Armanino Blog

Forgive and Forget? Not with PPP Loans — Be Prepared for a Future Audit

by Alex Thacher, Jenn McCabe
November 11, 2021

Did your business borrow more than $2 million from a PPP loan? If so, be aware that the Small Business Administration (SBA) may audit your business up to six years after your loan has been forgiven or repaid in full. Take the following steps to be ready for a potential audit and protect your business from having to pay back a PPP loan down the road.

What You Need to Do to Prepare

If your PPP loan is more than $2 million, you should document the following information to prepare for a potential PPP loan audit:

  • Government shutdown orders that adversely affected the operation of business
  • The number of employees furloughed, laid-off or terminated
  • The number of employees who would have been furloughed, laid-off or terminated if not for the fact of receiving the PPP loan
  • Expenses incurred because of COVID-19, such as PPE, increased sanitation, entry screenings, employee training or any other OSHA requirements
  • Any decrease in business revenue during the time period applicable to the PPP loan
  • Projected lost revenue due to COVID-19

In addition to the information listed above, PPP borrowers should maintain detailed records and make sure that the information documented clearly connects the dots to show that the PPP loan proceeds were used for qualified expenses and purposes. Without clear documentation, there is a higher likelihood that an audit results in a denial of forgiveness if the SBA can’t verify proper usage of PPP loan funds and eligibility.

PPP borrowers that received more than $2 million in loan proceeds should contact their professional advisors to ensure that all documentation is completed thoroughly and accurately.

Background on the Paycheck Protection Program (PPP)

The PPP was launched as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to provide economic assistance to small businesses during the COVID-19 pandemic. Under the PPP, U.S. Congress authorized the SBA to fund up to $800 billion in forgivable loans to qualifying small businesses.

The Forgiveness Process

To be granted forgiveness for PPP loans, PPP borrowers need to verify, among other things, that (i) loan proceeds were used to pay for qualified expenses, (ii) employees were retained and not furloughed or laid off, and (iii) employee compensation levels had been maintained.

When applying for a PPP loan, a PPP borrower was required to make a good-faith certification that the then-current economic uncertainty satisfied the need for a PPP loan. If a PPP borrower received less than a $2 million loan, the SBA automatically presumes the PPP loan was made in good faith, but reserves the right to review any PPP loan, regardless of size, to determine if that PPP borrower was eligible based on the PPP loan amount and to verify use of the loan proceeds.

Due to the nature of PPP eligibility, borrowers are also required to document the uncertainty of their business at the time of application. The eligibility process can be subjective, and affirmations of uncertainty are particularly important, especially for those organizations that ultimately did well during the pandemic. Borrowers must prove they were subject to business uncertainty and did not have access to enough funds from alternative sources.

As soon as all PPP loan proceeds have been spent, PPP borrowers are eligible to apply for loan forgiveness through the PPP lender’s forgiveness portal. PPP borrowers have up to 10 months after the PPP loan is issued to apply for forgiveness before PPP borrowers are required to start paying principal and interest on the PPP loan.

Although the SBA dropped the requirement of a “necessity questionnaire” (Form 3509/3510) in July 2021, the SBA will continue to audit the necessity qualification based on the economic uncertainty at the time the PPP loan application was submitted. The SBA will review all loans greater than $2 million to ensure those PPP borrowers complied with the good-faith requirement.

If the SBA determines that a PPP borrower was ineligible to qualify for a PPP loan, a PPP borrower is at risk of denial for forgiveness. And if the PPP loan application was made in bad faith or on a fraudulent basis, a PPP borrower could also be liable for fines and/or penalties.

The Appeals Process

The SBA may review a borrower’s PPP loan application or loan forgiveness application at any time to determine whether (i) the PPP borrower was eligible for the PPP loan, (ii) the borrower calculated the PPP loan amount correctly, or (iii) is entitled to loan forgiveness amounts claimed in the application.

Effective September 14, 2021, the SBA issued a final rule on appeals procedures for unfavorable forgiveness decisions by the SBA. The PPP borrower will have 30 days from the date of decision to file an appeal if the SBA denies a forgiveness for any of the following reasons:

  1. Ineligibility for the PPP loan
  2. Ineligibility for the PPP loan amount received
  3. Use of the PPP loan for unauthorized purposes
  4. Ineligibility for PPP loan forgiveness in the amount determined by the lender in its full or partial approval decision issued to SBA
  5. Ineligibility for PPP loan forgiveness in any amount when the lender has issued a full denial decision to the SBA

The appeal must include a copy of the SBA decision being appealed, a specific statement, including facts and legal arguments, as to why the SBA decision is incorrect, as well as the name, address, phone number, email address and signature of the PPP borrower or its attorney.

If you have any additional questions, or want to discuss your fact pattern, contact our experts below.

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Alex Thacher - Partner, Tax - San Jose, CA | Armanino
Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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