Earlier this week, the SBA announced that the portal for the RRF will go live on Friday, April 30, 2021, beginning at 9 am EDT so that qualified applicants may register for an account.  Further, the SBA announced that the portal would officially begin accepting applications to receive funds from the program on Monday, May 3, 2021 at 12 pm EDT.  Applicants will need an account in the system in order to apply for funds.

The SBA is encouraging applicants to familiarize themselves with the application process by registering for an account in advance, ensuring a smooth and efficient experience.  Applicants should also review the official SBA guidance, including the program guide, frequently asked questions, and the sample application.

One notable change is that the SBA has signaled that the portal will remain open to eligible applicants only until the Fund has been exhausted. Previously, there had been speculation about options to increase the funds if the applicants flooded the SBA with requests, as happened last year during the initial round of the Paycheck Protection Program.  This week’s announcements seems to imply that once the RRF funds have been exhausted, the application portal will shut down.

What does this mean for restaurant owners who have suffered huge losses during the pandemic?  For starters, applicants would be wise to review the application requirements in advance and be prepared with all the information required to complete the application once the portal begins accepting applications on Monday, May 3.

Although the SBA has set aside the first 21 days of the application period as a priority window to benefit businesses owned by women, veterans, and socially and economically disadvantaged individuals, it is recommended that any qualified applicant register and apply early.  Expectations are high that the SBA will be flooded with applicants and the funds will quickly be exhausted.

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Application

Ahead of the program launch and over the next two weeks, the SBA will conduct a 7-day pilot period where the SBA will address any technical issues ahead of the launch.  Applicants will be able to submit applications as soon as the program opens, but the SBA will prioritize applications from businesses owned by women, veterans, and economically disadvantaged individuals for the first 21 days.  After the first 21 days, the SBA will accept applications from all eligible participants and process applications in the order in which they are approved by the SBA. The SBA has not announced an official launch date for the program.

Applicants will be able to apply through SBA-recognized Point of Sale Restaurant Partners or directly via the SBA’s forthcoming online application portal.  While the SBA is not currently accepting applications, a sample application can be found on the SBA’s website.  Applicants must complete the application (SBA Form 3172) and provide the following additional documentation with their application:

1. IRS Form 4506-T (completion of this form digitally on the SBA platform will satisfy this requirement); and
2. Gross receipts documentation demonstrating gross receipts and, if applicable, eligible expenses. Gross receipts documentation includes business tax returns, IRS Form 1040 Schedule C, IRS Form 1040 Schedule F, a partnership’s IRS Form 1065 (including K-1s), bank statements, externally or internally prepared financial statements, and point of sale reports (including IRS Form 1099-K).
3. Brewpub, tasting room, taproom, brewery, winery, distillery, or bakery applicants must provide confirming documentation that onsite sales to the public comprise at least 33% of gross receipts.
4. Inn applicants must provide confirming documentation that onsite sales of food and beverage to the public comprise at least 33% of gross receipts.

Eligible Entities

Eligibility for the program is confined to those entities that have experienced pandemic-related revenue loss.  Eligible entities include: (1) restaurants; (2) food stands, food trucks, food carts; (3) caterers; (4) bars, saloons, lounges, taverns; (5) snack and nonalcoholic beverage bars; (6) bakeries; (7) brewpubs, tasting rooms, taprooms; (8) breweries and/or microbreweries; (9) wineries and distilleries; (10) inns; and (11) licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products.

