SBA Requires Borrowers to Submit “Pre-Audit Review” Information

Since its initial launch in April 2020, the Paycheck Protection Program has challenged recipients more than originally expected. What was once thought to be a no strings attached loan has now become a source of stress and worry for many of its recipients. Shortly after issuing loans to applicants, SBA announced that it would be conducting in-depth audits on any businesses that claimed $2 million or more. This also does not include the randomized audits for recipients at all loan amounts as a “spot check.” 

In October 2020 the U.S. Small Business Administration (SBA) released new information that they would begin collecting “Pre-Audit Review” information from all businesses that claimed $2 million or more in an attempt to begin to prepare for their inevitable upcoming audits. SBA declared that the purpose of this additional information “is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification” of borrowers.

The questionnaire released by SBA, titled “Loan Necessity Questionnaire,” includes the forms and instructions required for submission. The new Form 3509, applicable to for-profit businesses, requires the submission of additional information to verify whether the borrower met the required certification of their PPP application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

This form will be sent to the borrower by their lender, rather than by SBA directly. Upon the receipt of the form, the borrower will have 10 days to complete the form and return it to their lender following which the lender has 5 days to submit the completed form to SBA. 

The submission of the completed Form 3509 from the lender to SBA will serve as a catalyst for the beginning of what is essentially a pre-audit review. As previously mentioned, this process is only applicable to borrowers that received $2 million or more. The goal of this initial review is to determine whether there was an “economic necessity for the loan to be issued. If a borrower fails to return the form, the borrower can be considered ineligible for the PPP loan.

Specifically issued for for-profit borrowers, particularly those that are not publicly-traded, the new SBA Form 3509 requires an extensive amount of information, including:

• Gross revenues/receipts for quarters in both 2019 and 2020
• Information about whether the Borrower was required by state or local authorities to shut down due to COVID-19
• Information about whether the Borrower was required by state or local authorities to significantly change operations due to COVID-19
• Whether any voluntary reduction/alteration in operations took place due to COVID-19
• The amount of cash outlays for voluntary or mandatory alterations of operations or facilities due to COVID-19
• Cash and cash equivalents of the Borrower as of the last calendar quarter immediately before the PPP loan application
• Dividends/capital distributions to owners of the borrower between March 13, 2020, and the end of the Borrower’s covered period
• Prepayments made on debt before its contractual due date made between March 13, 2020, and the end of the Borrower’s covered period
• The number of employees and, separately, the number of owners of the borrower, who received compensation in an amount that exceeds $250,000 on an annualized basis during the Borrower’s covered period
• The total book value of the borrower’s equity on the last date of the calendar quarter preceding the date of the loan application
• Whether or not the Borrower received other funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act in addition to PPP funds

PPP borrowers that received $2 million or more should begin gathering this information even if they have not officially received the form from their lender. It can be assumed that if you fall under this category it’s only a matter of time until SBA begins digging into your records to see if you actually qualified to receive a PPP loan. 

If you received a PPP loan in excess of $2 million, contact Milikowsky Tax Law for support as you prepare for an audit from SBA. John Milikowsky’s significant experience defending his clients in IRS and EDD audits makes him well equipped to support you and your business through an SBA audit.