You may have applied for and received (or are waiting for) your Paycheck Protection Program (PPP) Funds. For those of you that are participating in this program, I thought I would put together a useful checklist to help you receive the funds and track the expenses. for you to use to receive the funds as well as track the expenses.
Since the intention is to get this loan forgiven, here are the steps I believe you can follow to achieve “loan forgiveness” and have the PPP Funds treated as non-taxable income. Please keep in mind that these steps are based on the best information available as of the date of this letter, but additional guidance may still be yet to come.
The PPP has two main tenets:
- Receive and Spend the PPP Funds on the appropriate expenses
- Track and prove that you have followed the rules with your spending
Here are guidelines I have set up for you to best-position your PPP loan for forgiveness and treated as non-taxable income:
Remember: The expenses must be paid in the eight (8) week period that immediately followed your receipt of the PPP funds.
Spend at least 75% of the funds on payroll costs. Those costs include:
- Vacation Pay
- Parental and Family Leave
- Medical and other Health Benefits
- Sick Leave
- Certain Payroll taxes (it is uncertain as to whether this includes the employer’s FICA expense or just the State Unemployment taxes). I am tracking all of them for now until we get further clarification.
- Retirement Expenses (i.e., Employer Match to a 401(k) or Simple IRA plan)
Spend the remaining 25% of the funds on other approved expenses
- Mortgage Interest (not the full payment, just the interest portion)
Begin tracking your expenses
- Either record the PPP Funds as a Loan (Long-Term Liability) on your books and records or Other Income on your Income Statement (not regular income. Other Income should show up on the bottom of your income statement).
- In the eight (8) weeks after receiving your PPP Funds, my suggestion would be to set up new accounts in the OTHER EXPENSE section of your income statement (again these would show up after your ordinary income, cost of goods sold and regular operating expenses):
- Record the expense amount
- Record the vendor or payee
- Record the expense to the appropriate new account (i.e., PPP Rent Expense, PPP Utilities, PPP Mortgage Interest).
- Maintain these records if you have an actual receipt in a separate folder (for payroll print a copy of the payroll for that period and include this in your file folder for PPP Expenses).
- Track the expenses through your income statement (or Excel if you don’t use QuickBooks or a similar program) making sure you have:
- Maintained a minimum 75%/25% split to payroll-related expenses and Operating Expenses. You can surely have a higher percentage of payroll-related expenses.
- Your Full-Time Equivalent (FTE) should be the same or higher to what you had on January 31st, which will affect your forgiveness calculation.
- At the end of the eight (8) weeks, apply for forgiveness through your PPP lender (Your lender will guide you on how this will happen).
- If your PPP Funds have been forgiven and you had reported the PPP Funds as a loan, be sure to reclassify it as Other Non-Taxable Income.
- Any amount that has not been forgiven will be treated as a long-term loan that will be converted to a two-year note at 1% interest with a six-month deferral of the first payment.
- Make sure to maintain all of your books and records as it relates to these expenses. If you received a substantial sum of money (in excess of $500,000 is what I have read) there is a good likelihood that you will get audited by the bank that issued your PPP funds or the Small Business Authority (SBA).
Questions about your PPP loan forgiveness?
As always, should you have any questions related to this, please feel free to give our office a call. We’re still working remotely on most days so we are alerting our clients that, on occasion, it might take a day or two to get back to you.