Paycheck Protection Program (“PPP”) Frequently Asked …



Paycheck Protection Program (“PPP”) Frequently Asked QuestionsUpdated May 14, 2020PPP Eligibility and Loan Forgiveness Questions Q. I have heard a lot in the press about the concept of “necessity” as a threshold for assessing whether a small business qualifies for a loan under the PPP rules. I am concerned that some of my clients who received PPP loans may not meet the “necessity” threshold for eligibility given the SBA’s somewhat vague clarifications in their most recent FAQ updates (FAQ #31, #37, #39 and #43). What should I do? Updated May 14, 2020 (information in red)A. Update: On Wednesday, May 13th, the Small Business Administration (“SBA”) updated their Frequently Asked Questions Document (“FAQ”) and added FAQ #46 and FAQ #47.In FAQ #46, the SBA revised its review threshold and safe-harbor provision and noted that businesses that accepted Paycheck Protection Program (PPP) funds of less than $2 million will be assumed to have made the required certification concerning the necessity of their loan requests in good faith. According to the SBA, this change was needed to promote economic certainty for these borrowers with loans below the $2 million threshold, as they are less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers who obtained larger loans. The $2 million threshold will help the SBA conserve its resources and focus its reviews on larger loans. For larger loans subject to review, the SBA noted that if they determine during a review that a borrower lacked an adequate basis for certifying the necessity of its loan, the SBA will seek repayment of the outstanding PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness. The SBA will not pursue administrative enforcement or referrals to other agencies if the borrower repays the loan after receiving notification from the SBA.FAQ #47 extends the repayment date for the safe harbor to May 18, 2020, (previously May 14th per FAQ #43) to give borrowers an opportunity to review and consider FAQ #46. This extension will be automatic. Any business that received a PPP loan prior to the issuance of this new guidance and now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full by May 18th, and will be deemed by the SBA to have made the required PPP loan application good faith certification. From CAMICO’s risk management perspective, it is critical that firms take loss prevention measures to “warn” business clients of the potential legal and regulatory risks associated with applying for, and receiving, funds under the program, as well as to “advise” them of steps to take to minimize their risks of potential legal and regulatory exposure. Unfortunately, however, this “warn” and “advise” step is not easy given the widespread confusion and many unanswered questions regarding PPP eligibility and the concept of “necessity.” The SBA frequently updates its Frequently Asked Questions Document (“FAQ”) May 13th (FAQs #46 and #47), May 5th (FAQ #43), April 28th (FAQ #37), and April 23rd (FAQ #31), and attempted to provide more clarity regarding program qualifications specific to private and public businesses with access to other sources of liquidity to support their ongoing operations. The updated guidance suggests that both public and private businesses that already received PPP funding may not have met the “necessity” threshold if they had “the ability to access other sources of liquidity.” The SBA has indicated that if those sources of liquidity can be accessed “in a manner that is not significantly detrimental to the business,” the business may not be eligible for a PPP loan. Other sources of liquidity may also be construed to include private companies with sufficient cash reserves or existing lines of credit. To further ensure PPP loans are limited to businesses that meet the “necessity” threshold for eligibility, the SBA has made it known that all PPP loans in excess of $2 million will be reviewed, in addition to other loans as appropriate (FAQ #39). The SBA established a grace period for businesses that received funding under the original promulgated rules to evaluate their decision in light of the updated guidance. Any business that received a PPP loan prior to the issuance of this new guidance and now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full prior to May 14, 2020 (FAQ #43). Any business that does so, will be deemed by the SBA to have made the required PPP loan application good faith certification. CAMICO believes it is extremely important from a risk management perspective that firms communicate with their clients and update them regarding the SBA’s additional guidance, even though ambiguity still remains, as the ultimate determination of “necessity” remains the client’s responsibility. Therefore, clients should be advised about the current status of the PPP eligibility issues, the potential legal and regulatory consequences if they are determined not to be eligible for PPP funding, and a recommendation to consult with legal counsel if they have questions regarding legal interpretations and/or implications of the rules. Although you should not interpret or opine regarding the actual determination of necessity as may be applied by regulators, you can and should arm your clients with as much information as possible while acknowledging the limitations that exist in the currently promulgated guidance, so that each client may make an informed decision. CAMICO has developed a business client notification template that can be used as the foundation for this communication. The template can be found on the CAMICO Members-Only Site’s Coronavirus Resources Page (Notification Letter to Clients re: Legal and Regulatory Considerations of PPP).Q. Can a taxpayer deduct business expenses paid with loan proceeds pursuant to the PPP, if the loan is ultimately forgiven? Updated May 14, 2020 (information in red)A. Update: On May 