Funding Calculations

The SBA may approve up to $5 million per location, not to exceed a total of $10 million per applicant and any affiliated businesses. The minimum award is $1,000.  The SBA has provided three separate calculations to determine an applicant’s funding amount:

CALCULATION 1:

For applicants in operation prior to or on January 1, 2019:

(2019 gross receipts) – (2020 gross receipts) – (PPP loan amounts)

CALCULATION 2:

For applicants whose business operations began partially through 2019:

[(Average 2019 monthly gross receipts) X (12 month)] – [(2020 gross receipts) – (PPP loan amounts)]

CALCULATION 3:

For applicants that began operations on or between January 1, 2020 and March 10, 2021 and have not yet opened but have incurred eligible expenses:

[(Amount spent on eligible expenses between February 15, 2020 and March 11, 2021) – (2020 gross receipts) – (2021 gross receipts through March 11, 2021) – (PPP loan amounts)

Entities who began operations partially through 2019 may elect to use either Calculation 2 or Calculation 3.  Further, for purposes of the program, gross receipts do not include:

1. Amounts received from Paycheck Protection Program (PPP) loans;
2. Amounts received from Economic Injury Disaster Loans (EIDL);
3. Advances on EIDL;
4. State and local grants; or
5. SBA Section 1112 payments.

Eligible Use of Funds

Recipients are not required to repay the funding, as long as funds are spent on eligible uses by no later than March 11, 2023.  RRF funds may be used for specific expenses including:

1. Business payroll costs (including sick leave);
2. Payments on any business mortgage obligation;
3. Business rent payments (not including prepayments of rent);
4. Business debt service (both principal and interest, but not including any prepayment of principal or interest);
5. Business utility payments;
6. Business maintenance expenses;
7. Construction of outdoor seating;
8. Business supplies;
9. Business food and beverage expenses;
10. Covered supplier costs;
11. Business operating expenses.

Conclusion

The SBA will announce in the near future a start date to start accepting applications once the website they will be using has been tested.  Until then, prospective applicants are encouraged to visit the SBA website for additional information and begin assembling all necessary data and documentation requirements for the application.

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As part of its efforts to finalize and unveil program, the SBA has released a draft application form, together with a letter to the Office of Management and Budget asking for emergency review of the materials.  While the application is merely in draft form, it is believed that the finalized application will largely reflect the information included in the current document.  Thus, the draft application helps shed some light on the specifics of the program and what information business owners should have available when applying for the RRF grants.

For instance, the draft application shows that the SBA plans to maximize the covered period under which businesses can spend grant proceeds.  The ARPA identifies a covered period of February 15, 2020 to December 31, 2021, however it also gives the SBA the ability to expand the covered period to no later than two years after the legislation was passed.  The current draft application indicates that the SBA intends to maximize the covered period so that businesses can spend grant proceeds through March 11, 2023.

Further, the draft application provides additional details on the group of applicants given priority under the program.  During the first 21 days of the program, the ARPA gives priority to applications for businesses owned by women, veterans, and/or socially and economically disadvantaged individuals.  Pursuant to the draft application, the applicant must be at least 51% owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals in order to receive priority treatment.

Additionally, businesses must not be permanently closed to qualify for the program.  Businesses that have declared bankruptcy but have an approved reorganization plan are still eligible to receive RRF grants.  However, if a business has declared bankruptcy but does not have a plan for reorganization, or has filed for a liquidation, the business will not be eligible for the program.

The draft application also details the documentation required to be submitted when applying for a RRF grant.  All applications must include:

1. a completed application form;
2. a completed IRS Form 4506-T; and
3. documentation demonstrating gross receipts, such as business tax returns, IRS Forms 1040 Schedule C and Schedule F, bank statements, externally or internally prepared financial statements, and point of sale reports. Paycheck Protection Program (PPP) proceeds are removed from gross income for purposes of calculating gross receipts in the application.

Additionally, applicants from businesses defined as brewpubs, tasting rooms, taprooms, breweries, wineries, distilleries, bakeries, and inns must supply additional documentation evidencing onsite sales to the public comprise at least 33% of gross receipts.  In total, the application is expected to take about 45 minutes to complete.

Further guidance by the SBA is expected as the program nears its launch date Though  the application is not “live,” applicants would do well to gather the required information in advance so they have everything ready when the program does go live, especially since the $28.6 billion ear-marked for the program is not expected to last long. In the meantime, the draft application is available for review and can be found at https://omb.report/icr/202104-3245-001.

