If you received a letter from the SBA denying your forgiveness request for your PPP loan within the last 30 days, the clock is ticking. You have 30 days to respond and file your appeal. The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires you will lose your right to appeal SBA’s denial to forgive your PPP loan.
We strongly recommend you hire an attorney to represent your company in the SBA appeal process. The ONLY individuals who can represent your company in the appeal process are: An owner, a company officer, or an attorney. CPAs are not authorized to represent borrowers in the appeal process.
Steps you must take to appeal your SBA Loan Forgiveness Denial
- Review “Final SBA Loan Review Decision Letter”
- Confirm your deadline to appeal the SBA decision
- Gather your documents & facts to identify issues to raise in your appeal
- Review SBA’s prior legal decisions & rulings
- Draft your Appeal (max 20 pages) and include exhibits (your evidence) and SBA’s Final Loan Review Decision Letter.
*You must include your legal arguments, facts, and legal authority to support your position to show SBA’s denial was “clearly erroneous” (there are additional requirements – see SBA’s website). - Create an online account at appeals.sba.gov.
- Answer all questions truthfully and completely when responding to SBA’s online questionnaire.
- Identify a legal representative for your business to handle the SBA Appeal.
- Upload your appeal, exhibits, and SBA Final Decision Letter.
Get Help With Your PPP Loan Forgiveness Appeal Now
Complete the form, and a member of our staff will contact you shortly. We strongly recommend retaining an attorney to represent your company and prepare and file your formal appeal.
SBA PPP Loan FAQs & Tips
Compliance, deductions, forgiveness, employees, the CARES Act has offered support and raised many questions. The experienced team at Milikowsky Tax Law is here to sort through all of the information and give you facts and strategies for your business as you resolve your SBA loan forgiveness.
If my PPP loan is eventually forgiven, can I deduct expenses on my tax return that I paid with my PPP loan?
Currently, IRS published Notice 2020-32 that prohibits deducting expenses if paid with a forgiven PPP loan.
Does the CARES Act exclude from payroll costs employee compensation greater than $100k?
Yes. However, the exclusion only applies to cash compensation and does not apply to all employee benefits such as contributions to a defined benefit retirement plan, group health care coverage, and payment of state/local taxes assessed on compensation.
Can a business include payments to an independent contractor or sole proprietor in the calculations of payroll costs?
No. The independent contractor or sole proprietor is itself potentially eligible for a PPP loan if it satisfies the requirements.
What rules should I rely on to ensure my business complies with the PPP requirements?
A borrower may rely on the laws, rules and guidance available when it submitted its application through the time its application was accepted.
Are there any restrictions on which employees are paid with SBA PPP loan funds?
Yes, employees need to have their “principal place of residence” in the United States.
To determine borrower eligibility for the “500-employee threshold” per the CARES Act, should a borrower count all employees or only full-time equivalent employees?
For purposes of loan eligibility, borrowers must calculate the total number of employees including part-time employees. For purposes of “loan forgiveness,” employers must use “full-time equivalent” employees to determine the extend the forgiveness amount will be reduced for workforce reductions.
Will SBA review all loans to ensure loans were provided to eligible borrowers?
Yes. SBA, in consulting with the Department of the Treasury, will review all loans greater than $2 million (as well as other loans) after a borrower submits a loan forgiveness application to ensure PPP loans were provided to eligible borrowers.
Will SBA review PPP loan of $2M or greater to ensure borrowers accurately and truthfully certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations…”?
Yes. However, a safe harbor provision applies to SBA’s review of PPP loans. Borrowers with an original principal amount less than $2M are deemed to have made the required certification regarding the necessity of the loan request in good faith. Borrowers with loans greater than $2M must be able to substantiate their certification in good-faith. If SBA determines a borrower lacked adequate basis for the required certification, SBA will seek repayment. SBA indicates it may not pursue administrative enforcement or referrals to other agencies (i.e. IRS) if the loan is repaid. However, there is no guidance at this time regarding the amount of time to repay the loan once SBA determines a borrower was not eligible for the loan.
Can an individual who is a partner in a partnership or member of an LLC file a separate application for an SBA PPP loan?
No. The PPP loan must be filed by the partnership or LLC. Only individuals who are self-employed or sole proprietors who filed a Form 1040 Schedule C for 2019 are eligible to file a PPP loan application if they were in operation on February 15, 2020 and their principal place of residence was in the U.S.
What expenses can be paid with an SBA PPP loan?
Owner compensation replacement (calculate based on 2019 net profit); employee payroll costs for employees whose principal place of residence is in the U.S.); mortgage interest payments (not mortgage repayments or principal payments) on any business loan on real or personal property (i.e. warehouse or vehicle used to conduct business); business rent payments; business utility payments. For these expenses to be “permissible,” you must be entitled to claim these expenses on your Form 1040 Schedule C. Additionally, interest payments on any other business debt incurred before February 15, 2020 can be paid with PPP loan funds but these amounts are not eligible for PPP loan forgiveness.
