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Accounting for PPP Loans and Maximizing Forgiveness
(Corrected content and added information to the orginal article sent on April 29 highlighted below)
If your company has received or will be receiving a loan from the Paycheck Protection Program (PPP), it is important to track the activity of these funds in great detail, with supporting documentation for all expenses. From an accounting standpoint, this is considered a loan unless and until you are granted forgiveness for all or a portion of the loan amount.
The first step is to set up a separate bank account for the PPP funds, if it is practical. Track every transaction separately and keep it separated from your normal operating bank accounts. Regulators will review the bank account and records, as well as the company’s supporting documentation during the forgiveness application process. Be prepared to explain all activity and have complete records of all transactions. Cash going out of the account should be well documented and supported as to the nature of the expense. See further below for documentation guidance.
The next step is to set up three new accounts on your books to track any activity in the separate bank account, as follows:
1 - A PPP Loan Funds Cash, where the PPP loan funds are deposited and cash is disbursed
from;
2 - PPP Loan Liability (a current liability); and
3 - Other Income – PPP Loan Funds (other income account, below operations). Make sure to
classify, name or group this account as non-taxable since the funds are not taxable as
income. Do not include the funding in revenue or operating income.
Mark each transaction as PPP Funds so that all activity can be separately tracked. Ideally, set it up to allow for reporting of the funds carved out of the income statement as a separate column, similar to department level or location reporting, or class tracking.
The following is the transaction cycle and the journal entries to record:
1 - When you receive the funds, debit the PPP Loan Funds Cash account and credit the PPP
Loan Funds account (current liability).
2 - Each time funds from the cash account are used to pay qualifying expenses, debit the
expense accounts based on the type of expenses per the normal process, and credit the PPP
Loan Funds Cash account. However, code each of these transactions as PPP Funds (as
noted above for separate class tracking of all PPP activity). Note that the PPP Loan Liability
account and the Other Income – PPP Loan Funds account will remain unchanged during this
time.
3 - Once you are granted forgiveness, move the amount that was forgiven from the PPP Loan
Liability account to the Other Income – PPP Loan Funds account by debiting the liability
account and crediting the Other Income account. It may be appropriate to characterize this
amount as grant income or debt forgiveness at such time, although there is no specific
guidance in US GAAP with respect to forgivable loans from government agencies. We expect
further discussions and guidance to be announced from standard setters and regulators on
this issue.
4 - For any amounts not forgiven, treat it as a normal loan for accounting purposes, including
interest expense under the interest method.
It is very important to keep copies of all of the documentation supporting the activity of the PPP funds in a separate file for later review by regulators. At a minimum, the following documents will be needed for the eight-week period beginning with the initial loan funding date when reporting the use of the funds and applying for loan forgiveness:
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Separate accounting activity for the cash movement and transactions recorded related to the use of every dollar of PPP funds (see above).
Third-party or internal payroll reports for each pay period, which should include gross wages for paid time off.
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Payroll tax reports filed with state agencies, the IRS, and unemployment agency reports.
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Utility statements and proof of payments.
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Lease agreements for real and tangible personal property and proof of payments.
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Interest statements on debt, including the payment amount and proof of payments.
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Monthly invoices or other statements supporting health insurance premiums paid by the company under a group health plan, including the owners of the company.
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Supporting schedules and documents for the calculation of employer contributions to retirement plans, as well as remittance payment documentation.
The PPP loan will be forgiven only to the extent proceeds are used to pay qualifying expenses during the eight-week period after the initial loan funding. The following are qualified expenses:
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Payroll costs including salaries, wages, commissions, and other cash compensation paid to employees up to $100,000 annualized compensation. Therefore, $15,385 is the maximum amount per employee.
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Qualified expenses include healthcare, retirement, and employee state taxes paid by the employer. Note that it does not include the employer portion of FICA and Medicare, separation or dismissal, or sick or family leave paid for which a tax credit is provided under the CARES Act.
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Mortgage and business debt interest paid for obligations in place before February 15, 2020.
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Rent paid for leases in place before February 15, 2020.
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Utility payments for service agreements in place before February 15, 2020.
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Refinance of Economic Injury Disaster Loans made between January 31 and April 3, 2020.
There are also payroll use and employee and salary retention requirements to qualify for loan forgiveness.
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It is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
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The amount of loan forgiveness may decrease if there is a reduction in full-time equivalent employees.
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The amount of loan forgiveness is further decreased if employees who make less than $100,000 in annualized wages receive a reduction in pay of more than 25% during the eight-week period.
- A borrower can cure reductions of employment that occurred between February 15 and April 26, 2020 by eliminating the reduction in full-time equivalent employees or reduction in wages by June 30, 2020, with no requirement to rehire the same employees.
The SBA will be issuing additional guidance on the loan forgiveness element of the PPP. In response to a large number of questions received, the AICPA has requested further clarification from the SBA on how reductions in forgiveness are to be applied. This includes the intended order of the application of reductions in forgiveness, since some requirements cause a dollar reduction while others produce a percentage reduction, and the order of application can significantly impact the amount of forgiveness. The AICPA also developed recommendations for applying for loan forgiveness that have been added to earlier recommendations on how to apply for PPP loans. The full list of recommendations is available on the AICPA’s website.
Additionally, please refer to the Windes COVID-19 Resource Center for more information related to the CARES Act, industry information, and other guidance at: https://windes.com/covid-19-resource-center/.
Sincerely,
Jeffrey Parsell, CPA
Partner
Audit & Assurance Services
jparsell@windes.com
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