The Paycheck Protection Program (PPP) was aimed at helping small businesses keep workers on the payroll and pay other bills during the pandemic. However, confusion about turning PPP loans into non-repayable grants is palpable. The U.S. Department of the Treasury and the Small Business Administration (SBA) have promised they will audit all PPP loan recipients who seek loan forgiveness.

PPP loans are loans that may be forgiven if a business meets certain criteria, chiefly spending at least 75% of the loan amount on payroll and no more than 25% on rent, mortgage interest and utilities. Sweetening the pot, the Coronavirus Aid, Relief and Economic Security (CARES) Act allowed any amount forgiven to be ignored for federal tax purposes. Of course, no tax deduction is allowed for otherwise deductible expenses (payroll costs, rent, etc.) if the payment of the expense results in forgiveness of the covered loan.

Most of the problems surrounding the PPP involve the conditions needed to turn the loans into grants. PPP loan recipients were required to certify that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.” What’s more, businesses seeking loan forgiveness were also required to certify they “used the forgiveness amount of keep employees and make eligible mortgage interest, rent and utility payments.”

Certifications found to be inaccurate or untrue are punishable under criminal and civil law. But how can anyone certify to an uncertainty and what makes the funds necessary? Ultimately, of course, it will be the courts that decide, but given the stakes, all borrowers can expect a bare-minimum file review — or a deep-dive forensic audit.

In addition to SBA audits, borrowers must prepare for investigation by the Special Inspector General for Pandemic Recovery and reviews by the Pandemic Response Accountability Committee and the Congressional Oversight Commission, although these presumably will be limited to borrowers of larger amounts.

Businesses that fail a PPP audit jeopardizes all or part of their loan forgiveness and, potentially face False Claim Act prosecution by the U.S. Department of Justice (DOJ). In the face of the threat posed by all these audits and reviews and a lack of guidance about calculating the portion of the loan that is forgivable, many contractors and other business owners are concerned that they’ll be on the hook to repay those amounts.

Records and more records

Many business owners, even those with no intent to commit fraud, often fall short when it comes to documentation and paperwork. Often, businesses are cautioned to keep good records for tax purposes. This time, those records could be crucial to forgiveness of a PPP loan.

Even if a business pays its taxes dutifully, it may be penalized for lacking documentation. After all, the law requires every taxpayer to retain the records used when preparing the tax returns. Those records generally should be kept for three years from the date the return is filed.

A good record-keeping strategy might include depositing PPP funds into a separate bank account. Beyond that, all expenses should be documented. Utility bills, rent statements, leases, cancelled checks, bank statements tracing any electronic transfers and other expenses that qualify for loan forgiveness such as health insurance. These amounts should be consistent with the amounts in the loan forgiveness application.


Auditors consider contemporaneous documentation — or an accurate written record of how the funds were applied — as more persuasive than information created once an audit or review begins. In other words, it is more efficient to organize records and documents now rather than attempt to create them later when under pressure.

Among the supporting documentation for funds used to cover payroll costs, mortgage interest, rent and utility costs should be:

  • Payroll verification to demonstrate funds used for payroll, mortgage interest or lease and utility payments.
  • Invoices for mortgage interest, lease payments and utility services.
  • Lease agreements stating amount due.
  • General ledger entries showing use of PPP funds.

When it comes to showing employee and compensation levels, from periods beginning Feb. 15, 2020, through the end of the period after the loan was made include:

  • Payment records such as payroll tax reports, employee benefit records and compensation records.
  • Calculation of full-time equivalents and pay rates, and
  • Documentation to support head-count changes.

Any remaining cash surpluses should be supported by documenting the use of those funds beyond the period analyzed. Naturally, the underlying supporting documents should provide enough support for the certification.

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A smaller target

Computers are less forgiving than humans. Any business that hopes to survive and thrive under the new algorithm-based IRS, should follow a few guidelines.

Always be prepared for scrutiny. Understanding the tax rules and potential red flags is essential to knowing what information should be saved and for how long.

Be prepared to move quickly. Information Document Requests (IDRs) and face-to-face audits now move on a shockingly fast timeline so have a plan of action. Build a relationship with an accountant who can step in quickly when you get the dreaded IRS audit notice.

Consistency is key. Inconsistencies in paperwork happen even to honest people when the accounting is not handled professionally. The IRS, however, is increasingly seeing discrepancies as fraud until proven otherwise.

Expect no mercy. IRS agents are being allowed no wiggle room and no grace.

Mark E. Battersby is a tax and financial writer based in Ardmore, Pa.