PPP Audits & 2020 Accounting Lessons

Have you thought about how the event that we dare not be reminded of from 2020 reshaped the way businesses manage their finances? Our resident Bookkeeping Mensch, Paul Rosenblum does. In this episode he’s sharing how accountants had to navigate constantly changing rules and regulations throughout that time. And now in 2024 the PPP program faces audits for potential fraud, which means that businesses documents must be checked to make sure that these funds were used properly. This includes PPP, EIDL loans, and unemployment benefits. So yes, this adds a layer of complexity to tax reporting. But don’t worry, Paul has you covered!

Transcript

Episode #43

I know I’ve said this before, but I still can’t believe we are 43 episodes into this pod.  I expected to run out of ideas after 10, but I’m still here.  I guess there’s plenty to talk about in the accounting world. So, here I am again to talk this time about 2020 and 2021 -- and I know you don’t want to go there, but remember, we’re talking about accounting and money and taxes here.  And today I’m going to talk about honeymoons -- I’ll explain in a minute. I’m (Glad to be in your ears and speakers again) -- Paul Rosenblum  

I hope you’ve been checking out the YouTube channel and if you feel the urge, email me @ Bookkeepermensch@gmail.I don’t bite! (At least not hard!) I would love to hear from you.   The other links are also below. 

I do have a quick announcement to make that has nothing to do with this episode. Intuit, the makers of QuickBooks had extended until September 30th the opportunity to purchase the desktop edition in the US for an annual fee. This was the last chance! “I Love my Desktop QuickBooks”!  I think I might have a T-shirt made that I can wear to the office every day unless I am having a meeting with a client, and then I have to dress the part! 😊The Accountants’ edition will still be available for Pro Advisors or users that still want to use the desktop edition.    

Now, let’s get back to honeymoons.  Let me say just one thing here.  ‘The Honeymoon is over’.  What am I talking about?  The PPP forgivable grants (or loans) that were given out by the Small Business Administration are getting one more look because of suspected pretty widespread fraud. They are auditing many companies that received the PPP money, so don’t get rid of bank statements, and all paperwork relating to your PPP money if you received any funds from that program.  Also, find the letter that you got declaring that the PPP was forgiven, and make sure that the correct entry was put in your books by you or your bookkeeper. (Hint: The original PPP was a debit to the bank account and a credit to a Liability, and the Forgiven entry is a debit to the liability and a credit to your Equity as ‘Additional Capital’.)   You might have to re-prove that not only the money was used properly, but that your company deserved that money in the first place.

Before we talk about specific things, let’s go through the 2020 options that businesses had for government money programs.  I don’t want to rehash everything in detail, but let’s summarize to get a full picture.  

In 2020, when the pandemic started and cities started to close down (NYC closed down from March – June, except for essential jobs like accounting, restaurants, and hospitals, for some examples), Local state and city government had grants that you could apply for if you had a business, many of which you didn’t have to pay back.  And special grants for businesses related to health care.  Then the US Government through the Small Business Administration, (SBA), started two programs to help businesses survive through the pandemic.  The first was the PPP (or Payroll Protection Program). This was money that businesses could apply for to help keep people on the payroll although they were working from home and not from the office.  The other program was and is the EIDL (The Economic Injury Disaster Loan) which would be a regular loan that would have to be paid back, unlike the PPP which was forgivable under certain circumstances. Businesses would have certain rules and would have to document how the PPP money was spent.  The EIDL loan had to be paid back within 20 years, at 3.5% interest.  So, even if your business received $100,000.00, the monthly payments would remain low. 

On the other side, there was state unemployment for people who were laid off, and self-employed people could also receive unemployment benefits (at least in NY). And then there was federal unemployment, a new program for the Pandemic era. 

People were saved financially through the pandemic. However, during this time, the PPP rules changed almost every day for about 6 months, making my job and tax preparers job difficult since we were helping people with applications and how to handle that money once received. 

However, the government didn’t tell you everything at the time.  They didn’t tell you that state unemployment was taxable, even though many states didn’t take tax out of the money that one received during the pandemic because it was a special circumstance. So, when taxes were filed, one had to pay state taxes on unemployment benefits collected. I did have one client who asked about that, and had the state taxes taken out of her state unemployment check at the time the check was created.  The federal government also had federal pandemic unemployment, which in some cases, individuals received more money from the government than they were making working full time. When cities started opening again and people were allowed to go back to work, many people had more money in their pockets and saved up through federal and state unemployment benefits than they did before 2020 and chose not to return to work.  And that affected the economy. 