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Extension of Covered Periods

Through the Flexibility Act, borrowers can elect to extend the PPP’s eight-week covered period for loan forgiveness purposes to 24 weeks. This will give borrowers more time to strategically use loan proceeds to maximize forgiveness. However, because PPP guidance continues to evolve and change, borrowers should avoid using the extended period on the loan forgiveness application if full loan forgiveness can be achieved during the original eight-week covered period.

Use of Loan Proceeds

Previously, in order to obtain full loan forgiveness, a borrower had to spend at least 75% of loan proceeds on payroll costs and no more than 25% on non-payroll costs. If a borrower was unable to meet that 75% threshold for payroll costs, loan forgiveness would be proportionately reduced based on the actual percentage spent on payroll. Under the Flexibility Act, the 75% threshold has been lowered to 60%. The SBA and Department of the Treasury issued a joint statement that clarified borrower’s will still be eligible for partial loan forgiveness if less than 60% of loan proceeds are not allocated to payroll costs, as was the case with the previously higher threshold. While this provides flexibility in terms of spending loan proceeds on non-payroll costs, the lower threshold represents such a significant departure from the prior rule that borrowers should expect further guidance.

Rehiring Deadline Extension

Under the original text of the PPP, the forgivable portion of a loan was proportionately reduced if a borrower did not rehire laid off employees by June 30, 2020 to the level that existed February 15, 2020. Under the Flexibility Act, the “rehire date” has been extended to December 31, 2020.

Workforce Reduction Safe Harbor

In the event a borrower attempts to rehire employees but is unsuccessful, the Flexibility Act provides an exemption from a reduction in loan forgiveness if, during the period beginning February 15, 2020 and ending December 31, 2020, the borrower is able to document, in good faith, one of the following: (1) it could not find qualified employees to hire; or (2) it could not restore its business to a comparable level of activity because of federal health guidance such as social distancing.

Loan Repayment Extension

Prior to the enactment of the Flexibility Act, the period for repaying any loan amount not forgiven was two years. That repayment window has been extended to five years, with the interest rate remaining at 1%.

Payroll Tax Deferral

Regardless of whether a borrower receives loan forgiveness, the Flexibility Act has made clear that borrowers are eligible to defer their employer’s share of payroll taxes. If a borrower elects to defer such taxes, 50% of the deferred amount must be paid in 2021, with the remaining 50% due in 2022.

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A PPP loan is forgivable to the extent that borrowers carefully follow certain requirements implemented by the SBA. In order for a loan to be completely forgiven, borrowers must use at least 75% of the loan proceeds on payroll costs during the eight-week period after receiving the loan, while the remainder can be used for certain specific nonpayroll costs: rent payments, utility expenses, and mortgage interest payments. The intention of the program is for small businesses to maintain employment and compensation levels during this period of economic uncertainty due to the coronavirus pandemic. The attorneys at McCarthy Lebit have written extensively about the PPP in The More Report.

The PPP Loan Forgiveness Application and its instructions include measures to reduce compliance burdens and simplify the process for borrowers. Step-by-step instructions explain how to perform the forgiveness calculations required by the CARES Act and confirm eligibility for loan forgiveness. Notably, the 75% requirement is not an “all-or-nothing” requirement and a borrower who spends less than 75% on payroll costs is still eligible for forgiveness.  The application makes clear that in such a scenario, “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.”

The application also includes the option for borrowers to calculate payroll costs using an “alternative payroll covered period” which is an eight-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP loan disbursement date. Further, the application includes the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined. A copy of the application and its instructions can be found on SBA’s website. Borrowers also have the option to complete the application electronically through their lenders.

Additional guidance on the application is expected to be released soon. Given the potential complexity of the loan forgiveness calculations and the numerous requirements of the PPP, borrowers are advised to contact their professional advisors for help in completing the loan forgiveness application.

