Firms that took a PPP loan under $2 million are about to get a break

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  • The Paycheck Protection Program offers forgivable loans that businesses can use to cover the cost of payroll and other expenses. Borrowers must certify that their entities need the money due to economic uncertainty.
  • The Treasury Department and the Small Business Administration now say that businesses borrowing less than $2 million are considered to have made the certification in good faith. They won’t be subject to additional scrutiny.
  • Got a loan and thinking of returning the money? Treasury and SBA are giving you more time to return the funds: May 18.
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Business owners who borrowed less than $2 million from the Paycheck Protection Program can breathe a little easier: They likely won’t face an audit from federal authorities.

The PPP — a forgivable loan program that allows small businesses to cover up to eight weeks of payroll costs, mortgage interest and other expenses — was refilled to the tune of $310 billion on April 27 to help employers keep workers on board.

Businesses applying for the lifeline needed to certify in good faith that “current economic uncertainty” made the request necessary.

The Treasury Department and Small Business Administration had said in a series of “frequently asked questions” that firms needed to consider their ability to tap “other sources of liquidity” when they said they needed funding.

Businesses of all sizes were concerned they would be facing an audit from the SBA, along with penalties, if they couldn’t adequately prove they needed the loan.

Indeed, nearly 350 public companies that received PPP proceeds have not indicated that they would return the money — even if they were able to raise cash through the capital markets.

Chart showing that of all the PPP loans given to public companies, 61 are being returned while 346 are being kept.

Now, business owners with loans under $2 million can breathe a sigh of relief.

Treasury and the SBA announced on Wednesday in an updated FAQ that these entrepreneurs will be given what’s known as “safe harbor” and won’t face additional scrutiny.

“If you’re under the $2 million threshold, you get this automatic certification in good faith,” said Glen Birnbaum, CPA at Heinold Banwart in Peoria, Illinois.

“Given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns,” the agency said in the FAQ.

Keeping or returning funds

Treasury and the SBA won’t be as easygoing on firms with loans exceeding $2 million.

Those businesses and their loans are subject to further review from the SBA.

If the SBA deems that a firm lacks adequate basis for certifying that it needed the loan, the agency will seek repayment of the loan balance and inform the lender that the business is ineligible for loan forgiveness, according to the FAQ.

Businesses that are sitting on the fence with a $2 million or larger loan now have a decision ahead of them.

If they keep the proceeds, they should prepare in the event the SBA comes knocking.

As a matter of good practice, businesses taking the PPP loan should maintain detailed records on how they use the funding and keep the money in a separate bank account, accountants said.

Entrepreneurs can also choose to return the loan proceeds. The Treasury and SBA are now giving them until May 18 to give the funds back.

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