Did Your Enterprise Get A PPP Mortgage For $2 Million Or Extra? Focus On These 7 Questions On SBA Kind 3509
The Small Enterprise Administration (“SBA”) requires debtors to finish SBA Kind 3509 (for-profits) if along with their associates, the borrower(s) obtained Paycheck Safety Program (“PPP”) cash loan totaling $2 million or better. The Kind was created by the SBA with a purpose to consider the debtors good-faith certification surrounding the necessity for funding as a result of present financial uncertainty on the time of the PPP utility. Regardless that the SBA has said a request to finish the questionnaire doesn’t imply that the SBA is difficult a borrower’s certification, many debtors are nonetheless uneasy on how this questionnaire can be utilized by the SBA.
A greater understanding of the SBA questionnaire is likely to be wanted before you suppose. Surprisingly, lots of the questions being requested on the Kind 3509 might have an effect on the 2020 Worker Retention Tax Credit score or submitting of the 2020 federal enterprise revenue tax return. If a enterprise is required to submit Kind 3509, the questionnaire needs to be reviewed to make sure knowledge is being constantly communicated to the federal authorities on all fronts. Time needs to be taken to overview the questionnaire to make sure 1) that correct data is being supplied, 2) the borrower’s want for PPP funding is correctly mirrored, and three) the identical information are being reported to the SBA and the Inside Income Service.
Background Surrounding From 3509
Based mostly on CARES Act Part 1102(a)(1)(G), that was handed on March 27, 2020, an eligible borrower making use of for a PPP mortgage needed to make an excellent religion certification on the time of the mortgage utility that the uncertainty of present financial circumstances made it vital for the mortgage request to help the continued operations. Initially, the great religion certification was generally interpreted that COVID-19 triggered important present or potential financial hurt as a result of materially decreased income and that working would doubtless result in layoffs. Nevertheless, on April 23rd, the SBA clarified that debtors should make this certification in good religion, bearing in mind their present enterprise exercise and their skill to entry different sources of liquidity to help their ongoing operations in a way that isn’t considerably detrimental to the enterprise.
The time lapse between the CARES Act and the SBA clarification relating to which facets needs to be evaluated when making an excellent religion certification is critical. The SBA clarification was supplied nearly a month after the passage of the CARES Act. Whereas not many individuals are excited to revisit April of 2020, you will need to overview the timeline to higher perceive why companies are scuffling with the SBA’s late clarification. On April 16th, previous to the SBA clarification, the preliminary $349 billion for PPP funding ran out after being obtainable to companies for lower than two weeks. Companies have been scrambling to safe PPP funding, and if they didn’t obtain funding by April sixteenth have been frantic to ensure their PPP mortgage purposes have been first in line ought to extra authorities funding be supplied. Within the nice phrases of Hen Little, many felt that the sky was falling! By April 23rd, many companies which already had a big PPP mortgage steadiness have been questioning whether or not their good religion certification on the time of the mortgage was ample, as it might not have centered on present enterprise exercise and liquidity. Whereas many count on the SBA steerage to be challenged within the courts, at current the questionnaire should be accomplished. The SBA has made clear that failure to finish the shape and supply the required supporting paperwork could outcome within the dedication that the enterprise was ineligible for both the PPP mortgage, the PPP mortgage quantity, or any forgiveness quantity claimed, and the SBA could search reimbursement of the mortgage or pursue different obtainable cures.
Borrower Secure Harbor: Mortgage Steadiness lower than $2 million
On Could 13, 2020, the SBA supplied a secure harbor for any borrower that, along with its associates, obtained PPP loans with an unique principal quantity of lower than $2 million. These debtors would routinely be deemed to have met the required certification that the mortgage request was made in good religion. Extra excellent news? On essentially the most lately up to date SBA debt forgiveness utility the evaluation as as to if the principal steadiness amongst associates exceeds $2 million, and subsequently a Kind 3509 is required, is assessed on the First Draw PPP mortgage steadiness OR the Second Draw PPP mortgage steadiness (not a mixture of the 2). Subsequently, even when the First and Second Draw PPP mortgage steadiness have been $1,100,000 every, for a complete of $2,200,000, the Kind 3509 wouldn’t be required because the mortgage steadiness per draw didn’t exceed $2 million.
Kind 3509 Questions
Half A-Borrower Info
Based mostly on Half A, a separate Kind can be required for every authorized borrower listed on the mortgage utility. If a number of affiliated enterprise entities obtained a complete PPP mortgage steadiness of $2 million or extra, they would wish to fill out a separate Kind 3509 for every enterprise. Every of the questions on the Kind that reference the borrower is asking for the authorized borrower’s data, and never the affiliated group, and contains the reporting of gross income, capital enchancment initiatives, and money balances. The affiliated group balances should not have to be reported. Nevertheless, this doesn’t preclude a borrower from attaching extra data relating to the affiliated group to the questionnaire if it higher displays the financial uncertainty of the bigger group.
