Overview of New SBA and IRS Guidance Regarding Paycheck Protection Program, Including the “Need” Certification and PPP Loan Eligibility

May 6, 2020
Firm Publication

This alert was updated to reflect further guidance issued by the Small Business Administration (SBA) on May 5, 2020 indicating that forthcoming rule changes will extend the repayment date for the safe harbor discussed below from May 7, 2020 to May 14, 2020 and provide additional guidance regarding the “need” certification. For more recent updates about subsequent SBA guidance regarding the “need” certification, please see our alert posted on May 13.

On April 23, the SBA issued important new guidance regarding Paycheck Protection Program (PPP) eligibility that could impact many businesses who have already applied for and received PPP loans, as well as businesses that have yet to apply for PPP funds. Since then, the SBA has continued to issue near-daily guidance regarding PPP eligibility and other interpretive matters relative to the PPP. In addition, the Internal Revenue Service (IRS) has issued guidance regarding the deductibility for federal income tax purposes of expenses for which a business receives PPP loan forgiveness.

This alert summarizes key recent developments in PPP guidance regarding the following topics:

  • Borrower certification that a PPP loan is “necessary to support [its] ongoing operations.”
  • Limitation on the aggregate amount of PPP loans to members of a single corporate group.
  • Tax deductibility of expenses for which a business receives PPP loan forgiveness.

Borrower Certification that PPP Loan is Necessary

The PPP loan application requires all applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Prior to April 23, the SBA had not provided interpretive guidance regarding this certification. Due in part to both a CARES Act provision waiving the “credit elsewhere” underwriting requirement typically associated with SBA loans and borrower information materials expressly stating that borrowers were not required to look for other funds before applying for a PPP loan, as well as the obvious broad adverse effects of the COVID-19 pandemic being experienced or projected to be suffered (to varying degrees) by many small businesses, much of the analysis of PPP eligibility had centered on other issues such as SBA size standards and affiliation rules and exemptions.

“Need” Certification and Updated Guidance

However, the SBA issued guidance on April 23 advising that “[b]orrowers must make this [need] certification in good faith, taking 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.” The SBA guidance went on to state that “… it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

On April 28, the SBA released further guidance affirming that the April 23 guidance applied not only to public companies but also to businesses owned by private companies.

In connection with the recent guidance, the SBA established a formal safe harbor for borrowers that obtained PPP funds “based on a misunderstanding or misapplication of the required certification standard.” Borrowers who had applied for a PPP loan prior to April 24 and repay their PPP loans in full by May 14, 2020, will be deemed to have made the “need” certification in good faith. The SBA has indicated that it will provide additional guidance regarding how it will review the “need” certification prior to May 14.

On April 29, following earlier public statements by the Treasury Secretary Steve Mnuchin, the SBA also confirmed that, to “ensure PPP loans are limited to eligible borrowers in need, […] it will review all loans in excess of $2 million, in addition to other loans as appropriate,” before approving loan forgiveness, and indicated that additional guidance implementing this review procedure will be forthcoming.

Recommendations for Borrowers Regarding “Need” Certification

[Update #1 (May 6, 2020): As noted above, we expect the SBA to issue additional guidance prior to May 14 that may be helpful to borrowers in assessing their “need” for a PPP loan. The recommendations included in this alert are based on SBA guidance as of May 5, 2020.]

[Update #2 (May 13, 2020): The SBA issued additional guidance regarding the “need” certification on May 13, 2020. Please see our alert posted on May 13 for details and updated recommendations for borrowers.]

Based on the SBA’s new guidance, we recommend that borrowers who have already applied for PPP loans review Questions 31 and 37 in the SBA’s Frequently Asked Questions and re-evaluate their ability to make the “need” certification in the PPP loan application prior to the safe harbor date of May 14, 2020. Prospective borrowers considering applying for a PPP loan should likewise give due consideration to the SBA’s new guidance, as they will likely not have an opportunity to remedy an inaccurate certification by repaying their PPP loans.

In making this assessment, borrowers should carefully evaluate the factual circumstances relevant to their “need” analysis, all as of the date that the certification is made, including:

  • The “current business activity” of the borrower, including:
    • Whether the borrower has been (or reasonably expects that it may be) subject to government-mandated closures.
    • Whether mandatory stay-at-home orders or other pandemic-related conditions have had a significant negative impact on the borrower’s operations and strategic business activities.
  • The borrower’s “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” including:
    • Whether the borrower had sufficient available cash reserves on hand or available borrowing capacity under existing credit facilities.
    • Whether the borrower had the ability to obtain additional debt financing on reasonable terms.
    • Whether the borrower had access to additional equity capital, including via public equity markets (for public companies) or mandatory capital calls or other equity investments by existing stakeholders (for private companies).
    • Whether the borrower had access to, or would receive, other assistance under the CARES Act (e.g., HHS relief funds).

We note that while these factors are intended to assist an applicant in making its “need” assessment, each applicant’s assessment will be highly fact-specific, and no one factor is necessarily determinative.