The EIDL money were regular loans that had to be paid back to the government in monthly installments 2 years after the loan money was received.  The PPP did not have to be paid back to the government, if forgiven. 

The PPP funds had to be used in a very specific way at the beginning and had to be documented according to very specific rules laid out by the government and by the SBA (Small Business Administration).  Over time, the rules were loosened by the government so that it was easier to deal with and to document.  I had my clients open up a separate bank account where they would deposit the PPP funds, and then be able to document the monthly bills and payroll expenses that they used the funds for. Then forgiveness would be easier when the time came. 

And now, let’s get to the point of this episode. 

Even if 2 years ago, your business got the PPP forgiven officially after sending paperwork to your bank or wherever you got the PPP funds from, the SBA now has the power to audit the company to make sure that

1. You were actually eligible for the PPP money according to the rules that the government set up at the time. This included 
   1. Being in operation on Feb. 20th, 2020 (not startup, but actually open for business)
   2. Maintaining the number of people on payroll prior to Feb. 20, 2020. 
2. That the forgiveness was done properly and that no mistakes or fraud was committed.  

Yes, the federal government and the IRS and the SBA figured out that there was fraud during the pandemic and that many companies received money from the PPP program who really weren’t ever eligible for it!  

Oh my, how did that happen??  I won’t get political here, but many people say that the PPP program was almost designed expecting fraud to happen.  But enough about that. It’s 2024 and we are mostly back on the saddle again and living life and making money and traveling again in record numbers.  

So, the point of this episode is to tell you two things: 

1. If you received PPP money, your company could get audited to make sure that you were eligible to start with 
2. That your company spent the money according to the rules of the PPP program. 

The first couple of years after the PPP came out, the IRS stated that the expenses using PPP funds were deductible, but if a company applied and received PPP funds in 2020, and were forgiven in 2021, then the 2020 tax return would have to be amended to show the income from PPP.  However, that changed after accountants and CPAs lobbied to include it on the current tax return.  So, the year in which the PPP was forgiven was the year it should show up on the current tax return filed. It has to be shown, but it has been determined that the PPP is not taxable.  

If, however, the PPP was not forgiven and the company needs to pay it back, it should be handled like a regular loan at a 1% interest rate.

The EIDL is a true loan. It’s a 20-year loan at 3.5% interest and payable monthly.  From a bookkeeping standpoint, like most mortgages and other loans, the first year at least, payments are going to be  (up to 100%) against interest.  

Interest IS deductible on a profit and loss for a business.  The principal is not. So, it’s very important for the bookkeeper to enter the monthly payment only after checking the ledger at the SBA to see how they are applying that monthly payment.  This will save you on taxes if it’s done correctly. If it was missed during the first year of payments, the bookkeeper could included it in the current years’ books, but there should be two subaccounts under interest for each year. 

 I have one client who I suspect wasn’t eligible for the PPP funds since in Feb. 2020, the entity existed, but they were not yet open for business.  They opened in September of 2020. They received a large sum of PPP funds. I never saw the paperwork, so I don’t know for sure, but I am keeping my eyes wide open to see what happens there.

There’s always excitement in the bookkeeping/accounting world! Even 4 years after the bookkeeping/accounting craziness of 2020 and 2021. 

I remember staying up at night and reading IRS bulletins about this stuff in 2020 and preparing for webinars that I was doing on a weekly basis.  And the IRS changed the rules once or twice in the middle of the webinar, so that parts of the live webinar were outdated even before it was finished. 

I like numbers.  Straight forward on a bank statement or a credit card statement.  They don’t move around. They don’t change color.  The rules don’t change. Everything’s static like my IP address for the internet.  I like to have order in my life.  I’m glad that the pandemic is over. 

However, I still miss my Burger King chicken sandwich! (listen to the Fast-Food wars episode!)  

Now that it’s after Labor Day and going through a mini-tax season with the September 15th and October 15th deadlines, I’ll get back to the core of this podcast talking about bookkeeping situations that come up that are interesting and fun to talk about.

July and August for me are what I call ‘catch-up’ months.  I save all the companies that I have been doing the bookkeeping for years and I know almost like the back of my hand and get a lot of relatively straightforward data entry work done.  So, I work hard during the summer, but with much less stress since bookkeeping is easier, the phones aren’t ringing, and the deadlines are in well into the distance. 

I’ll be in your device’s earphones or speakers soon --   I’m Paul Rosenblum