On May 5, 2020, the Small Business Administration (“SBA”) issued a new set of frequently asked questions (“FAQs”) concerning Paycheck Protection Program (“PPP”) loans. The new FAQs add guidance regarding the good faith necessity certification, loan forgiveness and eligible borrowers, among other subjects.

Good Faith Necessity Certificate

SBA Extends Amnesty to May 14

Recent SBA guidance allows borrowers who applied for a PPP loan prior to April 24, 2020, to return those funds by May 7, 2020, so as to be deemed to have made the required good faith certification about the economic necessity of the loan. The SBA has extended the time to repay a PPP loan to May 14, 2020.

SBA to Provide Additional Guidance on How It Will Review the Good Faith Necessity Certificate Before May 14

In FAQ 31, the SBA sets forth its initial guidance for the good faith necessity certification by requiring borrowers to “tak[e] into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” (emphasis added). FAQ 37 makes clear that this analysis applies to both publicly held companies and private companies. FAQ 40 reiterates a pledge recently made by Treasury Secretary Steven Mnuchin that the SBA and Department of the Treasury (“Treasury Department”) will review the good faith necessity certification for all PPP loans made in excess of $2 million following the borrower’s submission of the loan forgiveness application. The FAQ assures lenders that the SBA’s review of these loan files will not impact their loan guarantees as long as lenders conducted a good faith review of borrowers’ applications and payroll calculations. As borrowers grapple with the opaqueness of this requirement, the SBA in FAQ 43 states that it intends to provide before May 14 additional guidance on how it will review the necessity certificate.

Exemption from Reduction in Forgiveness Amount if Laid-Off Employee Refuses Offer to Return to Work

FAQ 40 advises that a new interim final rule will be published that will exempt a borrower from a reduction in their loan forgiveness if they attempt to re-hire a laid-off employee who subsequently declines the offer. The interim final rule will specify that the borrower must have made a good faith written offer to rehire the employee and the employee’s rejection of the offer must be documented by the borrower. The SBA goes on to note that “employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”

Alternative Loan Calculations for Seasonal Employers

On April 27, 2020, the Treasury Department issued an interim final rule permitting seasonal employers to use a 12-week period between May 1, 2019, and September 15, 2019, to calculate their maximum loan amounts. The FAQ affirms the use of the 12-week period by seasonal employers applying for PPP loans. Seasonal employers can disregard the calculation instructions on page 3 of the Borrower Application Form.

Treatment of Nonprofit Hospitals

Nonprofit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code can apply for PPP loans. However, there has been some confusion since nonprofit hospitals are often declared tax-exempt by the Internal Revenue Service because of statutory provisions different from Section 501(c)(3). The SBA is now permitting nonprofit hospitals to apply for PPP loans if they make their own determination that they would be considered tax-exempt under Section 501(c)(3). A nonprofit hospital’s certification of eligibility on the Borrower Application Form cannot be made without this determination. This is meant to provide relief to entities responding to the COVID-19 pandemic.

Counting Employees of Affiliates

For purposes of the PPP’s size standard of 500 or fewer employees, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates. All affiliates’ employees must be taken into consideration for the applicant’s size unless there is an applicable waiver or exception to the affiliation rules.

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