We are writing to update you on some important technical considerations with respect to the CARES Act, and a periodic foreign filing deadline quickly approaching.
SBA PPP Loans: May 14, 2020 is an important date in the administration of the PPP and loans that have already been funded. While the general focus has turned to forgiveness of the loans, there is a new concern over borrowers’ original qualification for the program. The Treasury has been vocal in their response to public companies that have taken out PPP loans. Under pressure, many of those companies have returned the funds. Further, the SBA has updated their FAQs on the topic which have seemingly narrowed the determination of whether a borrower can certify their need for the loan. Questions 31 and 37 have been presented here:
- Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by 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 (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification 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 sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, 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.
- Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: See response to FAQ #31.
The SBA has extended the “safe harbor” date to May 14, 2020 to return funds and be deemed to have made the required certification in good faith. If you have questions or concerns about your eligibility and certification under the PPP we urge you to talk to your lender and your legal advisor. There may be additional guidance in the next couple of days to help with your analysis. It is advisable to document your need for the funds to support your certification.
PPP Forgiveness: The covered period to measure the amount of a PPP loan that can be forgiven is the 8-week period beginning with the receipt of funds. The magic formula is a minimum of 75% of the funds used for payroll and related benefits, and a maximum of 25% on rent, mortgage interest or utilities to obtain full forgiveness. The loan forgiveness is reduced if your headcount is less during the covered period than in the baseline periods of February 15, 2019 to June 30, 2019 or between January 1, 2020 to February 29, 2020.
A more detailed discussion and a summary of the data needed to measure the forgiveness can be found here.
Finally, while the forgiveness is not taxable, the IRS has determined that the related expenses will not be deductible. An unpopular position to be sure, but it will take Congress to settle the conflict. Stay tuned for Phase 4 of the stabilization program for the answer!
BE-10 Reports: This year the benchmark surveys, known as the BE-10, are required to be filed. These are reports are due every 5 years and must be submitted to the BEA to reflect ownership, including financial information, of foreign businesses (including affiliates of U.S. companies) or real estate. The requirement to file is for those taxpayers owning 10% or more of the voting interest in the foreign company or affiliate. Additionally, if you own any foreign property that you hold out for rent, you meet the requirement to file these reports.
If you think you meet one of these requirements, have any questions, or have received correspondence from the BEA regarding a filing of the BE-10, please reach out to your L&B advisor.
L&B Operations: Our team is 95% remote, but our office remains open and we are maintaining core functions onsite. We are managing mail flow and express deliveries received at the office but have deferred all face to face client interactions. We are available by phone or video conference at your convenience.
Our highest priority is to protect the health of our employees and clients while continuing to deliver outstanding service. If we have any changes to our daily operations, we will immediately inform you.
Thank you again for your patience and support. Please reach out to your L&B advisor or to me directly if you have any questions.