Since the Paycheck Protection Program (PPP) was introduced, Congress made it clear transparency would be key with showing the need to obtain a loan, and ultimately, having it be fully forgiven. With the PPP Forgiveness Platform now open and many borrowers having already filed for loan forgiveness or planning to do so in the near future, the Small Business Administration (SBA) has also initiated its review and audit of borrowers’ eligibility of their PPP loan and determining loan forgiveness.

Until most recently, there was little guidance provided by the SBA on how they would determine loan forgiveness eligibility. However, the SBA rolled out two questionnaires designed to determine PPP loan necessity for borrowers of $2 million or more, by collecting supplemental information on business activity and liquidity that SBA loan reviewers will use in evaluating the good-faith certification borrowers made on PPP applications. Due to delay of guidance and borrowers making necessary business decisions prior to the release of these forms, unfavorable audit decisions from the SBA related to borrowers’ loan eligibility and loan forgiveness may be on the horizon. Borrowers will have the opportunity to challenge the SBA’s decision, however, it’s important to understand the appeals process because borrowers will have to act quickly.

Audit Support

Both loan forgiveness applications require borrowers to provide comprehensive documentation to justify all eligible expenses. This will be reviewed by the lender servicing the PPP loan and possibly the SBA during the loan forgiveness applications process, which is primarily based on the total amount of eligible expenses made during the 8-week or 24-week covered period following the first disbursement of PPP loan funds.

Once a borrower submits their loan forgiveness application to its lender, the lender has 60 days to issue its decision to the SBA. The SBA then has 90 days to remit the appropriate amount of forgiveness to the lender based on its review of the forgiveness application or loan eligibility.

Keep in mind, the PPP loan forgiveness application requires borrowers to retain appropriate documentation for six years after the date the loan is forgiven or repaid in full. The end of the 90-day period does not necessarily mean the SBA will not consider an audit/review of a borrowers’ application in the future, so be prepared should they need to access such documentation.

Appeals Process

Should a lender deny a borrower’s loan forgiveness application, whether partially or in full, they will provide written notice to the borrower informing them of the decision sent to the SBA. The borrower cannot appeal this decision, but may request SBA review within 30 days.

The appeals process is complex, so borrowers must have an understanding to challenge the SBA’s decision in a timely manner. Here are the five steps of appeals process be aware of:

  1. Borrower applies for loan forgiveness.
  2. Borrower requests SBA review of a lender’s partial or complete denial of loan forgiveness, or the SBA conducts its own review/audit.
  3. Borrower appeals the SBA’s decision of the SBA Office of Hearings and Appeals (OHA).
  4. OHA judge issues an initial decision and the borrower files either a request for review or request for reconsideration of this initial decision.
  5. Borrower files a complaint in federal district court contesting the final decision resulting from its request for review or request for reconsideration.

If the SBA decision finding determines the borrower was not eligible for the PPP loan , the loan amount received or loan forgiveness amount claimed, the borrower may file an appeal petition with the SBA’s OHA within 30 days after the borrower receives the SBA’s decision or is notified of the decision by their lender, whichever is earlier.

Be prepared – borrowers will have to provide heavy evidence that the SBA’s decision was based on clear error of fact or law. The judge will base the initial decision on a review of written administrative record, the appeal petition and responses, admitted evidence, and possibly, an oral hearing.

Borrowers can file a request for review or request for reconsideration of this initial decision within 30 days after its service, after which time if neither request is filed the initial decision becomes a final decision. It’s important for the borrower to file a request for review or request for reconsideration if they intend to seek review in federal district court, as these requests are administrative remedies that must be exhausted before judicial review in federal district court can be sought.

Tax Considerations

Keep caution of the potential tax consequences associated with the SBA’s review/audit and corresponding appeal processes. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the entire amount of the PPP loan forgiven is excluded from gross income. However, recent guidance released by the Internal Revenue Service (IRS) determined that a taxpayer with a PPP loan may not deduct PPP expenses that are otherwise deductible in 2020 if the taxpayer reasonably expects to receive forgiveness, if the taxpayer has not submitted their loan forgiveness application by the end of the tax year. Should a borrower receive partial forgiveness or be fully denied in the future, the IRS provides a safe harbor that allows them to claim deductions on their 2020 return, amended return or 2021 return.

Understanding the PPP continues to be a complex matter due limited guidance. Be sure to work closely with your attorney, lender and CPA to ensure you’re prepared for any potential outcome. Doeren Mayhew’s dedicated advisors stand ready to help you navigate this process. Contact us today for assistance.