According to Section 1106 of the CARES Act, a portion of the Paycheck Protection Program (“PPP”) loans can be forgiven on a tax-free basis based on the extent of certain covered expenses (i.e., payroll, rent obligations, utility payments and mortgage interest) incurred during the eight-week period following funding of the PPP loan.

Amounts forgiven may not exceed the principal amount of the loan. Amounts forgiven will be lowered for:

  1. A proportional reduction in employees retained during this eight-week period (in a manner to still be defined-the SBA clearly indicated in its last application guideline that it will address forgiveness guidance), and
  2. A reduction in compensation for any employee by more than twenty-five percent (25%)

A PPP loan recipient seeking loan forgiveness shall submit to their PPP lender:

  1. An application
  2. Certain documentation supporting payroll and covered expenses
  3. Certification from the company affirming the extent of requested loan forgiveness
  4. “Any other documentation the [SBA] determines necessary”

The PPP lender shall make a decision on the loan forgiveness request in no later than 60 days. Any PPP loan amounts forgiven plus interest will be paid by the Small Business Administration (“SBA”).

There are a number of unanswered questions as to how the loan forgiveness process may play out in due course and then eventually resolved, such as:

  • Will the application require the company or the PPP lender to calculate whether payroll-related adjustments are necessary?
  • Will the SBA issue guidance on how the applications and documentation is audited (if they are audited at all?), or will each PPP lender need to derive their own audit methodology?
  • Will the PPP lender be able to consult with the SBA prior to issuing its loan forgiveness decision? (This may be what is holding up a number of banks from moving forward in accepting applications; there is big downside for them if they do not get a strong understanding of how this is going to work)
  • If it does, how will the SBA audit the amount of loans forgiven by each PPP lender?
  • Will the SBA provide notice to each PPP lender, or the companies having PPP loans, as to the commencement or resolution of an audit?
  • If the SBA claws back amounts paid to a PPP lender, will that PPP lender be able to seek repayment from the company?

In any event, there is a common thread that establishing a clean audit trail of covered expenses and retaining relevant documentation may help expedite the loan forgiveness process and may help defend the company from questions – and perhaps further adjustments – by either the PPP lender or the SBA. As for a clean audit trail of covered expenses, GHJ recommends the following steps:

  • Deposit the PPP loan proceeds in a separate bank account so that these funds are not commingled with those from normal operations
  • Similar to how construction loans work, draw down from the available PPP loan proceeds for covered expenses and retain documentation supporting each component of covered expenses
  • Should it become necessary to draw down for non-covered expenses, retain documentation supporting these amounts as well
  • Establish account codes (or sub-codes as necessary) within a company’s General Ledger to track each component of covered expenses

As for retaining relevant documentation, GHJ recommends that they should be retained until

  1. The SBA has resolved its audit of the PPP lender and/or the company’s loan forgiveness application, or
  2. The SBA audit period has expired

If you have any questions, please reach out to GHJ’s COVID-19 Response Team to assist with this or any other aspect of the CARES Act or COVID-19-related questions.

Ben Sheppard Facts

Ben Sheppard

Ben Sheppard, CPA, is a managing director in GHJ’s Forensic Services Practice and has more than 35 years of experience. He has deep expertise in litigation support and expert witness services, as well as forensic investigations and valuations. Ben works closely with clients to helping them find…Learn More

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David Horwich

David Horwich is GHJ's Growth Planning and Strategic Advisory Practice Leader. He provides his clients with a focused, integrative and transparent approach and has advised clients in all facets of transactional activity, including raising capital and buying and selling their businesses. He has…Learn More