Will Your PPP Loan Be Audited?
On Saturday July 4, 2020, President Donald Trump signed a new law extending the deadline for applying for a Paycheck Protection Program (PPP) loan from June 30 to August 8. This extension comes on the heels of new Interim Final Rules (IFR) released by the Small Business Administration (SBA) on June 22, clarifying some issues and attempting to make complete loan forgiveness possible for most borrowers.
In addition, on July 6, 2020, the SBA and the Treasury Department released the complete database of all PPP loans issued to date– roughly 4.9 million. For loans exceeding $150,000, the data includes company name, address, NAICS codes, demographic information, date the loan was issued, number of employees, and congressional district. For loans less than $150,000, the name and address were left out.
In a July 6 press release issued by the SBA, Treasury Secretary Steven T. Mnuchin specified, “The average loan size is approximately $100,000, demonstrating that the program is serving the smallest of businesses.” He added that, “Today’s release of loan data strikes the appropriate balance of providing the American people with transparency, while protecting sensitive payroll and personal income information of small businesses, sole proprietors, and independent contractors.”
The release of the data came at the request of many groups and politicians seeking transparency for the $650 billion loan program created under the CARES Act. There is apprehension among some that the program is subject to widespread fraud and misuse, and they desire accountability. Already, many companies receiving negative press coverage and fearing audits and penalties returned $30 billion in PPP funds, although arguably they received them legitimately under the guidelines.
On the other side of the debate are many business groups who want to see a “safe harbor” that all borrowers who received the loans, or at least those under a specific threshold such as $1 million, will receive loan forgiveness for portions of the loan they use according to regulations– 60% on payroll and 40% on expenses such as rent, mortgage payments, utilities, and interest payments on loans.
The release of the data caused immediate apprehension among borrowers as the data seemed incomplete. After reviewing the data, many companies were reported having none or one employee, even though their loan amounts exceeded $150,000, signaling many more employees. This raised considerations that inaccurate data would cause audits or adversely impact a review. The reality is the data demonstrates the input from lenders who were working around the clock to issue the loans as fast as possible and, as per the CARES Act, gave borrowers the benefit of the doubt that the loans were necessary and employees were to be kept on the payroll.
For most borrowers, the inaccurate data will be of no consequence. Businesses with 10 or fewer employees, sole proprietors, or independent contractors will not be the target for harsh reviews or audits, and while those borrowers who received over $2 million in PPP funds have a much higher likelihood of audit, the real targets will consist of fraudsters lying on loan documents.
While the program has been filled with complications, confusion, and new regulations being released almost weekly, the reality is, it has had the desired effect of injecting liquidity into the economy and maintaining workers on the payroll. While approximately $130 billion remains in the program, necessitating the extension to August 8, the federal government moved at an unprecedented pace and scale on this program. Considering that the SBA issues about 1,000 loans in a typical year, 4.9 million PPP loans in three months is commendable.
The fact that funds remain is the result of a slowdown in applications as many borrowers were worried that audits would leave them keeping a loan they thought would become a grant, or worse, civil or criminal penalties. So, in addition to the extension, the new guidance from June 22 was also meant to assuage the worries of many businesses and increase applications.
While it remains to be seen whether the new guidance will boost loan applications over the next month, the new guidance and future regulations sure to come still create as many questions as they seek to answer. Here are some of the most frequently asked questions on PPP loans and forgiveness:Â https://gforcefunding.com/ppp-loan-forgiveness-6-26-2020/
Should I be worried about an audit on my PPP loan?
The new guidance did not provide any specific safe harbors for an audit. The SBA already provides a safe harbor, whereby loans less than $2 million will be considered made in good faith based on economic uncertainty, so there will not be much reason to audit these loans. With government mandated shutdowns, ongoing cases of COVID-19, and a rocky reopening of the economy, economic uncertainty remains for all businesses.
The main concern with audits of loans over $2 million will remain the issue of the “credit elsewhere” test and the liquidity of the borrower. Unlike traditional SBA loans, business owners didn’t have to document a lack of credit elsewhere, and only certify if they did not have sufficient access to credit. At this point, it appears that short of venture funding available or access to public capital markets by virtue of a stock exchange listing, most companies that are audited will likely be able to reasonably claim a lack of adequate credit elsewhere, even with traditional lines of credit.
What can I expect next for any easing of restrictions on PPP loans?
The main issue still remaining in the program is around taxes. PPP loans do create adverse tax consequences, mainly that expenses, including federal payroll taxes paid by the employer with PPP funds, are not deductible. So, while PPP funds that are forgiven are not taxable, businesses will lose these deductions.
Business groups are lobbying intensely to make changes to PPP, especially on the payroll tax issue, in what’s being called Phase 4 legislation. The new law could also offer new funds focused on certain demographics or allow companies a second PPP loan. Negotiations for the new law are underway and should conclude before the Congressional August recess.
Conclusion
The extension of the PPP program until August 8 and the new guidelines should incentivize more businesses to apply for loans. Despite the confusion, the program is largely functioning as designed, which is to provide small businesses with emergency funds to weather the coronavirus storm. While the possibility of an audit remains very real, there is likely more regulations to come that will, hopefully, explain and define what that looks like so businesses have the certainty they need.
In the meantime, with COVID-19 cases surging in many parts of the country, businesses may be facing a new wave of full or partial shutdowns. That prospect will likely accomplish two things: One, remove the issue of “economic uncertainty” from the discussion; and two, lead to a robust new package of economic stimulus.
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