PPP Loan Forgiveness: Step-by-Step Accounting Instructions

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There’s a lot of misconception floating around about what to do once you’ve secured a loan from the Paycheck Protection Program (PPP). First and foremost, if you’ve secured a PPP loan to keep the operations of your business running smoothly give yourself a pat on the back. That was hard work and you successfully navigated a pretty stressful process. You’re doing a great job. Now what? 

Start off on the right foot to make sure you qualify for loan forgiveness. Make sure you are appropriately tracking how the money has been spent in your accounting file. This will help ensure you are ready to submit your information to qualify for loan forgiveness in a timely fashion and with the least amount of extra stress. 

Qualify for Loan Forgiveness

As the name suggests, the Paycheck Protection Program funds are intended to keep your employees on your payroll so they continue to receive their, well, paychecks. When you’re ready to submit for forgiveness you’ll need to show that you only used the funds following these criteria laid out by the Small Business Administration (SBA):  

  • The loan proceeds were used to cover payroll costs and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made
  • Employee and compensation levels are maintained
  • Less than 25% of your total spend of PPP funds should be on things other than payroll costs 

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What is considered a payroll cost? 

According to the guidelines from the SBA, payroll costs are:

  • Salary, wages, commissions, or tips capped at $100,000 yearly for each employee. This means that forgivable use of loan proceeds is capped at $15,385 for each employee ($100K / 52 weeks x 8 weeks)
    • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payments required for health care benefits including insurance premiums
  • Payments for retirement benefits
  • State and local taxes based on employee compensation

Run Your Payroll

To qualify for loan forgiveness you’ll need to run payroll during the 8 week period after you receive the PPP loans into your account. The Small Business Administration has confirmed that once your lender makes the first disbursement of Paycheck Protection Program funds to your account, your 8 week period begins.  

If your payroll falls just outside of the 8 week period, you might consider running an off-cycle payroll to ensure your PPP spending is in line with what your business uses. If you’re having trouble understanding how to pay yourself as a business owner, check out our webinar recording which explains these options more in-depth.

Payroll as a Single Member LLC

To the best of our understanding, as long as you transfer the PPP funds from your business account to your personal account, that would qualify as your payroll as a single member LLC.

Payroll as a Partnership & Sole Proprietor

If your company has investors or works as a partnership, transfer your Paycheck Protection Plan funds into your accounts and let it flow through to K-1s and 1040s. 

Track Your Spending

Regardless of how you’re running payroll, you’ll want to track all the PPP funds you’ve used to make sure you’re qualifying for the most loan forgiveness possible. Stay on top of tracking your expenses and future-you will sing your praises when it’s time to apply for loan forgiveness.

If you’re able, open a new bank account to keep the PPP funds in. This ensures you don’t accidentally dip into those funds for expenses that won’t qualify for loan forgiveness. Keeping them separate in different accounts is the easiest and simplest way to do it. 

That said, opening a new business bank account is sometimes easier said than done. If this isn’t feasible for your business, that’s okay. Either way, you should track your spending in your accounting file. This will help when it’s time to show how you’ve spent your PPP money.

Utilize Your Accounting File

What’s the best way to track your expenses to show the government you only used the funds appropriately? Your accounting file. 

That’s right, it can be tracked directly in the same place all of your other bookkeeping and reconciliation tracking is done. If you’re using a software like ScaleFactor, you’re in luck! We can help you set this up to track how you are using your funds. 

If you’re doing it on your own, you’ll need to make some changes to your chart of accounts in your accounting file by making sub-accounts. Stay with us, here.  

How To Track PPP Spending In Your Accounting File

If you already have an established bookkeeper, let them know you’d like to track your PPP funds in your accounting file to keep the spend separate. They should be able to set it up for you with a combination of sub-accounts and changes to your chart of accounts. 

This process can get pretty complicated and it’s easy to get overwhelmed or lost so we highly recommend consulting with your bookkeeper or accountant. If you absolutely have to do it on your own, you’ll want to follow these steps:

  1. In your accounting file, create a new cash sub-account in your chart of accounts (maybe nickname it something like “PPP”)
  2. Make a journal entry to transfer the PPP funds you received from your cash account to your PPP sub-account (No money is actually being spent or moved. You’re just classifying it differently.)
  3. When you pay expenses using PPP funds, make a journal entry to transfer cash from your PPP sub-account back into the main cash account.  
    • For example, when you pay payroll (or other PPP approved expenses), you’ll increase the expense account and decrease your cash account. 
    • Then, use a journal entry to decrease cash in the PPP sub-account and increase the cash in your main cash account for the expense. 

PPP Accounting Example: Matty P’s Pizzeria Gets $100k 

Let’s say Matty P’s Pizzeria received $100,000 into their business checking account as a PPP loan. His checking account increased by $100,000. Matty—or his accountant—should create a sub-account for these funds in his chart of accounts in his accounting file. Then he’ll create a journal entry to decrease the cash account by $100k and increase the funds in the PPP sub-account by $100k. Because they all roll up into his parent account, his total cash balance never changes. 

As Matty spends, he can track the spending by creating additional journal entries. It’s time for him to run his payroll which will cost him $15,000. Normally, when his payroll funds leave his account, payroll expense increases and cash decreases by $15,000 in his accounting file. In order to track this spending in his PPP sub-account, he’ll create a journal entry with a debit to the checking account by $15k and credit the sub-account for $15k. Again, the total cash is unchanged by this journal entry. Matty P is essentially repaying the checking account out of the PPP sub-account. 

It Seems Like a Lot of Work…

Operating this way, Matty P—and the lender he’ll turn documentation into later—can track the total spending of PPP funds. He can also keep track of the total amount of funding he has spent versus what’s left. Using this sub-account method is going to be helpful to prove how the funds were spent and will show that they were indeed spent on the correct breakdown of 75% payroll costs and 25% mortgage interest, utilities, & rent.

Matty P should continue to track his spending in this manner until his 8-week period is up. 

Taking Care of Business

When your 8-week period is up and it’s time to apply for loan forgiveness you’ll submit the request to the lender who serviced your loan. The document you’ll fill out to apply for forgiveness with your lender is located on the Treasury Department’s website. It looks a lot like a tax form and has its own set of step-by-step instructions to find the numbers you’ll need when applying.

Until you’re ready to apply it’s best to keep the PPP funds separate from general operating funds and meticulously track the expenses paid with those funds. 

With so much up in the air about the Paycheck Protection Program it is easy to get overwhelmed. Small business owners everywhere are facing unbelievable challenges to their business, we hope this helps cut through some of the noise. 

We’ll continue updating our COVID-19 resources as more information becomes available. If you’re having trouble with your bookkeeping, don’t go at it alone. We are here to help. Learn more about our daily bookkeeping software here.

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