Updated: May 21
Did you receive a Paycheck Protection Protection Program (“PPP”) loan?
Did you know that you could be audited by the U.S. Department of Treasury or the Small Business Administration (“SBA”)?
The U.S. Department of Treasury and the SBA have indicated that the government will conduct a full audit of every business that received a PPP loan over $2 million who requested loan forgiveness.
Even if you did not receive a loan as much as $2 million dollars, you can still be subject to a “spot check” audit.
“On April 28, Treasury Secretary Steven Mnuchin stated that any business receiving more than $2 million in PPP loans would be fully audited, and spot checks would be made for smaller loans.”
So, why are they auditing you?
Because just think about it. Businesses were suffering! The government had to move very quickly to come up with a plan and a program to distribute money to small businesses to save the jobs of small business employees. The first round of PPP loans were approved very quickly, rightfully so.
But where did that get us?
Several HUGE companies ( ahem, Pot Belly, and Ruth Chris) received PPP funds (that without a loophole) should not have.
Now, the SBA is stepping up efforts to make sure every loan is going to the right business, for the right amount, for the right purpose. Better late than never right!
Here are some steps you can take to prepare for a PPP Audit:
1. Get Ready For the Audit Now!
When it comes to audits (no matter what kind), contemporaneous substantiating documentation is key! Ok, so I used a bunch of jargon there. I’ll break it down:
Contemporaneous = occurring in the same period of time
Substantiating = that proves
Documentation = records
You must maintain records that prove the expenses you incurred and paid. Those records must have been created during the same period of time that the expense was incurred and paid.
Whoa! That’s a mouth full! Basically, when you pay an expense, keep the records to prove you paid it. Use the 5 W’s as a guideline as to the additional details that are needed on those records to past the smell test.
What was the expense?
When was the expense incurred and paid?
Where was the expense incurred?
Who incurred the expense?
Why was the expense incurred and paid (the business purpose?
If you do not keep “contemporaneous” records. It’s cool. But it will make it that much harder and inefficient to recall and re-create records once an audit starts.
2. Document your analysis of how the PPP loan funds will support your ongoing business operations.
How did you determine you needed the loan funds to support your ongoing operations?
Your analysis of sources and uses of cash should be based on:
Historical financial data (look to your financial profile during a similar time period last year).
Projected financial data (look to your 2020 budgets and projections for the pandemic time period, had the pandemic not occurred).
Use your professional judgment to project revenue and expenses for the “getting-back-to-normal” period after your business re-opens this year.
These amounts should be consistent with the amounts you report in your loan forgiveness application for the eight-week period after you receive your PPP loan.
In addition, you need to document very specifically how you are going to use every dollar of the PPP loan proceeds.
I highly suggest you to list dollar amounts tied to specific expense line items.
The projected uses of the cash would typically be: payroll costs, rent and lease payments, inventory purchases, administrative expenses and other miscellaneous business uses of cash.
Not only document these items, but have supporting documents to prove each expense item.
Some examples of Supporting Documentation include:
Payment support (such as a receipt or transmittal of funds) that shows you paid payroll, mortgage interest, lease and utility payments
Invoices for mortgage interest payments, lease payments, and utility services
Lease agreements stating monthly amounts due
These amounts should be consistent with the amounts in your loan forgiveness application for the eight-week period after you received your loan proceeds.
3. Prepare for Your Loan Forgiveness Application
There is not yet any guidance on the loan forgiveness calculation or application process. For now, I highly recommend you:
Keep PPP loan proceeds in a separate bank account.
Create separate accounting records to keep track of the inflow and outflow of the PPP loan proceeds.
Maintain meticulous records on how you used the PPP loan proceeds.
Accounting records showing use of PPP funds
I give you these tips not for you to be scared of a government audit but to encourage you to have all your ducks in a row in case you are audited.
Please reach out to me if you have any questions or drop them in the comments below.
Keeping Making the World Beautiful,
❤️ Kenesha "The Beauty CPA"