12th, the House of Representatives introduced a Phase 4 stimulus package referred to as the HEROES Act. A PPP-related provision of the HEROES Act clarifies that business expenses paid with PPP funds that are forgiven would be deductible for federal income tax purposes. Based on the promulgated guidance noted below, the answer to this question remains “no” while we wait to see how this legislation progresses.No. According to IRS Notice 2020-32, otherwise deductible expenses that are paid with PPP funds and forgiven may not be deducted for federal income tax purposes. Under the PPP provisions of the CARES Act, borrowers who pay certain covered expenses (e.g., payroll, benefits, rent, interest and utilities) using funds borrowed under the PPP may have some or all of their loan forgiven. Moreover, under the CARES Act, amounts forgiven are excluded from taxable income. Under this new guidance, the IRS relies on IRC § 265(a) which disallows a deduction for amounts otherwise deductible if such amounts are allocable to one or more classes of tax-exempt income. The IRS concluded that the CARES Act exclusion from income for forgiven PPP loan amounts results in a “class of exempt income.”General Questions Q.I am unclear as to what my role is with respect to helping my clients with the PPP loan process. Am I considered a “consultant” or am I considered an “agent,” and is this distinction significant? April 14, 2020A.Due to the deficit of authoritative guidance from the SBA, distinguishing between “agent” and “consultant” roles is not as easy as one would hope. Distinguishing between these roles requires considerable judgment, caution, and possibly a Ouija board. SBA-imposed restrictions on fees charged for services related to PPP loan applications makes this determination relevant and one that cannot be ignored. The SBA’s April 3, 2020 interim final rule made definitive pronouncements regarding agent fees — “Agent fees will be paid by the lender out of the fees the lender receives from SBA” and “Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds.” Many understood these fee constraints to mean that CPAs could not be paid for any services tangentially related to assisting their clients with PPP loan applications. That is a misunderstanding.On April 10, 2020, the AICPA updated its guidance addressing the treatment of CPAs when they act as agents and get paid for their PPP loan services. The AICPA’s statement reaffirms their position that firms can provide advice, guidance and support outside of loan preparation assistance. The fees related to this work can be billed to and paid by the client/borrower. The AICPA further clarified that this treatment is not new or limited to PPP loans. For years, the SBA has permitted firms to be compensated by their clients for providing them with advice and guidance when assisting them with SBA loan applications when the services were performed in the normal course of business. The SBA has historically defined agents as a “loan packager, accountant, attorney, consultant, engineer, architect, appraiser, or any other party that receives compensation from representing an Applicant for an SBA disaster loan.” The typical role of an agent is to: complete and submit applications, expedite the approval process, represent clients with prospective lenders, sign loan applications and closing documents, and do the other things agents normally do. Fees for such services are to be paid by lenders in accordance with terms stipulated by the SBA. What’s new regarding compensating agents under the PPP arrangement is the introduction of a sliding scale lenders are to use to calculate the fees they pay those that agree to be agents and paid by the lenders from the fees the lenders receive from the SBA.Consultants, on the other hand, have typically had a more passive role assisting clients with the SBA loan process. For example, the SBA says an applicant’s “accountant for the preparation of financial statements or tax returns required by the Applicant in the normal course of business and not related to the loan application” is not an agent. Therefore, SBA rules would not be violated if fees associated with such services are billed to and paid for directly by the client/borrower. What remains unclear regarding the PPP is whether assisting a client with calculations necessary to apply for a PPP loan fall within the consulting services for which borrowers can be charged. For example, does the SBA prohibit CPAs from charging borrowers for using the AICPA’s PPP Loan Calculators in determining whether they qualify for the PPP or which program is preferable? If the SBA prohibits charging clients directly for these services, would being paid by the lender under the new sliding scale be desirable? CAMICO has requested authoritative bodies to state whether charging clients for the use of these calculators is prohibited but has received no definitive response. Without definitive guidance, firms must use professional judgment and consider their risk appetite when deciding between the consultant and agent role when wishing to be compensated for PPP loan assistance services.Q.Does it really matter whether I am considered a “consultant” or an “agent”? April 14, 2020A.Yes, it does. Taking on the role of an agent could pose a conflict of interest issue or create the appearance that independence is impaired (see the Ethical Considerations section below). It is important to note that CPAs not charging for these services have less risk exposure if they are consultants as opposed to agents. From a best-practice perspective, CAMICO encourages firms providing services pro bono to have a written understanding with their clients clearly defining the scope and limits of their engagements.However, for firms that want to be paid for these services, professional judgment is required to assess the firm’s level of involvement to determine whether those services align