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Although FAQs #31 and #46 are specific to the required necessity certification, all PPP borrowers should carefully consider all the certifications contained in the PPP application. Keep in mind that a borrower who knowingly makes a false statement to obtain a loan may face imprisonment up to 30 years and/or a fine up to $1 million.  Given the possibility of steep penalties, if a borrower feels it received a PPP loan that it was not entitled to, for whatever reason, now is the time to act within the extended safe harbor deadline. If there is any doubt regarding one’s eligibility for an already disbursed PPP loan, do not hesitate to contact a trusted legal advisor at McCarthy Lebit that can inform you of all the SBA safe harbor guidelines.

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FAQ #46 asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The SBA’s response establishes a safe harbor for borrowers with loans less than $2 million and provides borrowers with the option to repay their loans if they are deemed to be ineligible for the program by the SBA.

The SBA reiterates in FAQ #46 that all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA determined, in consultation with the Department of the Treasury, that any borrower that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the certification concerning the necessity of the loan request in good faith. Given the large volume of PPP loans, this safe harbor will allow the SBA to conserve its audit resources and focus its reviews on larger loans.

Additionally, borrowers with loans greater than $2 million may still have an adequate basis for making the good faith certification, based on their individual facts and circumstances. The SBA has previously stated in FAQ #39 that all PPP loans in excess of $2 million will be reviewed for compliance with the program’s requirements. FAQ #46 provides that if the SBA determines during the course of its review that the borrower lacked the adequate basis to make the certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding loan balance and inform the lender that the borrower will not be eligible for loan forgiveness. If the borrower repays the loan after receiving this notification from the SBA, the SBA will not pursue administration action or referrals to other agencies.

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Frequently Asked Question #37, published April 28, 2020, asks, “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  The SBA’s answer simply states, “See response to FAQ #31.” Thus, it appears that the SBA intends the information contained in FAQ #31 to apply to all borrowers, and not just those large companies with adequate sources of liquidity. The SBA has not, however, further defined what the phrase “adequate sources of liquidity” means. As stated in my previous post, the conservative approach is to treat FAQ #31 as if it applies to every single borrower.

Additionally, Frequently Asked Question #43, published May 5, 2020, asks whether a PPP borrower can obtain an extension to repay the loan in full beyond the May 7, 2020 date specified in FAQ #31. The SBA responded that it is extending the repayment date for this safe harbor to May 14, 2020, and borrowers do not need to apply for this extension. The SBA will promptly implement this extension through a revision to the SBA’s PPP final interim rule.

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The law and regulatory guidance applicable to PPP loans, including the interplay of PPP loans and the Internal Revenue Code (“Code”), continues to be examined, analyzed, and debated, as the guidance is ambiguous in parts. For example, the CARES Act did not address whether deductions available under the Internal Revenue Code (“Code”) apply to business expenses covered by a subsequently forgiven PPP loan, yet the CARES Act explicitly addresses the issue of excluding income for a forgiven PPP loan from gross income.  To help clarify the Internal Revenue Service’s (“IRS”) position on expense deductions, the IRS issued Notice 2020-32. This Notice states the IRS’s position that otherwise deductible business expenses for which the borrower pays with PPP loan proceeds from a loan that is subsequently forgiven shall not constitute deductible business expenses on the borrower’s income tax return.

Generally, taxpayers by statute are permitted a deduction for all ordinary and necessary business expenses paid or incurred in a taxable year, which typically includes rent, utilities, and payroll. Rent, utilities, and payroll also happen to be the cornerstone of forgivable expenses under the PPP loan program. But as the Notice states, the IRS is taking the position that allowing such deductions in conjunction with PPP loan forgiveness would create an unintended double benefit to the borrower. Therefore, citing to certain statutory provisions (that may or may not be applicable from a strict statutory construction standpoint) and certain case law interpretations, the IRS takes an announced position that expenses paid by a PPP loan that is subsequently forgiven are not deductible. There is some question as to the statutory basis for the IRS position on this issue and we assume there will be further debate and discussion. Congressional action may even be necessary to resolve it.

