Matter & Substance
  November 30, 2021

If Your Business Took a PPP Loan, You Need to Prepare for an Audit

As part of the CARES Act, the Paycheck Protection Program (PPP) was a loan created to provide economic assistance to small businesses during the COVID-19 pandemic. Under the PPP, U.S. Congress authorized the Small Business Administration (SBA) to fund up to $800 billion in forgivable loans to small businesses to keep their workforce employed.

Due to the volume of the loans and the effect that volume had on being able to identify red flags in loan applications, there is a high potential for fraud. Because of this, the SBA will audit all PPP loans over $2 million following the lender’s submission of a borrower’s loan forgiveness application. For anyone who took less than $2 million, the SBA says it reserves the right to “spot check” at its discretion. This opens all borrowers up for a future audit.
We’ve assembled the following outline to ensure you and your business are ready for a potential PPP audit.

Organize Your Documentation 

If your business borrowed more than $2 million with a PPP Loan, the SBA may audit you up to six years after your loan has been repaid in full or forgiven. In case of an audit, the first thing you’ll always be asked for is the paperwork to prove your situation. You should pull and compile the following into a folder:

  • The specific Federal, state, or local government shutdown orders that impacted your business. If your business operates in multiple states, you should gather all applicable governmental orders across all business units.
  • How those orders affected both your business and your employees
  • Keep a record of the employees who were furloughed, laid-off, or terminated during restrictions
  • Create a list of the employees who would have been furloughed, laid off, or terminated had you not received the PPP loan
  • All abnormal expenses incurred during COVID-19, including PPE, increased sanitation, entry screenings, and other OSHA requirements
  • All email communications with lenders
  • Comparative revenue reports showing how your business’s sales were negatively affected
  • A projection of lost revenue due to COVID-19
  • Any contemporaneous meeting notes, emails, or other internal correspondence that documents your assertion of uncertainty underlying the fundamental need for the PPP loan

Our advice is to maintain detailed records that show how the proceeds from the PPP loan were used for any and all qualified expenses. The clearer and more well-detailed your documentation is, the better your chances of the SBA giving you the all-clear.

Monitor Your Spending

Along with keeping a close record of your qualifying expenses, you should also be monitoring how you’re spending your money otherwise. After receiving federal assistance, companies need to be mindful of their corporate activity. Because the PPP loans were created to help in specific expenses and circumstances brought on by the pandemic, all company spending, pay increases, outsourcing, and other activities will be closely scrutinized during an audit.

What are the Potential Outcomes of an SBA Audit?

The SBA is authorized to audit three primary aspects of each borrower’s PPP loan:

  1. The borrower’s eligibility under the CARES Act, SBA rules, or guidance in place at the time of the borrower’s application
  2. The accuracy of the borrower’s calculations supporting the original loan amount and the allowable uses of proceeds under the CARES Act
  3. The borrower’s eligibility for forgiveness based on the information provided with the forgiveness application

The SBA has not yet released information on when they will begin initiating audits, how the audits will be conducted, or what information will be requested. However, they have stated if a borrower is selected for audit, the PPP lender will be notified in writing, and the lender will then have 5 days to notify the borrower.

We expect most audits will be conducted on PPP loans that have received forgiveness from the PPP lender. Based upon the outcome of the SBA’s audit, we expect the following possible outcomes:

  1. No change from the original forgiveness determination
  2. A partial or complete disallowance of the forgiveness amount based upon a review of the original loan calculation or the calculations supporting the requested forgiveness amount
  3. In the case that the SBA determines the loan was fraudulently obtained, referral to other governmental agencies

Any reductions to the previously determined forgiveness amount will become payable under the original terms of the PPP loan (i.e. over a 2 year or 5 year maturity period depending upon the original loan date and 1% carrying interest).

How Do I File an Appeal?

If you are denied loan forgiveness or only granted partial loan forgiveness, you will have 30 days from the date of the decision to file an appeal, which must include:

  • A copy of the SBA decision being appealed
  • A statement that argues legally why the SBA decision is incorrect
  • The name, address, phone number, email address and signature of the PPP borrower or its attorney

We're Here to Help

The best way to prepare for an audit is to make sure that you have followed all procedures correctly and kept organized documentation of the process. If your business took out a substantial PPP loan, you should contact us to make sure you have been and continue to document your expenses correctly.

As things continue to evolve, we will be here to guide you through any changes or questions. Our office has started to reopen, and all clients can now safely join us in person if desired. We will also continue to offer remote meeting options. We will ensure your tax planning needs are met on a timely basis.