Kind 3509 is split between two sections. Because the SBA is attempting to evaluate the borrower’s good religion certification, the primary part asks questions that the SBA views related relating to the enterprise exercise evaluation on the time of the PPP mortgage utility and the second part addresses liquidity on the time of the applying and in the course of the coated interval. For functions of this dialogue, the liquidity evaluation questions will take precedence.
Kind 3509: Liquidity Evaluation (“LA”) Questions
LA Query 1
Query 1 requests that the borrower present their money and money equivalents steadiness as of the final day of the calendar quarter instantly earlier than the date of the PPP mortgage utility together with supporting documentation. The supporting documentation that’s most available is the financial institution assertion for the money accounts. Investments in liquid securities, resembling shares, bonds, and derivatives, are usually not included in money and equivalents. Regardless that such belongings could also be simply become money (usually with a three-day settlement interval), they’re nonetheless excluded.
Some companies could replicate a better money quantity on their financial institution assertion than what’s a real reflection of the companies money place. For instance, development firms usually can have giant money deposits when beginning a contract, however that money has already been assigned to pay for varied provides and contractors. In such a case, the borrower ought to think about offering extra supporting documentation reflecting the amount of money that has already been allotted towards finishing the contracted initiatives.
LA Query 2
The latest challenge tax professionals are reviewing with companies who obtained a PPP mortgage pertains to query 2, which asks if the borrower paid any dividends or different capital distributions to its house owners between March 13, 2020 and the finish of the coated interval. A repetitive query obtained all through the 2020 yr from house owners who’s companies obtained a PPP mortgage was whether or not they need to take a distribution from their enterprise. The SBA appears to be point out that if distributions have been made to house owners in the course of the coated interval, there could not have been a real concern about financial uncertainty. Whereas the final rule appears to carry true, the SBA should additionally understand there are all the time exceptions.
Let’s dissect query 2 a bit additional. Earlier than getting into the quantity of distributions made between March 13 and the top of the coated interval, a enterprise is allowed to cut back the distribution quantity listed for Query 2B for estimated tax funds associated to pass-through entities. The SBA has supplied that pass-through entities, resembling S Firms and Partnerships, can distribute an quantity to cowl the tax funds of its proprietor(s). The quantity of distribution that may be excluded associated to tax funds can’t exceed:
1. the tax legal responsibility on income earned within the first three quarters of 2020,
2. 110 % of the pro-rata share of final yr’s tax legal responsibility on distributions, and/or
3. one hundred pc of the pro-rata share of tax legal responsibility on whole distributions in 2020
What if the exclusion of the estimated tax cost nonetheless requires a big quantity to be reported as a dividend or capital contribution? REVIEW THE END DATE OF THE PPP COVERED PERIOD. For instance, many debtors are assuming that they may make the most of a 24-week coated interval. Nevertheless, the Consolidated Appropriations Act, 2021 (“CAA 2021”) clarified that the coated interval for the First Draw PPP and Second Draw PPP should be at the very least 8 weeks, and now not than 24 weeks. Subsequently, relying on the dividend or distribution dates and the period of time it took the enterprise to make the most of is PPP funding on coated bills, there could also be a approach to lower the quantity of dividends or distributions being reported on line 2B.
For instance, lets assume that Firm A obtained a $2,100,000 mortgage on March 16, 2020. As well as, Firm A made proprietor distributions, above and past estimated tax funds, of $500,000 per 30 days beginning in June and ending in September. The 24-week coated interval would begin on March 16, 2020 and finish on August 30, 2020. If the complete 24-week coated interval is utilized, the borrower would have $1,500,000 of proprietor distributions. Nevertheless, upon cautious examination of the payroll prices and non-payroll prices, the corporate realized it spent all of the PPP funding on eligible bills inside 15 weeks and subsequently, the top of the coated interval might be accelerated to June 30, 2020. If this was the case, and the borrower correctly reported the shorter coated interval on their debt forgiveness utility, the quantity of distribution required to be reported for Query 2B would lower considerably from $1,500,000 to $500,000.
CAUTION: The acceleration of the coated interval additionally impacts the timing of the submitting of the enterprise debt forgiveness utility which defer the mortgage funds. If a borrower doesn’t apply for mortgage forgiveness inside 10 months after the final day of the borrower’s mortgage forgiveness coated interval, mortgage funds are now not deferred, and the borrower should start make funds on the mortgage. In our earlier instance, Firm A had a coated interval ending date of August 30, 2020 which might permit Firm A to attend till June 30, 2021 to use for debt forgiveness. If as an alternative the coated interval finish date is shortened to June 30, 2020, Firm A’s debt forgiveness utility would must be submitted by the top of April 2021.
In spite of everything that planning, is the distribution quantity on Line 2B nonetheless too excessive? There are logical causes that might be documented and supplied as help relating to why distributions have been made above and past the allotted quantity for the proprietor’s estimated tax invoice in the course of the coated interval. For instance, the estimated tax invoice could not solely embrace the 2020 estimated tax funds that have been due in June, July and September of 2020, but additionally the 2019 remaining tax legal responsibility that was due in July of 2020. Bear in mind, the submitting deadline for 2019 tax returns was prolong from April 15th 2020, to July 15th 2020 which might be proper in the course of a companies coated interval. Companies who did have tax distributions paid out that have been better than the quantity allotted above, ought to think about disclosing all tax cost distributions made to proprietor’s in the course of the coated interval.
