COVID-19 Response: Paycheck Protection Program Loans – Safe Harbor for Good Faith Certifications and Loan Forgiveness Details

by Rob Holcomb and Megan Roberts, Extension educators

In mid-May, the United States Treasury and the Small Business Administration (SBA) issued guidance on two important issues related to Paycheck Protection Program (PPP) loans. In this blog post, we will briefly overview these two important notices: 1) loan forgiveness application details and 2) safe harbor for good faith certifications. The new guidance was generally good news for agricultural applicants, as most farms and other agricultural businesses fall under the new threshold for SBA audits on PPP, which we describe below. For general information about PPP, please see this previous blog post.

Loan Forgiveness

PPP loans gave borrowers the option to apply for loan forgiveness, essentially turning the flexible 2 year short-term, 1% low interest loan into a grant. But, loan forgiveness is not automatic and the application for forgiveness was not immediately known. On May 15, 2020, the Treasury and SBA issued the PPP loan forgiveness application, providing much needed clarity on the process. Previously we knew borrowers, including farmers, must apply for forgiveness and meet specific qualifications, such as at least 75% of the loan used to pay for eligible payroll costs and up to 25% of the loan used to pay eligible mortgage, rent or utility payment [JUNE 2020 UPDATE: These percentages changed to 60/40 by act of Congress in June, please see a more recent blog post on PPP for additional information]. Now we also know how to apply for forgiveness by submitting the SBA loan forgiveness application to your PPP lender. For sole proprietors without employees, remember that eligible payroll costs for loan forgiveness include “income or net earnings from self-employment or similar compensation” (see 85 FR 20811, Part III, 2(f)). In other words, a PPP recipient that is a self-employed farmer without employees CAN qualify for loan forgiveness (use PPP Loan Forgiveness Application Schedule A, Line 9 for self-employed payroll costs).

The application asks borrowers to submit Line 1. Payroll Costs, Line 2. Business Mortgage Interest Payments, Line 3. Business Rent or Lease Payments, and Line 4. Business Utility Payments. Then borrowers must make adjustments based on reductions to full time equivalency and salary/wage reductions. This calculation provides the potential forgiveness amount. The borrower is required to certify their application and sign. Part of the certification references the veracity of documentation of forgivable costs. Since PPP loans were issued by lenders (under authority of the SBA), individual lenders are creating their own systems for verifying documentation and tax information. Because there is not one consistent process for submitting documentation, your lender may have a different system than another lender. Therefore, make sure you are communicating with your lender regarding the documentation process and following their process closely.

Safe Harbor

On May 13, 2020, the Treasury and SBA issued safe harbor guidelines for recipients of PPP loans.  When an applicant submits a PPP loan application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant” (see85 FR 20811, Part III, 2(t(ii))).

Previously, SBA and Treasury had communicated that applicants not meeting the uncertainty provisions of the loan should repay loan proceeds by May 14, 2020.  The concern for many taxpayers participating in this program was “what qualifies as uncertainty?”

This PPP loan safe harbor provides an answer for most PPP applicants. According to the Treasury, “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

Applicants with loan amounts in excess of the $2 million threshold are subject to examination by SBA to determine if the level of uncertainty meets minimum standards for the PPP loan program.  The threshold for “uncertainty” remains unclear for loan applications exceeding $2 million.  For more information on the safe harbor guidance, see FAQ #46 (page 16) of this online Treasury pdf.

The safe harbor does not automatically qualify an applicant for loan forgiveness.  To acquire loan forgiveness, loan recipients need to complete the loan forgiveness application (as described above) in coordination with their PPP lending institution.

This blog is offered as educational information only. It does not constitute not legal or financial advice.