best with the consultant or agent role. If the firm deems their role to be that of a consultant, the firm should obtain a signed engagement letter specifying the scope and limits of the services to be rendered and the fees associated with those services. The engagement letter should make clear that preparation of the loan application is outside the scope of the engagement and clarify that the firm will not act as or sign documents as the borrower’s authorized representative or agent. CAMICO has developed an engagement letter template for this purpose, which also includes suggested language if the engagement will be performed pro bono. An engagement letter template can be found on the Coronavirus Resources section of our public website () (Engagement Letter Template – Consultant Assistance with Paycheck Protection Program).If a firm were to decide to accept the role of an agent, the engagement letter should be modified to include indemnification language and a conflict of interest clause. Although the indemnification will be of little value if your client defaults on the loan, it does offer modest protection. Before accepting the agent role, it is critical to consult with your risk advisor to address the specific terms and conditions of the engagement and to modify your engagement letter and/or agent agreement as appropriate. Q.A lender has sent me their standard “lender agent agreement” which I am required to sign if I wish to receive agent fees as stipulated under the PPP program. However, I am concerned that the terms of this lender agreement appear to be much broader than my understanding of what an agent role would be. What should I do? April 14, 2020Contractually agreeing to terms and conditions that extend beyond the services you are rendering is never a good idea. The SBA allows lenders flexibility to have their own “Agent Agreements” assuming those agreements meet the SBA minimum requirements. Consequently, some lenders for purposes of the PPP loan process have elected to broaden the definition of an agent to include being an authorized representative. This definition significantly expands the risk as an authorized representative takes on the duties and responsibilities of the borrower. For example, hybrid lender-imposed agreements could require you to provide certifications on the loan application in addition to the certifications of the company’s owners. See the excerpt below from a lender agreement received by a firm related to the PPP loan process: REPRESENTATIONS AND WARRANTIES. With respect to each and every loan application and related information and certification transmitted by Agent on a Potential Borrower’s behalf, Agent represents and warrants the following: (i) Agent is acting as such Potential Borrower’s agent and authorized representative in the delivery of loan applications and associated documents and files to Bank and the making of requested certifications in connection with same; (ii) to the best of its knowledge, information and belief and after making appropriate inquiries into the source of such information, Agent will supplement or correct any information submitted that it identifies as having been inaccurate at the time of submission of same to Bank; (iii) and each loan application and associated data and information is accurate, in proper form, timely, legally permissible and in compliance with all of the parameters of the PPP as well as all Rules, applicable laws, regulations and orders governing same. CPAs should tread carefully and consider their own risk appetite, and whether the fees associated with serving as an agent are worth assuming the additional risks of the agent role given the terms and conditions of a lender’s agent agreement. Before signing such an agreement, CAMICO recommends that you consult with your risk advisor so that they you review the agreement. Ethical ConsiderationsQ.A local business has approached me requesting assistance with their PPP application. During the discussion, the owner expressed interest in having our firm prepare their financial statements and perform a review engagement on those financial statements. Does it matter how I engage or serve them regarding their SBA loan? If so, what are the issues I need to consider? April 14, 2020A.It could matter. The services you perform and how you engage to perform SBA loan-related services could become relevant. These services are nonattest services. If the business isn’t and won’t be an attest client, the services being nonattest services is of no consequence to independence. But precautions should be taken to avoid inadvertently giving the perception that your independence is impaired if you wish to perform attest services for the business during any period that includes the period in which you will provide SBA loan–related services. Recent AICPA guidance indicates the AICPA’s Professional Ethics Executive Committee (PEEC) has determined that simply advising or assisting attest clients to understand the information gathering and lending application process under the PPP, even if an “agent fee” is paid to the CPA by the lender, does not constitute the performance of management responsibilities for purposes of applying the AICPA Code of Professional Conduct if the CPA does not assume management responsibilities. But which services are management functions and which aren’t is subjective and could become an issue.To avoid this ambiguity, possible allegations of noncompliance with professional standards, or allegations your independence is impaired due to a perceived management participation threat, CAMICO encourages CPAs performing PPP loan–related nonattest services for attest clients to follow the general standards for performing nonattest services interpretation. Have your client sign an engagement letter agreeing to assume all management responsibilities related to the services and oversee your services by designating an