One other level of overview it to make sure that the distributions that have been made have been actually a money distribution or a mortgage to the house owners. After cautious overview, and applicable documentation, companies ought to guarantee the correct mortgage and distribution quantities are reported on the monetary statements and tax return for consistency.
LA Query 4 & 5
Questions 4 and 5 makes an attempt to determine any of the staff or house owners of the borrower who have been compensated in the course of the coated interval in an quantity that exceeds $250,000 on an annualized foundation. The SBA query appears considerably uninformed as it’s not asking for comparative wage knowledge from 2019. Debtors ought to think about disclosing 2019 comparative knowledge within the supporting documentation, in addition to highlighting these staff or house owners’ salaries which stayed stagnant or decreased in 2020 compared to the 2019 compensation.
Kind 3509: Enterprise Exercise Evaluation (“BAA”) Questions
BAA Query 1
Query 1 requests the borrower’s gross income for the second quarter of 2020 and 2019 with supporting documentation. It’s assumed that the SBA is anticipating a decline in these two comparative quarters, thereby confirming the financial uncertainty surrounding the enterprise on the time of the PPP mortgage utility. This frustrates many debtors who concern that the second quarter is the one data that the SBA is assessing when attempting to guage the present enterprise exercise surrounding financial uncertainty. Nevertheless, some companies didn’t see the numerous gross receipts decline till the third and even fourth quarter of 2020. This might be for quite a lot of causes, together with when the pandemic was distinguished of their bodily location which then led to governmental shutdowns, but additionally might be associated to contracts nonetheless being accomplished within the second quarter that have been entered into pre-pandemic.
Companies who didn’t see a decline till after the second quarter ought to think about offering extra supporting documentation for the gross receipts decline that occurred in later quarters. That being stated, for debtors who clearly had a second quarter lower there isn’t a want, or requirement, that your complete yr’s gross receipts be disclosed.
BAA Query 2
Query 2 asks the borrower if they’ve been ordered to close down by a state or native authority as a result of COVID-19 for the reason that COVID-19 Nationwide Emergency Declaration issued by President Trump on March 13, 2020. BE CAREFUL! Whereas we regularly don’t suppose governmental companies are the very best at sharing data, the reply to this query could be of curiosity to the Inside Income Service if the borrower is claiming the Worker Retention Credit score (“ERC”) for 2020 as a result of a full or partial governmental shutdown. You will need to not solely reply this query sure if the 2020 ERC is being claimed as a result of a governmental order (State or native), but additionally affirm the dates being claimed for the 2020 ERC full or partial shutdown are the identical dates mirrored within the reply to query 2C. This query just isn’t restricted to the PPP coated interval, however is referring to any time since March 13, 2020, which might additionally embrace dates in 2021 if the SBA Kind 3508 has but to be submitted. An analogous thought course of needs to be utilized to BAA Query 3 as nicely.
BAA Query 4
Query 4 asks if the borrower has voluntarily ceased or decreased its operations as a result of COVID-19 at any time since March 13, 2020. Much like query 2 and three, if the borrower can be looking for the ERC they may need to overview intimately the time that the enterprise operations have been suspended and clearly determine which dates have been as a result of mandates by the state or native authority versus voluntary.
BAA Query 5
Questions 5 asks whether or not the borrower voluntarily altered its operations as a result of COVID-19 (apart from ceasing or decreasing operations) since March 13, 2020. This query might make clear the extra eligible bills allotted for by the CAA 2021 associated to coated employee safety expenditures. Coated employee safety expenditures are outlined as:
Working or capital expenditures that facilitate the variation of the enterprise actions of an entity to adjust to the necessities established or steerage issued by the Division of Well being and Human Companies, the Facilities for Illness Management, or the Occupational Security and Well being Administration, or any equal necessities established or steerage issued by a State or native authorities…associated to upkeep requirements for sanitation, social distancing, or every other employee or buyer security requirement associated to COVID-19, however doesn’t embrace residential actual property or intangible property.
Whereas a Borrower just isn’t required to report coated employee safety expenditures as a part of their PPP debt forgiveness utility, in the event that they do report coated employee safety expenditures on their utility they need to guarantee it aligns with what’s being reported on BAA Query 5.
Whereas there’s a lot to unpack almost about the assorted federal stimulus packages, and the importance SBA Kind 3509 will in the end have on a debtors uncertainty certification, the questionnaire remains to be required for debtors whose principal steadiness, when added to associates, exceeds $2 million. The precedence of reviewing and drafting solutions to the questionnaire will escalate as amendments to 2020 quarterly payroll tax types are made for the ERC, 2020 monetary assertion and federal enterprise revenue tax returns are finalized, and the ten month interval referring to the deferment of mortgage funds continues to dwindle. Companies might want to work towards a wholistic strategy to make sure that all documentation and communication is constant amongst all returns and stories submitted to the federal authorities.