Audit fears quelled as SBA releases new PPP safe harbor guidance.

The SBA released new guidance stating all PPP loans under $2M will automatically qualify for the notorious “loan necessity certification”, a clause that has never been clearly defined. Although this allows most small business owners to rest at ease, it does not mean you have no audit risk, and owners still need to maintain high-quality records to apply for loan forgiveness. 

Background on the PPP loan necessity certification

All borrowers of the Payroll Protection Program (PPP) were required to certify that the economic uncertainty caused by Covid-19 made the PPP loan necessary to support ongoing operations. In the first round of PPP funding, most businesses didn’t think twice about checking that box, but after a number of large public companies received big PPP awards, the Treasury Department released a stern warning indicating that certification must be taken seriously, proven, and is subject to audit. This resulted in a series of foreboding emails from lenders reminding borrowers of the seriousness of this statement.

The unintended consequence was incredible confusion. What does “uncertainty” mean, and how do you prove it? How do you define “ongoing operations?” Does it mean you lost revenue, or just that your outlook has gotten worse? If you have an existing line of credit, does that mean you don’t qualify?

What the Safe Harbor rule means for small businesses.

Good news for the smallest businesses: if your loan amount was under $2M, you no longer need to prove you met this condition. The SBA considers any loan under this amount to fall under “Safe Harbor” guidelines, meaning it is by default considered qualified.

If you didn’t apply for the PPP loan because you were unsure if you could meet this certification AND your loan amount is under $2M, you should now reconsider applying for the funding.

What Safe Harbor does not mean.

Don’t relax just yet – you may still get audited. An SBA audit would now focus on your calculations of average payroll, loan amount, and loan forgiveness. So keep up best practices on documentation, or contact your business financial advisor if you are unsure what is needed.

And remember, if your loan amount was over $2M, safe harbor doethe SBA says you WILL get audited.

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