Accounting For Your PPP Loan Funds
In response to the impact of the COVID-19 pandemic on the US economy, the Paycheck Protection Program (PPP) loan was developed as a direct incentive for small businesses to keep workers on their payrolls. The SBA loans are forgivable if specific criteria are met which include keeping workers on the payroll for eight weeks and using the funds for payroll, rent or mortgage, interest, or utilities.
If your business was eligible and you’ve received PPP loan funds, take seriously your responsibility to accurately track the use of the funds within the 8 week time limit. Some advisors have suggested that you keep the funds in a separate bank account; however, with good bookkeeping, it’s not necessary. The SBA continues to provide additional rules on the use of funds for qualified expenses. Stay in touch with your lender to understand the requirements for maximizing the “forgiveness” portion of the PPP loan.
Following are my recommendations for the bookkeeping/accounting steps and practices you’ll need to implement to document your use of these funds.
- Mark your calendar for the date that is 8 weeks from the date you received the PPP loan funds.
- Set up a new General Ledger account named “SBA PPP Loan” as a Long-Term Liability.
- Set up a new General Ledger account named “PPP Loan Forgiveness” as Other Income.
- Set up a new Class named “PPP Loan.”
- Code the PPP Loan funds to the new “PPP Loan” GL account.
- Identify all expenditures for payroll, health insurance, retirement expense, rent, utilities and mortgage with the Class “PPP Loan” when entered into your books (i.e. as accounts payable, cash disbursements, or journal entries for recording payroll).
- Run an Income Statement weekly, filtered with Class “PPP Loan” to determine the remaining amount to be spent by the time you reach the 8-week date on your calendar.
- Make copies of all reports and invoices paid.
- File them to have on hand when the SBA determines the reporting requirements for verification of use of the loan funds.
- Plan to spend all of the SBA PPP loan funds before the 8 week time frame ends, even if you have to accelerate payments before your normal due dates.
- At the end of 8 weeks do the following:
- Run an Income Statement filtered with Class “PPP Loan” then file a copy of the report.
- For the Total Expenses from the Income Statement make the following journal entry:
- DR SBA PPP Loan
- CR PPP Loan Forgiveness
- NOTE: It’s important to make this entry to identify the forgivable amount of the loan, which will not be taxed.
- Determine whether the SBA PPP Loan balance is zero.
- If not, this is the amount you will have to pay back to the SBA.
- If yes, you will have no obligation to repay the SBA.
It goes without saying that accuracy is imperative from the outset. If you have questions about the PPP accounting process or if I can help with other issues you’re facing as we move through this ever-changing situation, please don’t hesitate to contact me.