Is there a limitation on the “allowable” use of the SBA PPP loan funds?
Yes, for self-employed individuals who file a form 1040 Schedule C, allowable uses for the funds are the type of expenses incurred and paid in 2019. The purpose for the PPP loan is to “maintain existing operations and payroll.” It is not for business expansion. Additionally, at least 75 percent of the PPP loan proceeds shall be used for payroll costs. Other restrictions and conditions may apply.
Is there a deadline to pay expenses with the PPP loan funds?
Yes, you have 8 weeks to use the loan funds starting with the date of the first disbursement of the SBA PPP loan.
Can you apply for an SBA PPP loan if you received an SBA EIDL loan from January 31, 2020 through April 3, 2020?
Yes, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
What amounts paid with PPP loan funds are eligible for forgiveness?
Payroll costs including salary/wages and tips up to $100k of annualized pay per employee (max $15,385 per individual for the 8 week period) including covered benefits for employees (not owners) and including health care expenses, retirement contributions, and state tax imposed on employee payroll paid by the employer (i.e. unemployment insurance premiums). Additionally, payments for owners compensation (calculated based on 2019 net profit, limited to 8 weeks worth (8/52) of 2019 net profit) excluding qualified sick leave equivalent amount where a credit is claimed under section 7002 of the Families First Coronavirus Response Act or qualified family leave equivalent amount where a credit is claimed under section 7004 of FFCRA. Lastly, the following payments are eligible for forgiveness to the extent they are deductible on Form 1040 Schedule C: i) interest on mortgage obligations on real or personal property (incurred before February 15, 2020); ii) rent business rent payments (leases in force before February 15, 2020); iii) and business utility payments (under service agreements before February 15, 2020).
5 Tips for CPAs to Minimize Audit Risk for Their Clients
If you are a CPA, here are 5 things to help your client reduce the risk of an EDD, IRS, or SBA audit:
If you are a CPA, here are 5 things to help your client reduce the risk of an EDD, IRS, or SBA audit:
1: Confirm that your client’s 1099-K (provided by a merchant processor) does not report gross proceeds from credit card sales that are higher than the amount you are reporting as “gross receipts” on a business income tax return.
If there is a difference, you may consider adding a statement to explain a legitimate difference. For instance, chargebacks and returns are not subtracted from the amount of “gross proceeds” on the 1099-K form.
2: If you have a client who has more 1099 contractors than employees, have your client provide facts to support these workers have a legitimate and independent business i.e. EIN, business entity, website – something to establish a legit business.
EDD and IRS typically look under one the following expense categories for contractors to identify contractors that paid by a business:
If you prepare a business return where the business has, for instance, 10 independent contractors and only 2 employees (i.e. where the business owners are also officers of the corporation), you should spend time with the company’s management team to analyze whether the 1099 contractors are legitimate under your state’s law and federal law.
California recently passed a new law called AB5 (effective as of 1/1/2020) that changes the analysis of a worker’s status. AB5 now has a 3-part test that is more difficult for companies to satisfy.
You will want to review your client’s general ledger and confirm they are properly reporting ALL 1099s. You should confirm that every independent contractor who provides services (over $600) receives a 1099. If one is missed, the Employment Development Department (EDD) may extend a 3-year audit to 8 years and assess an additional penalty, where the penalty may be higher than the tax.
When reviewing the general ledger, confirm the payees are truly contractors and not workers that should be reported as employees.
3: If your client is selling a business, the buyer will require the current owner to produce a “tax clearance certificate” from the California Department of Tax and Fee Administration (CDTFA), the agency responsible for collecting and regulating sales tax in California.
We have had numerous audits that commenced during escrow, possibly a result of the Tax Clearance Certificate application that was filed with the tax agency. So, you may want to review your client’s general ledger and confirm that the amount of sales tax reported and paid to the state is accurate and the proper correct sales tax rate was used (that includes both local and city tax), as well as confirming that exempt sales are truly exempt.
4: If your client applied for a PPP loan, and receives a request for information and documents from their bank to substantiate their financials, consider calling a tax attorney to review SBA’s regulations and any questions from the bank.
The Small Business Administration (SBA) is currently investigating all SBA Payment Protection Program (PPP) loans, regardless of the dollar amount of the loan.
Based on information obtained from SBA, once a request has been made for additional documents following the funding of the loan, there is an active investigation. The response from you, the CPA, and your client will affect whether the case is referred to for potential criminal investigation. This would be the case when the information simply does not support the financials or the requirements of the PPP loan.
Issues that have come up in some of our cases include:
5: There are significant benefits to a CPA working with our firm. Some include the following:
Additional Information and Best Practices
Understanding the Audit Process
Implementing Proactive Measures
Client Education
Maintaining Open Communication
Legal and Regulatory Changes
At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit.