Background and context
PPP provided SBA-guaranteed emergency loans to eligible small businesses navigating the unprecedented COVID-19 global pandemic to be used for payroll and other fixed obligations. One of the most attractive features of the loan program was the ability to obtain loan forgiveness if the loan funds were used for payroll and certain other fixed obligations, like rent and utilities, and 75 percent of the requested forgivable amount was used for payroll. Any loan proceeds not used for forgivable purposes would accrue interest at 1 percent. This unprecedented program caused applicants to rush to submit applications to their lenders for PPP funds, and the SBA announced within two weeks that the initial $349 billion in CARES Act PPP funds had been exhausted. Eventually, an additional $321 billion in funding for PPP loans was made available on April 24, 2020. Following the initial announcement of the loan program, the SBA and the Treasury issued significant additional guidance on eligibility, which clarified the regulations and eligibility criteria in some part and in other cases, arguably moved the goal posts, particularly with respect to public companies and private equity companies. Following the release of a series of FAQs and increased scrutiny in the press, Treasury Secretary Mnuchin also announced that the SBA will conduct audits of all businesses that received PPP loans amounting to more than $2 million, and reiterated his warning that PPP borrowers may face potential law enforcement action if they took funds without satisfying eligibility requirements. The SBA then announced a safe harbor date for loan recipients to return the funds without penalty if they determined they no longer qualified under the revised guidelines. Now that the borrowing safe harbor date has passed (discussing SBA FAQ # 43; see also SBA FAQ # 47), borrowers next must navigate the PPP forgiveness provisions in seeking forgiveness of their loans.
Generally, PPP loans are eligible for up to 100 percent forgiveness in connection with the approved use of proceeds for the recipient’s qualifying payroll costs; interest payments on real or personal property mortgage obligations, for obligations incurred before February 15, 2020; rent payments under leases in force before February 15, 2020; utility payments where service began prior to February 15, 2020; and additional wages paid to tipped employees – with the condition that all of the foregoing costs were incurred and paid during the eight-week period beginning on the date of PPP loan origination, defined by the CARES Act as the “covered period.”
As an incentive for small businesses to retain employees and maintain compensation, the PPP reduces the total eligible forgiveness amount based on a comparison between a business’s reductions in full-time equivalent (FTE) and reductions in employee compensation for those making less than $100,000. Such a reduction is calculated by comparing those two data points for the covered period with the same data for a “reference period” from the business’s 2019 operations. See Reed Smith’s PPP Interim Final Rule (IFR) analysis and Treasury FAQs. For example, if the recipient has an average of 75 FTE during the covered period and an average of 100 FTE during the reference period, the recipient would only be entitled to a maximum of 75 percent of the loan forgiveness of the total eligible forgiveness amount. The amount of the loan forgiveness is not included in gross income for federal tax purposes.
The forgiveness application
On May 16, 2020, the SBA administrator published the PPP forgiveness application. Our CARES Act team highlighted some of the key aspects of the PPP forgiveness application and guidance on the process.
PPP recipients must apply for forgiveness through their lender using the SBA’s forgiveness application, and include the following information supporting forgiveness:
- Documentation, including payroll filings, verifying the number of FTEs employed during the relevant reference and covered periods and the compensation that it paid them.
- Documentation, including cancelled checks, payment receipts, transcript of accounts, and similar information, verifying payments of mortgage obligations, rent, and utilities.
- Certifications representing that the documentation is true and correct and that the amount of forgiveness requested was used for retaining employees and paying mortgage interest, rent, and utilities during the covered period.
- Any additional information that the SBA administrator requires.
This application is comprised of (1) the PPP Loan Forgiveness Calculation Form, (2) the PPP Schedule A, (3) the PPP Schedule A Worksheet; and (4) the (optional) PPP Borrower Demographic Information Form. Borrowers are only required to submit (1) and (2) in support of their request for loan forgiveness.
The forgiveness application instructions state that a loan is eligible for forgiveness only if at least 75 percent of the loan amount was used for payroll expenses, or, stated differently, that no more than 25 percent of the loan amount was used for qualifying nonpayroll expenses. See Forgiveness Application Instructions at page 2 (“Eligible nonpayroll costs cannot exceed 25 percent of the total forgiveness amount.”).1
Additionally, the application makes it clear that eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by the SBA, and that the SBA may direct a lender to deny a loan forgiveness application if the SBA determines the borrower was ineligible for the PPP loan. See Application page 4. According to the IFR, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to the SBA. If the SBA review determines that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness and will need to be repaid in full.2
The application also requires, if the borrower (together with its affiliates) received PPP loans in excess of $2 million, that the borrower attest to such. See Application page 1.
The forgiveness application also creates a potential ambiguity between the statutory “covered period” of the loan and reference to an alternative covered period. In some places, the applicant is directed to use the “alternative covered period” but in other areas, the applicant must relate back to the covered period, which creates potential challenges and confusion in certifying the accuracy and compliance of the supporting records.
As critical to enforcement mitigation, the forgiveness application requires the forgiveness applicant to make seven distinct financial and other certifications under oath that accompany the aforementioned documentation. The certifications include:
- That the PPP forgiveness requested was used for the purposes provided and was properly calculated based on the CARES Act, regulations, and guidance.
- An acknowledgement that if the funds were used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
- That the borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the borrower is requesting forgiveness.
