What the Hospitality Industry Should Know About New Regulations and Guidance for the CARES Act
Below is a brief synopsis of some of the recent regulations and guidance pertaining to the CARES Act of particular concern to the hospitality industry.
PPP Forgiveness & Laid-Off Employees Who Won’t Return to Work
As the Hospitality Practice Group recently described in a blog post, on May 3, 2020, the SBA issued several new questions and answers to their SBA CARES Act FAQs, including Question #40, which indicated that an employer’s ability to obtain forgiveness of a Paycheck Protection Program (“PPP”) loan under the CARES Act might not be adversely affected as a result of an employer being unable, after making good faith efforts (including having an employee reject a written offer), to rehire one or more laid-off employees. We expect further guidance and regulations to be issued soon to deal with such issue. For an explanation on why an employee not returning to work might affect PPP forgiveness, see our March 31, 2020 Summary of Key Provisions of the CARES Act.
PPP Loans and Eligibility for ERTC
On May 4, 2020, the IRS issued an update to its IRS ERTC FAQs pertaining to the Employee Retention Tax Credit (“ERTC”). As background, an employer may not receive the ERTC if such employer also receives a PPP loan (See IRS ERTC FAQs Question #79). While many hospitality owners initially applied for and received one or more PPP loans, a number of significant problems with the PPP (many of which were detailed by the National Restaurant Association in their April 27, 2020 letter to the SBA) have made it very difficult for hospitality businesses to use PPP funds and/or ultimately have such PPP loan(s) forgiven. As a result, some hospitality businesses have determined that the ERTC may actually be more advantageous than the PPP. According to the May 4th update to Question #80 of the IRS ERTC FAQs, an employer who repays its PPP loan by May 7, 2020, is eligible for the ERTC.
Extension of Date of Safe Harbor
On May 5, 2020, the SBA issued an update to its SBA CARES Act FAQs pertaining to the so-called limited safe harbor with respect to PPP certification (the “Safe Harbor”). As background, all PPP applicants are required to complete and submit SBA Form 2483, which contains several certifications from the PPP applicant, including that: ‘‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’’ On April 23, 2020, the SBA updated the SBA CARES Act FAQs by adding Question #31, which states:
“31. 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.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”
Then, on April 24, 2020, the SBA issued an Interim Final Rule On Requirements for Promissory Notes and Authorizations of Affiliation and Eligibility, which formalized the safe harbor concept first raised in SBA CARES Act FAQs Question #31. Section 5 of such IFR provides that: “…[a]ny borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith. The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.” According to the May 5th update to the SBA CARES Act FAQs, Question #43, the “SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension.”