individual (preferably within senior management) with the skill, knowledge, and experience to do so. Also, you will need to satisfy yourself that the individuals designated by the business understand and accept these responsibilities. Use of an engagement letter isn’t mandated, but having one is a risk management best practice that would document this understanding as required by the interplay between ET 1.295.050 and the compliance with standards rule. So, being an agent would not per se impair your independence. However, ET 1.295 safeguards should be implemented to avoid any perception of a management participation threat. While you wouldn’t necessarily impair your independence by assuming the agent role, be aware that signing a loan agreement as an authorized representative impairs independence. Signing as an authorized representative is a management responsibility that would impair you and your firm’s independence.Q.My client has asked for my assistance obtaining one or more of the SBA loans under the CARES Act. I would like to be paid and have heard that lenders will pay for my services as an agent under the SBA rules. Do professional standards permit this relationship? What risks are involved in providing these services as an agent? What should I do to mitigate the risks? April 14, 2020A.When deciding whether to perform these services in the capacity of an agent, you must pay special attention to any conflicts, perceived (from the perspective of client/borrower, lender, etc.) or real. It is critical to define what specific services you are being asked to perform as an agent to be able to fully understand and assess the potential for a conflict. At a minimum, you will need to ensure that you comply with the AICPA’s Code of Professional Conduct (“Code”) for addressing Conflicts of Interest [ET 1.110.010]. The Code of Professional Conduct states: “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.” To assume a role as an agent for the lender and representing your client at the same time may present a conflict of interest. Such a conflict of interest creates adverse interest and self-interest threats to the CPA firm’s compliance because the interests of the CPA firm with respect to a particular matter and the interests of the client for whom the CPA firm provides a professional service related to that matter may be in conflict if appropriate safeguards are not put in place to mitigate these threats. Additionally, Circular 230, Section 10.29, prohibits a tax practitioner from representing a client before the Internal Revenue Service if the representation involves a conflict of interest. It, too, defines as a conflict of interest those situations where there is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibility to another client, a former client or a third person, or by personal interest of the practitioner. It is important to assess whether the agent relationship given the specific scope of your services would impair your objectivity and compliance with professional standards. If after an appropriate analysis of the significance of the threat created by the potential conflict of interest, you determine that there are reasonable safeguards in place to eliminate the threats or reduce the threats to an acceptable level, you can accept the role of an agent but you should disclose the nature of the potential conflict to those parties affected by the potential conflict (client/borrower and the lender) and obtain their consent to perform these services as an agent. If consent is not forthcoming from both parties, you should NOT perform services as an agent (see ET 1.110.010.09-12). Similarly, Section 10.37 of Circular 230 provides that if the practitioner is able to provide competent and diligent representation to each affected client and the representation is not prohibited by law, then the practitioner may request the parties affected to waive the conflict of interest. Unlike the Code of Professional Conduct, Circular 230 requires this consent to be in writing. While only Circular 230 requires written consent to waive a conflict of interest (see Section 10.29(b)), CAMICO strongly recommends that accountants always obtain informed, written consent to waive potential conflicts of interest.Important to note, however, is that lenders may not be willing to sign such a consent. In those situations, taking on the agent role would jeopardize a CPA’s professional and ethical standards of care. CPAs who find themselves in that predicament should assist their clients without assuming the responsibilities of an agent.Additional ResourcesQ.Where can I go to find additional information? May 1, 2020A.CAMICO’s public website () contains Coronavirus Resources and is the ideal place to look for select risk management guidance related to the pandemic. Additional coronavirus-related guidance can be found in the AICPA Coronavirus Resource Center as well as the Small Business Administration website. Refer to select links below: document is not intended to be used, or relied upon, as a substitute for a firm’s compliance with applicable professional standards nor is it intended to substitute for seeking appropriate legal advice. CAMICO presents this Q&A guide for reference purposes only. The considerations are not all-inclusive; they are instead but a few of the matters that accountants and their clients should be considering when assisting clients with the Paycheck Protection Program. We invite CAMICO policyholders to contact CAMICO’s Loss Prevention Hotline with specific questions, comments or concerns. You can call the Loss Prevention department at 800.652.1772 or email lp@ for guidance regarding these matters. We can assist you with navigating the potential issues associated with your actual fact pattern. Additional risk management resources are available on CAMICO’s Members-Only Site (). ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download