Paycheck Protection Program Are you off the hook?
Paycheck Protection Program (PPP):
Are you off the hook?
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides that loans made under the Paycheck Protection Program (“PPP”) do not require a personal guarantee or collateral.
However, this waiver does not mean that the individual shareholders, members, or partners of a borrower under the PPP are completely immune from personal liability.
The CARES Act provides the Small Business Administration (“SBA”) recourse against the individual shareholders, members, or partners of a borrower under the PPP if any of them use the PPP loan proceeds for a purpose not authorized under the CARES Act.
Under the CARES Act, during the period beginning on February 15, 2020 and ending on June 30, 2020, a borrower under the PPP is authorized to use the PPP loan proceeds for:
(1) payroll costs, which include salary, wages, commissions, tips, payments for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payments required for the provision of group health care benefits, including insurance premiums, payment of any retirement benefit, and payment of state or local tax assessed on the compensation of employees;
(2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
(3) employee salaries, commissions, or similar compensations;
(4) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
(5) rent (including rent under a lease agreement);
(6) utilities;
(7) interest on any other debt obligations that were incurred before the covered period; and
(8) refinancing certain disaster loans made on or after January 31, 2020
PPP loan proceeds cannot be used for:
(1) compensation of any individual employee, sole proprietor, or independent contractor in excess of $100,000 in one year, prorated for the period beginning on February 15, 2020 and ending on June 30, 2020;
(2) certain federal taxes imposed or withheld;
(3) compensation of an employee whose principal place of residence is outside of the United States;
(4) qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act; or
(5) qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
So, if any individual shareholders, members, or partners of a borrower under the PPP use the PPP loan proceeds for a purpose not authorized under the CARES Act, they might not be off the hook.
Days before a major deadline, the Small Business Administration (SBA) updated its PPP loan program’s frequently asked questions (“FAQ”)[1] in which it noted a safe harbor for recipients of loans of $2 million or less would be presumed properly certified in need of the PPP loan. SBA also indicated that the certification on the application would be the basis for review of need and recipients would not need to update the certification now. However, please know that the SBA and Treasury seem to continue to ‘clarify’ these PPP loan issues and any PPP borrower should be vigilant in documenting the need for the PPP loan and the use of the proceeds. Documenting the need can come in many forms, including, for instance, documentation of the impact of COVID-19 on the borrower and the cost-saving measures undertaken, collections of receivables, slowdown in business itself, financial accounting, etc. The corporate borrower may also document this in board of director meeting minutes, projections, liquidity analysis, etc.
The new FAQ answers provide relief and also raise some additional questions for loan recipients: relief in that if the SBA determines the PPP recipient did not meet the necessity certification, differing from the loan recipient’s certification, the SBA will give the recipient notice and the loan recipient may then repay the loan, and in turn, the SBA will not pursue enforcement actions.
Any borrower that received the PPP proceeds and wishes to return the money now may do so under the new further extended deadline to return or repay PPP funds no later than Monday, May 18th.
Gabriel Courey and Dawn Coulson prepared this client update. Thank you, Gabe. For more information contact Dawn or Gabe with any questions at dcoulson@eppscoulson.com or gcourey@eppscoulson.com
Other resources:
See the PPP Interim Final Rules https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
[1] https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
Epps & Coulson, LLP
Attorneys Admitted to practice in
California, New York, Colorado,
Texas, Oregon and Hawaii
Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. While intended as information and educational, it is considered advertising under applicable various laws of some states.