The CARES Act: PPP Loans

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides $350 billion of loan relief to small businesses with fewer than 500 employees (“Small Businesses”). This is done through the Paycheck Protection Program (“PPP”) which is administered by the Small Business Administration (“SBA”). If Small Businesses primarily use PPP loan funds for employee payroll, the loan will be forgiven.

Small Businesses seeking loan forgiveness start the process by submitting a request to the lender administrating their loan. The request must include:

(1) documents verifying the number of full time employees and their pay rates; (2) payments on eligible mortgage obligations; (3) payments on eligible lease obligations; and (4) payments on eligible utility obligations. Small Businesses must certify the documents they provided are true.

Lenders then have sixty (60) days to make a decision on whether the PPP loan will be forgiven. If your loan is not forgiven, your balance will continue to accrue interest at one (1) percent for the remainder of the two-year period.

In regards to auditing, lenders themselves do not have to look beyond a Small Businesses application for a loan or request for forgiveness. The CARES Act itself establishes the Office of the Special Inspector General for Pandemic Recovery (“CARES Act Special Inspector”) that is charged with conducting, supervising, and coordinating audits and investigations of PPP loans. However, no further information is provided within the CARES Act regarding the auditing method the CARES Act Special Inspector will take.

SBA Recommendations Under the CARES ACT

The SBA also has an Office of Inspector General (“SBA Inspector General”) charged with the financial auditing of borrowers from SBA programs. Financial audits “examine the presentation of financial information, internal controls, and adherence to financial requirements.” On April 3, 2020 the SBA Inspector General published a White Paper regarding general suggestions for the auditing of PPP loans. The following are suggested:

(1) establishing proper controls in the loan approval phase to ensure eligibility of borrowers and mitigate the risk of default; (2) establishing quality assurance to prevent and detect improper payments; and (3) overseeing the program to ensure it is implemented as intended.

Prior SBA Audit Reports may also be instructive in answering questions regarding the potential auditing PPP loan recipients may face. Some Small Businesses have raised concerns over the fact that they may be requesting PPP loans in good faith but are unsure whether they will ultimately have needed the funds. A prior SBA Audit Report has raised the issue of loans being issued to Small Businesses without sufficient justification the funds are necessary, however, while no repayment or penalties to the Small Businesses are mentioned in these instances, policies may have changed. Investigation appears to only occur when a loan is flagged for suspicious activity. Though what constitutes suspicious activity is not described, failing to comply with loan requirements and/or the terms of the loan could be sufficient.

PPP Loan Funding Best Practices

There are still many questions to be answered. However, in order to ensure that any potential audit of PPP loan funds occurs promptly and efficiently, we recommend the following best practices:

1. Place any PPP loan funds you receive into a separate bank account and pay any covered expenses directly from this account.
2. Spend the funds on covered expenses over an eight (8) week period beginning on the date the first payment was made by your lender (depending on your payroll schedule, you may want to adjust the timing to accommodate as many payroll cycles as possible).
3. Ensure at least seventy-five (75) percent of the funds are used for payroll: salary, wage, vacation, parental, family, medical, or sick leave, and health benefits (payments to independent contractors cannot be included in this amount).
4. Maintain payroll reports, payroll tax filings, income, payroll and unemployment insurance filings, and documents verifying retirement and health insurance contributions.
5. Ensure that no more than twenty-five (25) percent of the funds are used for mortgage interest (as long as the mortgage was signed before February 15, 2020), rent (as long as the lease agreement was in effect before February 15, 2020) and utility payments (as long as the service began before February 15, 2020) and maintain canceled checks, payment receipts, and account statements.
6. Ensure you maintain your staff numbers.
7. Ensure that you do not reduce an employee’s salary by more than twenty-five (25) percent per employee for those making under $100,000. For those making over $100,000 salaries can be reduced to $100,000.
8. Verify the accuracy of your loan and forgiveness request supporting documents.
9. Ensure that not more than twenty-five (25) percent of the PPP loan is used for non-payroll costs when applying for forgiveness.

Disclaimer: This document is for informational purposes only. This document seeks to provide an overview of rapidly changing and nuanced topics relating to the 2020 Coronavirus Aid, Relief, and Economic Security Act amongst other items, and may not reflect current information. This document should not be construed as providing legal, tax, investment, financial, or any other advice. You should contact your attorney and/or financial advisor to obtain advice with respect to any legal and/or financial matter within this document.