Paycheck Protection Program (PPP) Accounting
So you applied for the PPP loan and have gotten notification that the funds are on the way. What do you do next?
The CARES Act requires that you certify that the funds will be used for purposes that are authorized under the act. In the rush to claim PPP funds, you should remember the legal restrictions on the use of these funds. Knowingly using the funds for unauthorized purposes may mean that the loan may not be forgiven or, even worse; it may lead to charges of fraud.
How can I get my loan forgiven?
In the 8 weeks following your loan signing date, all expenses related to these items may be forgiven:
- Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits. In other words, most payroll costs are covered. However, the following costs are not covered:
- Payments made to independent contractors
- S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program).
- Employer paid matching social security and Medicare taxes
- Mortgage interest—as long as the mortgage was signed before February 15, 2020
- Rent—as long as the lease agreement was in effect before February 15, 2020
- Utilities—as long as service began before February 15, 2020
You’ll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period. You will also need to have spent 75% of the loan on payroll in order to qualify for loan forgiveness. To ensure you comply with the CARES Act’s provisions to receive 100% loan forgiveness, keep in mind these requirements:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
How do I track the money?
You will ultimately be required to submit a request for loan forgiveness to the bank that is servicing the loan. The request will need to include a number of items, such as documentation to verify the number of full-time employees and their pay rates, as well as documentation to prove expenditures on eligible mortgages, leases, and utility obligations. You can do one of the following options to ensure the funds are used appropriately and track the use of the funds:
Separate Bank Account
Set up a separate bank account to deposit and track the funds. Only use this new account for authorized expenses (payroll, rent or mortgage interest, company paid retirement (not including amounts paid by or withheld from employee), company paid group insurance (not including amounts paid by or withheld from employees). You must also keep all records documenting these expenses – copies of payroll checks, time cards, direct deposit receipts; copies of payments made to retirement and healthcare providers; copies of rent payments and copy of lease or mortgage loan payments showing breakdown of principle and interest.
You should code these eligible expenses so that they can also be easily identified on your P&L statement by your CPA when they are preparing your tax return. How the IRS will require these expenses to be reported is still not clear but ensuring they are clearly identified will certainly help your CPA.
Note for payroll: The pay date must fall into the 8-week tracking period (NOT the pay period covered) to be considered an authorized expense.
Class Code Tracking
If you use QuickBooks for your accounting system, set up class code tracking. You will need to allow class code tracking in “preferences” (both QB desktop and selected versions of QBO). Then set up a class code called “PPP Funds.” Use this class code on all funds received and on all allowable expenses detailed above. Run a report called Profit and Loss by Class to track the funds. You can also create sub-class codes if you need to track additional info. Remember – you will still need to keep all receipts as detailed above.
Your bank will be providing guidance on the format your application for forgiveness should follow. By that time, if you have been following the guidelines above, that should be a fairly simple process. You will receive the forgiveness determination from your bank within a 60-day period after submitting the application.
Note: The SBA may be issuing additional guidance on loan forgiveness.
Update: The SBA issued a PPP Loan Forgiveness Application form on May 15, 2020. For a copy of the form and instructions on how to complete, go to: https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application
Other Important Info
- You can only apply for one PPP loan
- You must begin making payments six months after you have received funding if the PPP loan is not forgiven. Interest at a rate of 1% will accrue during this deferment period. The term of the loan is two years.
- Your PPP loan will not be affected if you received an SBA Economic Impact Disaster Loan (EIDL) between January 31, 2020 through April 3, 2020 and the proceeds were not used to cover payroll costs. The PPP loan must be used to refinance your EIDL loan if the EIDL was used for payroll costs . The $10,000 advance on the EIDL will be deducted from the loan forgiveness amount of the PPP loan.
For more details, see the Interim Final Rule – an interesting oxymoron.
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