SBA’s Paycheck Protection Program (PPP) has stopped accepting applications, and funds are making their way to small businesses across the United States. Attention is now turning to how to administer the use of the PPP funds to achieve the best possible outcome in relation to cash flow and forgiveness. The program allows for total loan forgiveness through authorized expenditures per the loan agreements; however, there may still be amounts that will require repayment if a business is unable to satisfy the criteria for full forgiveness.
To help businesses prepare, below are some suggestions on the accounting for PPP funds as well as high-level forgiveness considerations. This summary is not intended as a dive into the details of the forgiveness mechanics; that’s a separate topic warranting its own forthcoming summary but will provide you with an overview.
1. Receiving PPP Proceeds
One of the most common questions we hear is, “Should PPP funds be physically segregated from other funds?” Nothing in the current guidance states this, only that the funds must be used as intended and expenses validated for forgiveness.
With that said, many financial institutions and advisors are suggesting funds be separated for ease of record-keeping and to limit the amount of activity outside of PPP fund usage that must be shared externally during the forgiveness assessment.
Some recommendations, including those from the American Institute of Certified Public Accountants (AICPA), suggest placing 75% of the proceeds in one account for payroll costs and 25% in another account for other authorized expenses. From there, funds would be transferred from the appropriate PPP account to the operating account(s) the respective expenses are paid from.
Our position is that Company’s with sound accounting practices who aren’t concerned about the visibility of activity outside of PPP usage can co-mingle funds. Many accounting packages allow you to define “classes” for expenses, and this would be an option to help track eligible expenses. If you’re on the fence about tracking, set up at least one additional bank account and follow the expenses using this cash account.
2. Accounting for Use and Forgiveness of PPP Loan Proceeds
Another common question is, “What are the debits and credits?” We suggest the following:
- Debit Cash, credit PPP loan payable upon receipt
- No changes to accounting for expenses (except perhaps crediting a new cash account when PPP funds are disbursed)
- When forgiveness is determined, debit the PPP loan and credit an “other income” type account for the loan forgiveness amount.
- We do not recommend reducing the actual expenses incurred (payroll, rent, utilities, etc.) by the forgiveness amount. That distorts the operational meaning of your accounting information and may complicate record keeping.
- If less than full forgiveness is achieved, an entry for accrued interest would also be required.
3. Preparing for Forgiveness Calculations
Final guidance has not yet been issued on all the forgiveness details; what we currently have is more akin to a “framework.” The lack of clarity includes precisely what financial institutions will be required to obtain and assess. With that said, it can reasonably be anticipated that payroll summaries, copies of mortgage statements showing the interest paid, utility bills, lease agreements to support rent payments, etc., will be required.
“What about leases without a formal agreement in place on February 15, 2020 – for example, long-term related party leases?”
Definitive guidance hasn’t been provided in those situations. Our recommendation is to look in files for any informal lease agreements (emails, memorandum of understandings, etc.) and to be prepared to demonstrate a consistent pattern of rent payments both before and after February 15th.
Consider making a separate network (or hard copy) folder for the allowable expenses loan proceeds are used to pay and reconcile your tracking to the documentation periodically during the 8-week forgiveness period.
4. Planning Related to the PPP Loan Forgiveness
Preparing for the forgiveness calculations in item three is purposefully separate from planning related to loan forgiveness. As noted above, planning for PPP loan forgiveness warrants its independent commentary as it involves several considerations, a few of which are listed below.
- When and how to bring employees back (FT, PT, some, all?)
- Projecting payroll costs and headcount during the 8-week measurement period
- Split between payroll and non-payroll costs (75/25 rule)
Strategizing, including scenario modeling, to achieve maximum forgiveness is strongly recommended. We’ve developed tools to assist with this type of modeling.
As a reminder, funds received that are not forgiven become a loan, albeit one with favorable repayment terms (two years with 1% interest).
We know that PPP is complex and can be overwhelming. SN’s COVID-19 Response Team is here for you, no matter your industry, business size, or where you are in this process. Please reach out to us if you need answers or guidance.
Chad Bumbaugh, CPA | Managing Director, Entrepreneurial Services Group
During his career, Chad has worked with many different types of businesses on a wide range of tax and accounting issues. Beyond the traditional compliance work, he assists clients with tax and general business consulting matters, as well as implementations of new accounting pronouncements. He particularly enjoys opportunities to strategize with clients on how to more efficiently conduct operations, improve cash flow, and minimize tax burdens. The relationship which develops when you partner with clients to identify practice solutions is one of the highlights of his position.