- That the signor making the certification submitted to the lender included all required documentation verifying payroll and other costs.
- That under penalty of perjury, the information provided in the application and the information provided in all supporting documents and forms is true and correct in all material respects.
- That the tax documents submitted to the lender are consistent with those the borrower has submitted or will submit to the IRS and/or the state tax or workforce agency.
- That the signor making the certification understands, acknowledges, and agrees that the SBA may request additional information for the purposes of evaluating the borrower’s eligibility for the PPP loan and for loan forgiveness, and that the borrower’s failure to provide information requested by the SBA may result in a determination that the borrower was ineligible for the PPP loan or a denial of the borrower’s loan forgiveness application.
The government will rely on the certifications, statements in forgiveness applications, and underlying financial records to calculate loan amounts to be forgiven. SBA auditors – and likely federal enforcement agencies – will be closely scrutinizing forgiveness applications, documentation, and certifications. Borrowers seeking forgiveness must be diligent to mitigate enforcement risks, including the risks that exist under the False Claims Act.
The False Claims Act
As we have previously described in written alerts on avoiding FCA liability for CARES Act recipients and guidance regarding student workers under the CARES Act, the False Claims Act (FCA) is the government’s primary tool to fight fraud against the government. Generally speaking, the FCA prohibits individuals and companies from obtaining government funds through the use of false claims or certifications. (Additional background on the intersection between the FCA and PPP loans can also be found in our prior podcast and webinar.) The FCA’s unique “qui tam” or whistleblower provisions mean the FCA is frequently used by the Justice Department and also by private individuals (often referred to as whistleblowers or qui tam relators) who are permitted to bring FCA allegations against defendants. See generally 31 U.S.C. section 3730(b). The FCA statute provides a potentially enormous incentive for whistleblowers to come forward and bring FCA actions: a “bounty” of up to 30 percent of any recovery, plus payment of the whistleblower’s attorney’s fees. See 31 U.S.C. section 3730(d). PPP loans fall within the scope of federal funds to which the FCA is or may be applicable.
The forgiveness application arguably constitutes a separate and independent basis for FCA liability – even if the company previously has complied with all requirements and satisfied all conditions for PPP loan funds. FCA exposure may be triggered if information in or appended to the forgiveness application is intentionally misrepresented as a false statement or record. In addition, the forgiveness application may implicate the FCA’s overpayments provision, which generally proscribes the use of false or improper statements to reduce a debt or payment obligation to the government. Thus, when applicants certify under oath compliance with eligibility standards and the accuracy of data as a prerequisite to obtaining PPP forgiveness, they must be diligent in understanding and following SBA guidelines to satisfy those requirements – even if they appear to be moving targets.
While honest errors or misinterpretations of applicable requirements in some instances can provide defenses to FCA liability, a company remains subject to potential FCA exposure for a forgiveness application that is completed with a “reckless disregard” for its accuracy.
The obvious recommendation, of course, is for companies to be truthful when including information in their forgiveness applications. But just as important as intentionally being truthful is to be vigilant that you have taken all appropriate steps to corral and report the relevant information, including relevant corporate documentation or housekeeping to help support the analysis for forgiveness, as further described below. One important focus of analysis is whether the applicant acted reasonably and undertook the efforts reasonably expected by others who are acting in good faith.
Second, loan forgiveness applicants should save and maintain a file that documents all information and data you considered and relied upon in making your calculations for the forgiveness application. Even though you may now be able to easily recollect and recite all the information relied upon for the forgiveness application and the sources of that information, an audit by the SBA or a lawsuit by the government or whistleblower could occur years down the road when memories may have faded.
Third: Explain, explain, explain. If there are questions that are ambiguous or unclear, consider including them with your forgiveness application supplemental pages that explain how and why you interpreted the ambiguous questions as you did, and why you believe such interpretation and information supports your eligibility. Even if your interpretation ultimately is deemed incorrect, your explanation may be viewed as a good-faith attempt to be transparent and to counter any suggestion you were trying to deceive the lender and/or the government. Likewise, the accurate reporting of truthful circumstances may help to support a defense that any inaccuracy in your reporting was not material to the forgiveness determination.
Traditionally, regulatory lawyers frame client recommendation as either asking for permission or forgiveness – that is, asking or not asking a regulator before taking a course of action or position on a regulation. Asking for permission is generally seen as the lower risk option.
Here, where asking for forgiveness under the PPP requires express certifications of regulatory compliance in calculations and interpretations concerning entitlement to loan forgiveness, applicants seeking forgiveness should take all reasonable steps to understand the forgiveness requirements, scrutinize their submissions, and accurately represent compliance to reduce the risk of adverse audits, subsequent enforcement, and litigation.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVIDemail@example.com
- This 75 percent payroll threshold derives from a provision in the IFR which specifies the same criteria. See 85 Fed. Reg. 20811, 20813-20814 (Apr. 15, 2020). However, as we recently noted when we reported on the SBA Inspector General’s Flash Report: Small Business Administration Implementation of the Paycheck Protection Program Requirements, the 75 percent payroll threshold does not appear in the statute creating the PPP loan program. Importantly, and as the SBA IG determined, small businesses that have more operational expenses than employee expenses, may be unable to meet the threshold requirements for loan forgiveness.
- The SBA has indicated that a borrower may appeal the SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed and will be issuing a separate IFR addressing this process.
Client Alert 2020-345