Tax Monitor

Economic Necessity Safe Harbor

May 13, 2020

By: Robert G. Tweel

The SBA provided a great deal of relief to PPP loan borrowers today concerning the economic necessity certification. In a new FAQ 46, the SBA provided a safe harbor concerning the economic necessity certification which required borrowers to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The SBA has adopted the following safe harbor concerning this certification:

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.

A couple of notes concerning this relief. First, it is a safe harbor -- meaning it only provides a presumption of satisfaction of the certification which can be rebutted by the SBA (however, this approach will likely be reserved for extreme cases below the $2 million threshold). However, we would still encourage borrowers below the $2 million threshold to establish the reasoning for their good faith certification as a back stop to any potential investigation. This was set forth in the Article by Matthew Davis entitled Certifier Beware.

Second, for borrowers with loans greater than $2 million they will have to rely on SBA guidance and must establish an adequate basis for making the required good-faith certification based on their individual circumstances.

Third, if the SBA determines that a borrower does not satisfy the economic necessity certification, the SBA will seek repayment of the PPP loan proceeds and the borrower will not be eligible for any forgiveness. More importantly, if the borrower does repay the PPP loan proceeds, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.