycheck Protection Program loan recipients regarding their proceeds.

The Small Business Administration (SBA) published a notice in the Federal Register on Oct. 26 that it will seek information from an estimated 52,000 Paycheck Protection Program (PPP) loan recipients regarding the necessity of the proceeds to their organization. The information will be reported on SBA Forms 3509 (For-Profit Borrowers) and 3510 (Non-Profit Borrowers).

What we know so far


The agency has not published the forms, but we have obtained copies and linked them here and here.

There hasn’t been much reported about these “questionnaires” so far and what has been is somewhat confusing.

S&P Global quoted Carol Wilkerson, SBA head of public relations, as saying that “These forms are for specific borrowers with PPP loans worth $2 million and above.” However, the number of PPP loans that are $2 million and above includes approximately 30,000 loans, according to the SBA website.

This means there could be loans of under $2 million that are affected. Most likely, this means the SBA will be looking at affiliated groups of companies that received smaller loans which add up to more than $2 million combined.

SBA Frequently Asked Question #46 states:

“When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”

Possible challenges to forgiveness

The borrowers that may face a challenge to forgiveness are those that maintained or increased compensation to high paid employees and owners, made distributions to owners over and above that needed for taxes, those whose gross revenues did not take a hit and those with substantial cash immediately prior to taking a PPP loan.

Businesses with 20% Private Equity Group or Venture Capital Firm ownership may face additional scrutiny to forgiveness if those owners are well capitalized and sitting on significant cash and liquid assets.

For those with concerns about these factors, it is important to counter with the uncertainties considered in deciding to apply for the loans. The timing and impact have varied among industries and, with the rising trend in COVID cases, there is ongoing uncertainty as to economic impact as we go through the fourth quarter and into 2021. If the economy shuts down or significantly slows, there is likely a compounding effect for businesses already hurt in the second and third quarters of this year.

Things you can do now

It is critical that you provide information regarding the uncertainties that drove your decision to apply for the PPP loan by responding to Question 8 in the “Business Activity Assessment” section and Question 13 in the “Liquidity Assessment” section.

Keep in mind that once your lender provides you with Form 3509/3510 to complete, you only have 10 days to respond. The lender then must submit within five days of receipt.

Based on this, we recommend you prepare a draft Form 3509 and gather the required supporting information and documents. Consider having someone independent from your organization review it in order to provide recommendations for improvement or additions to your responses.

Additional information

In most situations, we are still advising borrowers to not get in a hurry to submit their forgiveness application. This is primarily due to the uncertainty regarding deductibility of qualified expenses during the covered period, and the chance that the SBA may revise form 3509 as they get comments over the next 30 days.

We will continue to monitor the situation and keep you informed of updates. For additional information and applicability to your 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.

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