PPP loan borrowers will have the burden of tracking, documenting, and justifying forgivable expenses for their lenders, when the borrower applies for loan forgiveness. The same documentation should be shared with the borrower’s tax preparer to ensure a proper reconciliation of business expenses and deductions occurs. This will enable to borrower to avoid claiming improper business expense deductions due to PPP loan forgiveness, at least pursuant to current IRS guidance. But again, this may change if Congress acts.

Guidance pertaining to the PPP loan programs continues to move at a furious pace. Business owners should be constantly working with their professional advisors to ensure their interests are protected during these challenging times. Please contact a McCarthy Lebit tax attorney to discuss planning opportunities for your business.

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The SBA’s response to this question provides that all borrowers must assess their economic need for a PPP loan under the established guidance of the CARES Act and the PPP regulations at the time of the loan application.  Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers must certify on their application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.

As an example, the SBA explains that it is unlikely that a public company with a substantial market value and access to capital markets is able to make the required certification in good faith.  Further, any borrower that applied for a loan and repays the loan by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.

The PPP loan application indicates that a borrower who knowingly makes a false statement to obtain a loan can face imprisonment up to 30 years and/or a fine up to $1 million.  Thus, while FAQ #31 is intended to curb the perceived abuse surrounding the first round of PPP applications, the end result is a subjective standard that raises additional questions for borrowers.

Who does FAQ #31 apply to?

The language of FAQ #31 asks whether businesses “owned by large companies with adequate sources of liquidity” qualify for a PPP loan.  However, the answer given by the SBA states that “all borrowers” must assess their economic need for the loan and carefully review the required certification.  Thus, the question arises, does FAQ #31 apply only to large companies with adequate sources of liquidity, or to every, single applicant?

The current PPP guidance does not provide an answer to this question.  As a result, the conservative approach would be to treat FAQ #31 as if it applies to every, single borrower.

What does the phrase, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” mean?

Similarly, this question is not clarified in the related PPP guidance.  It would appear that every company can in good faith say they face “current economic uncertainty” as a result of the coronavirus and no business is totally immune to the pandemic.  However, the second part of the phrase – “necessary to support ongoing operations of the Applicant” – is much more subjective.

In determining whether the loan is “necessary,” the following factors should be considered:

• But for the PPP loan, would the applicant have fired or furloughed employees, or reduced compensation levels?
• Would the partners or shareholders of the company need to reach into their personal funds to retain employees?
• When will the business collect its receivables?
• Will the business be able to collect its receivables?
• What is the business’s burn rate?
• How quickly can the business replenish its cash reserves?
• How long can the business stretch its current cash reserves?

Further, when making PPP loan application certifications, applicants should consider the following:

• Impact on the industry. For example, a primarily dine-in restaurant is impacted more by the pandemic than a grocery store.
• Impact on the specific business. Some industries may see an influx of business as a result of the pandemic, whereas others may see business come to a standstill.
• Financial strength of the business. How long would the business be able to keep its head above water without the loan?  How much cash is coming in versus going out?  Will a business be able to collect its receivables?
• Management team. How adaptable and sophisticated are the business’s decision makers?  Is this a large or small group?  How flexible and prepared is the business for a catastrophic situation like this?

Reviewing Financial Statements and Projections

Applicants should also be sure to review their financial statements and projections when applying for a PPP loan.  Consider whether it is likely that the company will collect its receivables as they are due.  Also, consider the length of the pandemic in making projections.  However, a financial statement analysis alone should not be the sole consideration.  Keep in mind that the goal of the program is to keep people employed and to protect compensation levels.

Other Considerations

Comfort letters might be helpful to include with an application, which set forth a good faith statement of necessity in applying for the loan.  Borrowers may also want to document the specific reasons why they believe the loan is necessary and what actions they would have taken if they did not receive the loan.  Including financial projections showing an expected burn rate can also help support the necessity of the loan.  Finally, borrowers that clearly do not meet the eligibility standard set forth above should repay the loans by May 7^th as FAQ #31 indicates in order to avoid future problems.

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