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Layers of an Onion: PPP Issues to be Aware of

As we continue to field questions around the new PPP program, there are a few issues we want to be sure to highlight for you that you should be aware of, and your borrowers should consider. The first is around employee count. The new First Draw and Second Draw applications have a box on them for “Number of Employees.” Borrowers should be putting into this box their current number of employees at time of application. However, it is important for borrowers to remember that when it comes time for forgiveness, there will be a comparison done of number of employees during the borrower’s reference period (the period on which the maximum loan amount calculation is based; new law permits this to be 2019 or 2020 payroll figures) and the number of employees during the borrower’s covered period (the 8-24 week time period after borrower receives loan proceeds). If there is a reduction in the number of employees from the reference period to the covered period, the borrower’s forgiveness will correspondingly be reduced on a percentage basis unless the borrower’s situation fits into one of the exemptions. So just like when peeling back the layers of an onion it can cause tears to form in your eyes, this PPP program may make borrowers and lenders alike feel the same way. To mitigate surprises at the back end of this program with your borrowers, it may be important to have these conversations now at time of application. More information on the forgiveness rules (which remain largely unchanged from the 2020 PPP program) can be found starting on page 29 in recent FAQs issued by SBA.  

Another issue that has been brought to WBA’s attention relates to PPP borrowers that used a “draft” 2019 tax return to form the basis of the business’ PPP application last year and now as these same borrowers apply for forgiveness, a copy of the real 2019 tax return that was filed with the IRS is being shared with the lender, causing the lender to realize significant and meaningful discrepancies exist. The example shared with WBA relates to a Schedule C sole-proprietor borrower who shared a draft 2019 tax return (presumably prior to having his/her accountant review it) that showed a profit on Line 31. This was then used to calculate the borrower’s maximum loan amount, and the loan was closed and proceeds distributed. Upon receiving the forgiveness application which included a copy of the final tax return filed with the IRS, it was discovered by the lender that Schedule C, Line 31 was a negative number. Of course, this makes the borrower ineligible for a PPP loan in the first place, and may call into question the borrower’s certification that he/she made on the application that all information on the application was truthful and accurate (presumably in these cases the borrower acted in good faith at the time and did not knowingly provide false information). Furthermore, the lender is now in a difficult situation of likely having to deny loan forgiveness based on this new information. As a result, WBA is talking with SBA and advocating for some change to provide relief for these borrowers; however, with the new Biden Administration taking over and the reality that people are shifting around in agency positions so the issuance of new regulations may be frozen for a period of time, it is unknown when or if we will see resolution to this particular circumstance. Given this scenario, WBA urges all lenders to proceed with some caution when accepting “draft” documents (e.g., an unfiled 2020 tax return) from borrowers to substantiate new PPP applications. In addition, if you have a borrower in this situation, it may be best for the borrower to wait a bit longer to apply for forgiveness in case SBA or Congress makes a change that is helpful. 

By, Alex Paniagua