PPP Loans & Tax Audits: What Your Business Needs To Know
In response to the COVID-19 pandemic, the government worked quickly to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, offering financial relief to individuals and small businesses. Many small business owners have received (or are waiting to receive) their share of billions of dollars allotted to the Paycheck Protection Program (PPP) — forgivable loans that can be used for payroll costs, rent, mortgage interest, or utilities.
The program has faced some backlash. Longer waits than anticipated to receive funds has been a big complaint among small business owners. This frustration was further compounded when it came to light that public companies had been approved for millions of dollars in funding under the PPP. While some public companies opted to return the funds, the damage had been done — and many struggling small business owners are still left wondering why these loans were approved.
In response to the backlash, Treasury Secretary Steven Mnuchin announced that before loans are forgiven, companies that receive funding will be audited. In this article, we’re going to discuss what we currently know about PPP tax audits. We’ll look at what businesses will be audited, what these audits will look like, and answer some FAQs about the PPP audits. We’ll continue to monitor this situation and will update this article as more information becomes available.
Table of Contents
Who Will Get Audited?
If you’re a recipient of a PPP loan, you may be wondering if your business is going to be audited. The short answer? Maybe. Any business that has received PPP funding may be subject to undergo an audit before loans are forgiven.
On April 28, Treasury Secretary Steven Mnuchin announced that any business that receives more than $2 million as a loan will be audited. Before loans are forgiven, each business must undergo a full audit.
If you receive less than $2 million, you may still be audited. While spot checks will be performed on smaller amounts, any person that has applied for and received PPP loan funds may be audited before receiving loan forgiveness.
As part of the PPP application process, applicants are required to certify that all tax information provided can be shared by the lender to the Small Business Administration and authorized representatives of the SBA Office of Inspector General for review and SBA program compliance.
Why Are There Going To Be PPP Audits?
Currently, to receive funding, PPP applicants are only required to certify in good faith that they need the money and will spend it for approved purposes. These audits will confirm that the information provided during the application process was accurate and that there was a genuine need for receiving a loan.
Over 200 public companies were issued millions of dollars in loan funds, among them AutoNation, the Los Angeles Lakers, and the parent companies of Ruth’s Chris Steak House and Shake Shack. While some of these companies returned loan funds following public backlash, it left many wondering why a program designed for small businesses was benefiting larger public companies.
Mnuchin clarified that the program was intended for small businesses and not for larger businesses with liquidity. The Department of the Treasury also updated its FAQs to reflect this. In the document last updated on May 3, 2020, the following is stated:
“[B]efore 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.”
It’s already round two of PPP funding, and many small business owners have yet to secure the funds needed to keep their businesses open or fully staffed. A full audit for companies that received larger loans and spot checks for smaller loans will help ensure that the businesses that have participated in this program are qualified to receive loan forgiveness.
How PPP Audits Work
At this point, there isn’t a lot of information about how PPP audits work, but there should be more information coming forth in the weeks ahead. For now, though, this is what we know.
Mnuchin told the Wall Street Journal that one of the things that would be evaluated in the audit is payroll reports. These payroll reports will be used to prove that businesses spent at least 60% of the loan proceeds toward payroll costs. There are a few exceptions to this rule:
- Employees did not return despite receiving a good faith offer to return to their jobs with the same wages and hours
- The business was unable to find qualified employees
- Business operations were unable to be restored to the pre-coronavirus levels as a result of restrictions on operations
It is also safe to assume that businesses may be asked to provide proof of other approved expenses outside of payroll. You should expect that any information provided in the PPP application may be evaluated in an audit.
As the Department of Treasury provides more guidance on PPP loan audits, we will continue to provide the most updated information in this article.
PPP Audit FAQs
Will My PPP Loan Be Audited?
Your PPP loan may be audited to ensure funds were used for their intended purpose. All loans over $2 million will be fully audited, while spot checks will be performed on smaller loans. One thing to remember, though, is that any PPP loan can be audited.
How Will PPP Loan Audits Work?
Little is known right now as to how exactly PPP loan audits will work. Those who are audited will need to provide payroll reports proving that at least 60% of loan proceeds were used for payroll costs. Additional documentation may also be required. As of now, there are no set timelines or further information on these audits, but we expect to learn more in the weeks ahead.
What Information Will Need To Be Verified For My PPP Loan Audit?
According to the Treasury Secretary, payroll reports will need to be verified. It can also be safely assumed that any information provided in your PPP application may also require verification during an audit.
When Will I Face A PPP Loan Tax Audit?
PPP loan tax audits will be performed when businesses seek loan forgiveness. At this moment, however, there aren’t any timelines available as to when these audits may occur. We will update this article when we have more information.
Do I Need An Accountant To Navigate A PPP Audit?
From what we know now, you don’t need an accountant to navigate your PPP audit. As long as you provided accurate information in your application and have documentation backing up your payroll expenses and how loan funds were spent, you should be fine. Most businesses that use accounting software should be able to navigate an audit without an accountant, although having one on your side can certainly make things less stressful. Of course, this may all change as the Department of the Treasury releases more information on PPP audit requirements.
The word “audit” can strike fear in even the most organized business owner, but there’s no reason to fear the PPP audit. Though not much is known at this time, you shouldn’t have anything to worry about, provided you gave accurate information on your PPP application and put funds toward approved expenses.
Haven’t applied for your PPP loan? Whether you’re a sole proprietor, self-employed, or own a small business, we have a variety of resources in our COVID-19 hub to help you navigate the PPP process, learn about other funding options, or read our guides to surviving the financial fallout from the coronavirus.
Finally, don’t forget to check back in on this post for updated information as it’s released. It’s our goal to provide you with the most up-to-date information to help small business owners through this troubling time. Good luck!