Accounting for your PPP Loan: Keep Solid Records
Now that you have received your Paycheck Protection Program (PPP) loan, it's time to get organized for loan forgiveness. That means using the funds for eligible expenses and keeping accurate records. It is not too late to get organized.
Which expenses are eligible for PPP loan forgiveness?
- Salaries, wages, bonuses, commissions, and tips up to $100,000 per employee in gross earnings
- Employee benefits like vacation, sick leave, health care benefits, and retirement benefits (costs associated with payroll)
- All state and local taxes including employer taxes
- Interest on mortgages originated before February 15, 2020
- Rent payments for lease agreements originated before February 15, 2020
- Utilities for services originated before February 15, 2020
Open a new business bank account
Do not co-mingle these funds with your current business bank accounts. Open a new business bank account and deposit the PPP loan into this account. Your accounting software will make it easier to summarize the transactions associated with the PPP loan funds. This separate account will make it easier for you to report your results to the bank that provided the loan and to the IRS. In case of an audit, you will make it very easy for the auditor to trace the funds from one distinct bank statement to your transaction records.
Recording Initial PPP Loan Deposit:
increase-debit Cash-PPP Bank Account $50,000
decrease-credit PPP Loan Payable $50,000
You will need to create two new accounts for this transaction. A cash account for the Cash-PPP Bank Account and a liability account for the PPP Loan Payable. Note: The PPP loan is a liability until you receive a confirmation on the amount of funds that will be forgiven.
There is no need to create new expense accounts to record expenses against the PPP loan funds. Use your existing expense accounts to record PPP disbursements and make sure all the expenses in 1-6 above are paid from the new bank account. Ineligible expenses should be paid with existing funds.
Recording expenses with PPP Loan funds from your new bank account:
Let’s not forget which expenses are eligible to be forgiven:
· #1 Salaries, wages, bonuses, commissions, and tips up to $100,000 per employee in gross earnings
· #2 Employee benefits like vacation, sick leave, health care benefits, and retirement benefits (costs associated with payroll)
· #3 All state and local taxes including employer taxes
· #4 Interest on mortgages originated before February 15, 2020
· #5 Rent payments for lease agreements originated before February 15, 2020
· #6 Utilities for services originated before February 15, 2020
increase-debit Expense #1 $23,000
decrease-credit Cash-PPP Bank Account $23,000
increase-debit Expense #2 $3,000
decrease-credit Cash-PPP Bank Account $3,000
increase-debit Expense #3 $5,000
decrease-credit Cash-PPP Bank Account $5,000
increase-debit Expense #4 $11,000
decrease-credit Cash-PPP Bank Account $11,000
increase-debit Expense #5 $100
decrease-credit Cash-PPP Bank Account $100
increase-debit Expense #6 $3,000
decrease-credit Cash-PPP Bank Account $3,000
The more records you keep, the better position you will be in for loan forgiveness. Keep all receipts for these expenses in a folder and store it in a safe place.
In our illustration above, you have used up $45,100 of the $50,000 PPP Loan. You have also met the 60% requirement on payroll costs (illustration shows you spent 69% of the funds used on payroll costs). You can return leftover funds or use up the rest of the money. As mentioned, the PPP funds are a loan until it is forgiven and paid off, so treat any remaining funds as a very low-interest loan. The PPP loan interest rate is 1% and begins to accrue from the date your business receives funds. The loan repayment begins six months from the date your business gets the PPP loan funds.
If you need the remaining funds, use them on ineligible expenses. If you have enough funds in your existing business bank accounts, pay off the remaining amount of the PPP loan.
Loan Forgiveness and recording the final transactions:
If you retained employees and maintained the salary levels that were in place before February 15, 2020, the Small Business Administration (SBA) will forgive part or all of the principal amount of your PPP loan, plus the accrued interest.
Let's assume the SBA forgives $45,100, and you now have an SBA loan of $4,900 plus the interest accrued on the $4,900 from the date your business received the funds. Let's assume the 1% rate on the $4,900 from the time your business received the funds is $25. This tiny number does not warrant a need to go back to prior periods and book interest expense by month.
You should transfer the remaining $4,900 from the Cash-PPP Bank Account to your business bank account. This transaction is recorded as follows:
increase-debit Cash-business bank account $4,900
decrease-credit Cash-PPP Bank Account $4,900
Since you need to tack on $25 to the amount owed to the SBA for interest, this transaction is recorded as follows:
increase-debit Interest Expense $25
decrease-credit PPP Loan Payable $25
Note: If your accounting method is on the cash basis, you will not be recording this transaction. This transaction is valid on the accrual method of accounting.
Your PPP Loan Payable should now have a balance of $50,025. Wait a minute. You only owe the SBA $4,925, so how do we fix this? Uncle Sam has forgiven $45,100, so we need to lower the PPP Loan Payable by that amount. This loan forgiveness is income to your business. You should create a new income account and name it "Debt Forgiveness." A separate account will make it easier for you to report your results to the SBA. It will make any auditor happy if you ever meet one. This transaction is recorded as follows:
increase-debit PPP Loan Payable $45,100
decrease-credit Debt Forgiveness $45,100
There you have it. For more details on payroll requirements and the Paycheck Protection Program conditions, read this article from Bench. The PPP loan program has helped many small businesses during the disruption caused by the COVID-19 pandemic, and we hope it has or will help you. Please remember, proper documentation and proper accounting for these funds is essential for loan forgiveness.
If you have questions or need assistance in accounting for a PPP loan, please reach out to us at email@example.com. You should always consult with the appropriate professional on accounting and tax matters.
About Michael D’Amato, CPA and Alto CPA Group, LLC.
Michael D’Amato is the founder of Alto CPA Group, LLC. and is a member of the American Institute of CPA's and the New Jersey Society of CPA's. Michael has more than 25 years of enterprise accounting, finance, operational, and technology experience to go along with his accounting firm experience. Alto CPA Group provides accounting/tax and cloud solution services. As one of the early adopters of Virtual accounting and tax services, Alto CPA Group is big on automation. Michael and his family lives in Red Bank, New Jersey.