The Small Business Administration (SBA) recently rolled out its Loan Necessity Questionnaire (Form 3509 or Form 3510), which is being sent to business owners who took out Paycheck Protection Program (PPP) loans over $2 million. Information obtained from the questionnaires will help determine whether the funds were necessary to support business operations during the pandemic. Recipients have 10 days to complete the forms and return them to their lenders. Although all loans over $2 million are automatically up for audit, borrowers who took out smaller loans should not assume they are immune to scrutiny. In fact, there is some concern that applying for PPP loan forgiveness may increase your risk of being audited. To ensure your business is ready for a PPP Loan audit, follow our tips on what to expect and how to prepare for an SBA review.
PPP Loan Audit Scope
If and when the SBA decides to audit your company, it will notify your lender in writing. The lender then has five (5) business days to inform you about the audit request. To ensure you are compliant with the program requirements, the SBA is likely to look at the following items during your PPP loan audit:
- Borrower Eligibility. This was addressed when you originally applied for the PPP loan, but the SBA will likely revisit to determine if you still meet those requirements.
- Loan Amount. The SBA may rerun the numbers to ensure your loan amount was correctly calculated.
- Use of Funding. The purpose of the PPP loan was to keep employees on the payroll. The SBA will scrutinize your use of funding to ensure you stayed within the required guidelines.
- Loan Forgiveness Application (Form 3508). Accuracy is key. The SBA will look for calculation errors, missing information, and proper use of safe harbors.
They are also taking a close look at the answers provided on the Loan Necessity Questionnaire (LNQ), including:
- 2020 Revenue vs. 2019
- Other Funding Received From CARES Act Programs
- Involuntary and/or Voluntary Closures or Alterations to Operations
- Number of Employees Paid $250,000 or More
- Capital Improvements Made During the Covered Period
- Liquidity Prior to PPP Funding
Failure to provide documentation to support your answers on the LNQ, or not addressing follow-up questions from the PPP loan audit, could result in your forgiveness application being declined or the SBA determining you were ineligible for the loan. This could lead to a slew of unforeseen tax liabilities and complications.
How to Prepare for a PPP Loan Audit
Given the current lack of guidance from the SBA concerning the review process, preparing for a PPP loan audit is no easy task. You can, however, begin to compile the necessary documentation needed to support your case should you be audited. Use this handy checklist to ensure you have everything readily available.
- Copies of Your PPP Loan Application
- Copies of Your PPP Forgiveness Application
- Payroll Records
- Internal Communications (emails, memos, etc.) Outlining Approval, Necessity and Use of Funds
- Mortgage Statements or Lease Agreements
- Utility Bills
- Financial Records
- Tax Records
- Health and Retirement Plan Contribution Receipts
- Receipts for Non-Payroll Expenses Submitted for Forgiveness
- Cash Disbursements Journal
- Records Detailing Your Company’s Access to Capital
Be sure to designate a point of contact (POC) through whom all communications with the SBA will flow. All PPP-related questions and inquiries should be directed to that person, both internally and externally. You will also need to keep all records on file for a minimum of six years after the loan is forgiven or paid in full. It’s a good idea to make digital copies of everything, as well as keeping the original paperwork.
PPP Audit Appeal Process
If you disagree with the SBA findings, you may appeal within 30 days of notification by your lender or receipt of the SBA loan review decision, whichever is earlier. Appeals are heard by the SBA Office of Hearings and Appeals.
The appeal petition must include all the following information:
- A Copy of the SBA Loan Review Decision
- Evidence That the Appeal Was Timely Filed
- Your Statement Why the SBA Decision is Incorrect
- Supporting Documentation and Legal Arguments
- Signed Copies of Your Payroll Tax Filings (State & Federal)
- Signed Copies of Your Federal Tax Returns & Schedules
- The Relief Requested
- Your Name, Contact Information (Address, Phone, and Email), and Signature, or Your Legal Representative’s Information
If any of the requested documentation is missing, you will need to explain why it’s irrelevant or unavailable. A copy of your appeal petition and all required attachments should be sent to the following address:
Associate General Counsel for Litigation
U.S. Small Business Administration
409 Third Street SW
Washington, DC 20416
Once an appeal is filed, an administrative judge will be assigned to your case. During the appeal process, the judge will consider the SBA’s decision, as well as the administrative record and the merits of your petition. Within 45 days, after the record is closed, an initial decision will be issued. You will have 30 days to file a request for review or the decision will become final. Please note that an appeal will not extend the deferral period of your PPP loan.
PPP Loan Forgiveness & Audit Assistance
Although the Paycheck Protection Program has provided much-need financial support to millions of business owners, the lack of guidance has left many vulnerable to potential PPP loan audits or declined forgiveness applications. If you received funding through PPP, don’t face the SBA alone. At Tax Defense Network, we can help you file your PPP loan forgiveness application and prepare for an SBA loan review. Our tax professionals can also assist with preparing your 2020 business tax returns to ensure you get every deduction and credit you deserve. To schedule your free consultation, call 833-803-4222 today!