It has been six weeks since we last heard from the SBA and Treasury with regard to Paycheck Protection Loan forgiveness despite the fact that the guidance released to that point left many questions unanswered.
Well, in the past week the Administration released guidance dealing with changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds AND changes to the loan forgiveness rules AND a new form for borrowers whose loan was $50,000 or less. Somewhat confusingly, the new form is set to expire October 31, 2020 (the same date as the original forms). It is not clear yet what happens after the forms expire.
The new form is available to borrowers whose loans are $50,000 or less.
NOTE: However, borrowers may not use the form if the borrower and its affiliates received PPP loans totaling $2 million or more.
The advantage of the new form is that borrowers who use it are exempt from reductions in loan forgiveness based on reductions in full time equivalent (“FTE”) employees or reductions in salaries or wages. The instructions say that borrowers do not have to show calculations of these amounts but the SBA can still ask for information and documentation to review the calculations.
QUERY: Borrowers have to do the math but don’t have to show their work unless asked. But, even if they ask, the borrower is exempt. So, why would they ask?
Changes to the Loan Forgiveness Rules
In addition to changing some rules to conform to the issuance of the new form, the SBA has also obliquely started to address one of the implications of the longer 24-week covered period. As we have reported previously, since the original loan amount was based on two and half months (roughly 11 weeks of payroll), payroll and nonpayroll costs incurred in a 24-week covered period might significantly exceed the original loan amount and the amount of forgiveness requested.
The SBA has now told lenders that they need to confirm a borrower’s calculations on the Loan Forgiveness Application only “up to the amount required to reach the requested Forgiveness Amount.”
PPP Loans and Changes of Ownership
We have been asked many times how to handle PPP loans when borrowers undergo a change of ownership. Until now, we have not been certain since PPP loans are technically not like other borrowings.
The SBA has now released guidance covering transactions in which:
1. At least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions including to an affiliate or an existing owner of the entity;
2. The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or
3. A PPP borrower is merged with or into another entity.
The guidance makes clear the original PPP borrower remains responsible for:
1. The performance of all obligations under the PPP loan;
2. Certifications made in connection with the PPP loan application, including the certification of economic necessity;
3. Compliance with all other applicable PPP requirements; and
4. Obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender” in this Notice) or to SBA upon request.
There are different procedures depending on the circumstances of the change of ownership and whether the PPP Note is fully satisfied or not. In certain circumstances, prior SBA approval of the change of ownership is required. PPP Lenders cannot unilaterally approve such changes.
Unfortunately, we still have no guidance as to how to handle PPP loans and loan forgiveness calculations subsequent to merger and acquisition transactions. We hope that will be forthcoming.
If you are a PPP borrower and are currently contemplating a potential change of ownership transaction, please contact us immediately to determine if your circumstances will require prior SBA approval so we can assist you with the process.
Of course, we will continue to update you as new guidance is release. In the meantime, please contact your Friedman LLP advisor with any questions.