You’ve cleared the hurdles in getting a Paycheck Protection Program loan, worked your way through the labyrinth of PPP loan forgiveness criteria. At some point you may find yourself faced with a potential PPP loan audit.

Preparing for PPP audits


Phillip R. McCollum, Jr., CPA, JD

2020 continues to make its mark in the history of accounting books. You’ve cleared the hurdles in getting a Paycheck Protection Program loan, and now you’re working your way through the labyrinth of PPP loan forgiveness criteria. At some point in the future (see later discussion on statute of limitation period), you may find yourself faced with a potential PPP loan audit. Here’s what we know currently about PPP loan forgiveness, what you can expect and what you need to do to prepare for a future audit.

PPP Timeline

When you applied for a PPP loan, the clock started the day your bank received the funds. The loan was intended to pay for expenses and employee retention for eight weeks. The PPP Flex Act extended the eight weeks to 24 weeks and included more allowances on what the funds could be used for. Instead of 75% spent on payroll expenditures, you could now reduce that to 60%, freeing up more funds for operational expenses. If your loan was issued prior to June 5, any amounts not forgiven could extend the loan from two to five years with a 1% interest rate. For loans issued after June 5, any amounts not forgiven would be a five-year loan at 1% interest.

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At the end of your eight to 24-week period, you have ten months to apply for forgiveness. Wages for non-owner employees are capped at $46,154 for the 24-week period. To streamline the forgiveness application process, the SBA is offering an EZ application for:

  • Self-employed, independent contractors and sole proprietors with no employees
  • Borrowers who don’t have a salary or hourly wage reduction and didn’t have a FTE reduction
  • Borrowers who didn’t have a salary and hour wage reduction and were unable to operate during the covered period at the same level of business as before February 1, 2020.

When you file for forgiveness, be sure to include copies of bank statements or payroll journals documenting wages during the covered period, Form 941, state unemployment filings and any payment receipts, cancelled checks or account statements for employer contributions paid for employee health insurance and retirement plans.

You’ll also need to include business mortgage interest documentation, copies of business rent or lease payments and any relevant utility payments if these expenses are being used as part of your PPP loan funds

Schedule A and the accompanying worksheet of the PPP application (Form 3508) are used to provide the detail for the qualifying expenses, the FTE reductions and employee detail. The specifics of these sections are beyond the scope of this article


As initial questions started to be raised on how to account for the loan, the AICPA provided advice on how  to account for the loan as though it would be forgiven.  At this point in time, the AICPA suggests the following two options be considered.

Record the loan as conditional under “other income.”

  • Account for government assistance under IFRS – IAS 20 – similar to accounting for the conditional contribution over time as expenses are incurred
  • Gain contingency under ASC 450-30 – AICPA does not prefer this method

Record the loan as a liability ASC 470 and accrue interest under ASC 835-30.

  • This option will show the loan as a liability until it is fully forgiven or paid off
  • Expenses are recorded as usual and are not deductible for tax (based on current IRS guidance)


After you file for forgiveness, your bank has up to 60 days to review the loan. The SBA has up to 90 days to review the forgiveness application, and then there is a six-year statute after the date of loan forgiveness where the SBA could audit. More guidance is needed as to when the actual statute starts to run.  All disputes an applicant has regarding decisions by the bank or the SBA must be filed within 30 days of the decision.

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To date, details on PPP loan audits have not been provided. The general thinking is that instructions and guidelines will be released closer to when PPP loans are eligible to be audited. When that occurs, the audits will be of the actual PPP loan forgiveness, not the reporting of PPP loan in an audited financial statement. SBA has indicated all loans more than $2 million will likely be reviewed.

Latest Developments

As of the drafting date of this article, Congress continues to debate additional small-business relief measures, including allowing eligible businesses to receive second PPP loans (more than $130 billion in funding remains after the initial program ended in early August), or providing blanket forgiveness for loans of less than $150,000.

On October 1, the Treasury Department said that PPP requests will start to be approved.  A very positive development as banks and small businesses have raised concerns about the complexity of applying for forgiveness.  Forgiveness for smaller PPP loans is expected to be processed quickly. The average size of a PPP loan is $101,000. It is a lot, we know, and more is yet to come. 2020 has been a heavy year for everyone. We are here to help carry the load. We will keep you updated as things change.

For more information and resources on COVID-19, see our coronavirus page. Feel free to contact your Henry+Horne tax adviser with any questions.

Phillip R. McCollum, Jr., CPA, JD, Partner, specializes in tax planning, consulting and compliance work for privately held businesses and their owners. He can be reached at (480) 839-4900 or