We also note that the recent guidance, together with public statements by Treasury Secretary Steve Mnuchin, suggests that public company applicants and applicants that are owned by large companies, including those that are owned by private equity firms, venture capital firms, or family enterprises that might have relied upon affiliation exemptions to qualify for PPP loans, may be presumptively less likely to meet the need standard due to the nature of their ownership structure and potential access to alternative sources of capital.

In light of the above, we suggest that every borrower contemporaneously document the basis for its determination that a PPP loan is “necessary to support [its] ongoing operations,” including, as applicable:

  • The borrower’s revenue and liquidity projections, including the factual basis for those projections, such as disruptions to supply chains, delayed collection of accounts receivable, drop-offs in orders received or services provided and other relevant facts.
  • The borrower’s ability to access other sources of liquidity on reasonable terms and, if applicable, any efforts made in furtherance of obtaining such alternative financing.  We suggest noting the pricing, timing and terms applicable to other avenues of liquidity, as well as anticipated impediments to funding (such as breach of financial covenants on lines of credit), and whether the pursuit of those avenues would be significantly detrimental to the borrower.
  • The projected impact to the business and its employees if the PPP loan is not (or had not been) obtained, including in particular workforce reductions that will be necessary in the absence of the PPP loan.

While this re-evaluation is recommended for all borrowers, we believe it is particularly important for borrowers of larger loans, especially those in the $2 million and up category which have been designated for special review upon application for forgiveness. According to SBA statistics released relating to the initial tranche of PPP loans, these borrowers represented less than 2% of the approved loans but constituted nearly 28% of the total funds approved under the initial PPP funds.

Borrowers should note that making a false or improper “need” certification on the PPP loan application could give rise to civil and criminal liability. Indeed, the Department of Justice has already begun an investigation to root out inappropriate PPP applications. Companies making inaccurate certifications also risk encouraging employees to file whistleblower qui tam lawsuits under the False Claims Act, which could result in significant damages awards and monetary penalties against the companies. Additionally, certain information about PPP borrowers is expected to become publicly available and could lead to publicity risks and reputational harm even in the absence of government investigatory or enforcement actions.

Borrowers eligible for the safe harbor and wishing to repay their PPP loan in full as a result of this additional guidance are encouraged to contact their lending bank prior to May 14 to ensure the bank will be able to process the repayment in advance of the safe harbor deadline.

Limitation on PPP Loans to a Single Corporate Group

In an Interim Final Rule issued on April 30, the SBA also imposed a cap on the maximum aggregate amount of PPP loans that may be obtained by borrowers that are part of a “single corporate group.” Businesses are part of a single corporate group if they are “majority owned, directly or indirectly, by a common parent,” a standard that may result in many private equity portfolio companies that may have qualified for PPP loans being aggregated for purposes of this cap.

Effective immediately, borrowers that are part of a single corporate group may not receive any further PPP loan disbursements to the extent the cumulative disbursements to the corporate group would exceed $20 million. However, to the extent that a single corporate group may have already received disbursement of PPP funds in excess of $20 million, the SBA will not require the repayment of amounts disbursed prior to April 30 in order to comply with this cap.

It will be the responsibility of the borrower to notify its lender if it is a member of a single corporate group that has applied for or received PPP loans in excess of the aggregate maximum amount and withdraw or request cancellation of any PPP loans or applications to the extent in excess of such aggregate amount. The borrower’s failure to do so will be regarded as a use of PPP funds for unauthorized purposes, which will render the loan ineligible for forgiveness and subject the borrower to potential further liability.

Elimination of Tax Deductions for Expenses Supporting PPP Loan Forgiveness 

The CARES Act provides that, for federal income tax purposes, any amount that would otherwise be includible in gross income of the recipient by reason of the forgiveness of a PPP loan will be excluded from gross income. As a result, the forgiven portion of any PPP loan would not be treated as taxable income, as would ordinarily be the case upon the forgiveness of debt.

In a notice released on April 30, the IRS clarified that, in order to avoid a double tax benefit, no deduction will be allowed for an expense that is otherwise deductible to the extent that the payment of the expense results in forgiveness of a PPP loan pursuant to provisions of the CARES Act and the income associated with the forgiveness is excluded from gross income under the CARES Act.


This alert is intended to provide information, insights and understanding of the authors as of the date this alert was published. The rules and available guidance regarding the PPP are regularly being refined and clarified by the SBA and other agencies. As a result, any specific content of this alert may be affected by the evolving nature of applicable guidance. PPP participants will need to evaluate and draw their own conclusions and determine their approach relative to participation in the PPP based on their business’s specific circumstances, cash flow forecast and strategy. Readers are encouraged to contact legal counsel to address the legal implications and the specific impact of the CARES Act on your business, including your participation in the PPP.

The Bass, Berry & Sims CARES Act Task Force has been closely monitoring developments related to the unprecedented governmental assistance programs enacted in response to the COVID-19 pandemic. If you have questions about the PPP and your business, please contact the authors or your relationship partner at the firm.