SBA Announces Deadline to Return PPP Loans Extended

By Joseph A. Camilli

Originally published: May 6, 2020

  1. What deadline is this?

Under the CARES Act’s Payroll Protection Program (PPP), qualifying small business owners and independent contractors are able to apply for forgivable loans through the federal Small Business Administration (SBA).   Applicants for the PPP loans must certify that current economic uncertainty makes the loan request “necessary” to support the ongoing operations of the applicant.  Applicants 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.  However, from the passage of the CARES Act to the most recent guidance provided by the SBA, no clear definition of “necessary” or what applicants must provide in order to prove their need has emerged.   In fact, when the SBA published a recent Frequently Asked Question (FAQ) on this subject, they potentially further confused the matter.  Additionally, the SBA informed employers that they could return any PPP funds awarded to them by May 7, 2020 without fear of audit or prosecution.

Because the penalties for violating the required certifications (in the eyes of the SBA) are so significant, many employers are asking whether they should consider  returning these funds, resources that might be the difference between surviving the economic downturn or not. Most businesses have nothing to worry about as their need is easily provable. However, it’s critical that businesses that applied for PPP loans understand the standards for “necessity” and how to properly document their need.

  1. New Deadline.

The SBA previously indicated businesses that did not meet the necessity test had until May 7th to return the funds without penalty. After a great deal of pressure the SBA has extended the deadline to return the PPP loan proceeds to May 14, 2020.  This additional week will hopefully give employers the extra time they need to determine whether their certification is defensible or the funds should be returned.

  1. Proving Need.

Unfortunately, there is no bright-line test for determining the necessity of a PPP loan.  Various commentators have reasonably concluded that the threshold for PPP loan necessity requires some objective showing that the applicant’s financial position is worse than merely “adversely impacted by COVID-19” (since that condition is presumed), but that the applicant’s financial condition can be objectively better than a company unable to obtain “credit elsewhere” under the standard that is ordinarily applied for obtaining SBA guaranteed financing in other situations.

One factor in analyzing an applicant’s financial need would be its ability to sustain its operations through retained earnings and reserves.  Were the SBA to take the stance that an applicant’s mere access to capital disqualifies it from PPP loan eligibility, one could interpret such enforcement as penalizing well-run businesses that have healthy balance sheets.  If an applicant has available cash and reserves, it might be necessary for it to establish other needs that would make the available cash and reserves unavailable for sustaining operations during the pandemic.  Again, there are no objective standards provided by the SBA or the CARES Act; however, one might draw analogies to how the IRS tests the needs of a corporations to retain earnings and profits without the reserves being taxed as “excess” undistributed earnings and profits. 26 CFR 1.537-1 through 3 addresses the reasonable needs of a business for the purposes of accumulating earnings and profits.  If the retention of profits is so beyond the reasonable needs of the corporation, the IRS takes the position that the corporation should have distributed additional profits to the shareholders and therefore said shareholders should be subject to additional taxation.

26 CFR Section 1.537-2 lists some permissible reasons for accumulating earnings and

Profits, including:

  • debt retirement;
  • business expansion and plant replacement;
  • acquisition of another business by purchase of stock or assets;
  • working capital;
  • investments or loans to suppliers or customers necessary to maintain the corporation’s business; and
  • reasonably anticipated product liability losses.

The regulation also sets forth some grounds which do not justify the accumulation of earnings and profits. These include:

  • loans to shareholders and expenditures for their personal benefit;
  • loans to others which have no reasonable connection to the business,
  • loans to a related corporation,
  • investments that are not related to the business; and
  • any accumulations to provide for unrealistic hazards.

26 CFR section 1.533 lists factors that are echoed by (or perhaps clarified by) Section 1.537-2 above in determining whether retention of earnings and profit was for a purpose that would not avoid taxation of the excess:

  • Dealings between the corporation and its shareholders, such as withdrawals by the shareholders as personal loans or the expenditure of funds by the corporation for the personal benefit of the shareholders,
  • The investment by the corporation of undistributed earnings in assets having no reasonable connection with the business of the corporation (see § 1.537-3), and
  • The extent to which the corporation has distributed its earnings and profits.

Synthesizing the factor lists, it is clear that the IRS is concerned with corporations retaining resources to benefit shareholders without considering the business needs of the corporation.  Analogizing the accumulated profits analysis to PPP loan necessity, one would be wise to closely examine precisely who within their organization is benefiting from the PPP loan.  If the SBA were to audit a PPP loan applicant, and they have made it abundantly clear they intend to audit every PPP loan recipient who received more than $2,000,000 in funds, the applicant will not have painted a sympathetic picture of need if the primary beneficiary of the funds are the equity holders in the enterprise.

Therefore, it is strongly encouraged that applicants conduct a review of their objective financial and operational information, the reasonability of their business forecasts, and then craft a narrative explaining precisely why, in the opinion of the applicant, the PPP loan proceeds are necessary.  This narrative should address the following questions and should be supported by as much objective, factual information as possible:

  1. What will the PPP loans be used for;
  2. How does the corporation objectively view its business prospects;
  3. What resources are otherwise available to the corporation; and
  4. Do the PPP loans personally benefit the owners of the corporation?

By conducting what is essentially a self-audit, and building a narrative constructed upon provable facts, PPP loan applicants will hopefully be putting themselves in as favorable of a light as possible in the event of an SBA audit.  Alternatively, should that self-audit reveal some real weaknesses in the applicant’s need, perhaps a sober assessment can be made that the PPP funds should, in fact, be returned.  These are not easy decisions and often employers are too close to the situation to see clearly.  Working with your trusted advisors to provide an objective, distanced review.


This article was authored by Attorney Joe Camilli.  Attorney Camilli is a graduate of the Hamline University School of Law and practices business and employment law as part of Neider & Boucher, S.C.’s business team.  Attorney Camilli was recognized as a 2019 Up and Coming Lawyer by the Wisconsin Law Journal and is co-chair of the firm’s COVID-19 response team.


The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.


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