Created as part of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, the Payroll Protection Program, or PPP, is a federal relief program intended to provide small businesses with forgivable loans to keep workers employed during the COVID-19 crisis. Since its inception in late March, millions of businesses have applied for PPP loans. As part of the application process, borrowers are required to certify that current economic uncertainty makes the loan request necessary to support the ongoing operations of the borrower. According to the Small Business Administration, 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. If it is determined that a borrower has not made the certification in good faith, the borrower’s loan will not be forgiven, and the borrower may be subject to possible administrative and even criminal repercussions.

Given the vagueness of the certification, the lack of an objective standard from the SBA and the possible consequences of making an error, the PPP loan certification has been a source of great consternation for many PPP loan borrowers. However, on May 13, 2020, the SBA released additional guidance providing safe harbors for borrowers related to the certification requirement. Under the new guidance, any borrower that, together with its affiliates, receives 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.

When determining the $2 million threshold for this safe harbor, a borrower must include any PPP loans granted to its affiliates to the extent required under the SBA’s interim final rule on affiliates. The interim final rule provides that entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Under this broad standard, affiliation may be determined based on:

(1) Equity ownership when an individual or entity owns or has the power to control more than 50% of another entity’s voting equity. Notably, the SBA will deem a minority shareholder to be in control if that individual or entity has the ability, under an entity’s charter, bylaws, shareholder’s agreement, or similar agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.

(2) Exercisable options, convertible securities and, in some cases, merger agreements that, if exercised, would grant an individual or entity the power to control another entity. The SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised.

(3) Shared management among entities when a CEO, president, officer, managing member, partner or entity in control of an entity’s management also controls the management of another entity, including through board control of multiple entities and/or control through a management agreement.

(4) Identity of interests when individuals or entities have identical or substantially identical business or economic interests, such as in the case of close relatives, individuals or entities with common investment, or entities that are economically dependent through contractual or other relationships.

If, after application of the affiliation rules, it is determined that a borrower, together with its affiliates, has received PPP loans of $2 million or more, then its certification will not automatically be deemed to have been made in good faith, and the borrower will be subject to review by the SBA for compliance with PPP certification requirements. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, then the borrower will not be eligible for loan forgiveness. However, the SBA’s new guidance provides a safe harbor of sorts for those borrowers as well. If the borrower repays the loan after receiving notification from the SBA that it has determined that the certification was not made in good faith, then the SBA will not pursue administrative enforcement or referrals to other agencies based solely on that determination.

Based on this guidance, PPP loan borrowers with aggregate loans of less than $2 million can rest a little easier, at least when it comes to the required certification. Borrowers with aggregate PPP loans of $2 million or more must carefully analyze whether they can defend their certification if challenged by the SBA. Forgiveness of all PPP loans, regardless of amount, is still subject to careful adherence to the other PPP loan requirements outlined in the CARES Act and SBA guidance. All PPP loan borrowers should therefore maintain detailed records establishing both the need for the PPP loan proceeds and how they were used.

Clint L. Taylor is a shareholder in Stutzman, Bromberg, Esserman & Plifka in Dallas. He specializes in federal tax matters as well as mergers, acquisitions, commercial restructurings, and other business transactions. Taylor can be reached at