ACCOUNTING & AUDITING iStock.com/Andres Victorero
PREPARING FOR A POTENTIAL AUDIT OF YOUR CLIENT’S PAYCHECK PROTECTION PROGRAM LOAN By Juan F. Vasquez, Jr., Jaime Vasquez and Victor J. Viser
Businesses with Paycheck Protection Program loans have used PPP loan funds despite the lack of clear guidance on several aspects of the program. This article discusses three areas of potential review or audit by lenders, the SBA and/or the IRS. First, applicants were required to make a good-faith certification concerning need for a PPP loan. This good-faith certification may be subject to review by the SBA, especially for borrowers with loans in excess of $2 million. Second, when borrowers submit their application for loan forgiveness, they must provide documentation substantiating eligible expenses. Third, when the business completes its federal income tax return, it may decide to deduct under 162 of the Code business expenses that were forgiven as part of its PPP loan. If the business takes this deduction, it may be subject to audit by the IRS. These review/audit risks can be prepared for and are considered in turn.
Defending the Good-Faith Certification Businesses must be ready to defend the good-faith certification made when they applied for their PPP loans and potentially when they signed their promissory notes. The certification states, “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” To make the certification in good faith, businesses must take into account two factors: • Their business activity at the time the certification was made; and • Whether they had access to other sources of liquidity, the use of which would not be significantly detrimental to their business.
Business Activity Importantly, for purposes of the good-faith certification, business
activity is determined as of the date of the application. A business, therefore, will want to support the narrative by showing that its business activity was negatively affected by COVID-19 at the time of its application. Part of this can be the number of jobs potentially impacted. This should be done through a combination of financial records and analysis and secondary sources. With regard to financial records, year-over-year comparisons of revenue, sales or other industryspecific metrics can be used to show the decline relative to the prior year, as well as highlighting the days leading up to the application date to further emphasize the declines in business activity. With regard to secondary sources, consider referencing ordinances that prohibited business activity and/or specifically targeted the business. Note that multiple ordinances were likely in effect before the application date. Industry-wide or regional Today's CPA July / August 2020 5
