The PPP was designed to keep people employed, businesses open, and rent and mortgage payments current. Once you understand what the program is trying to achieve, it becomes much easier to understand the rules, develop a strategy for compliance, and put together a successful application for Loan Forgiveness.
A review of the terms:
The PPP loan is a 1% interest rate loan that matures in 2 years. Payment is deferred for 6 months. There is no prepayment penalty, meaning you can repay the loan at any time before the maturity date. There is no collateral or personal guarantee required. The PPP loans are 100% guaranteed by the SBA with no personal guarantees of payment to the SBA. Lenders are not allowed to collect fees from you or be paid out of the PPP loan proceeds.
The loan amount is based on your average monthly payroll cost for 2019. You can receive 2.5 times that amount, to help cover eight weeks of payroll.
PPP loans may be forgiven in their entirety (principal + interest) as long as:
You will apply for forgiveness through your lender and provide thorough and accurate documentation of the uses of the funds.
The funds can be used for:
Timing & Documentation are Critical
Beginning on the day that the loan proceeds are deposited into your account, you have eight weeks to spend the money. Maintaining documentation along the way will increase your chance of spending the money appropriately so that you maximize loan forgiveness.
What documentation will you need?
While the SBA hasn’t confirmed specific requirements for the forgiveness application yet, here is the documentation that we recommend that you start gathering:
Bank Statements & General Ledger
Payroll Provider Report, Historical Payroll Provider Report, Proof of Rehiring
There are two payroll tests you need to pass.
TEST 1: Is (total payroll paid over 8 weeks / loan amount) greater than .75?
TEST 2: Is the number of full-time equivalent people on the payroll now greater than the number of full-time equivalent people on the payroll during the periods: February 15 - June 30, 2019, OR January 1 - February 29, 2020.
If you rehire employees laid off between Feb. 15 and Apr 26, pay their back-pay and restore their salary to the pre-coronavirus level, the total spending may be used against the 75% payroll requirement.
Note: Payroll for an individual is only eligible up to $100k & 1099 contractors are not eligible.
Invoices & Statements, Bank statements & General Ledger
Up to 25% of the loan can be forgiven if it is used to cover eligible expenses that include:
How should I Account for PPP Loan Funds and Expenses in my accounting system?
As you receive and then spend your PPP funds on qualified expenses ie: payroll, utilities, rent, you will want to track as you go. This will give you visibility into your spending rate and allocations during the 8 weeks which is critical data when trying to maximize forgiveness. It will also save you time when you go to apply for forgiveness.
Here are a few things tips to help you track activity in your accounting system:
Chart of Accounts
Create an “Other Liability” account
When PPP Funds get deposited into your account, create a new account in Chart of Accounts under “Other Liability” and name it clearly ie: CARES Act PPP Funds
It will live there as a liability on your balance sheet until / unless your loan is forgiven.
Create an “Other Expense” account (see below if you have the Class feature available in your accounting software for an alternate tracking method)
Create a new account under your Chart of Accounts – just like you did for “Other Liability” and this time create one in your “Other Expense” and name it something simple PPP expenses.
When expenses come in related to PPP Loan, put them in this account – so payroll related to PPP will go here instead of in payroll (for the time being), utilities will go in here instead of in utilities…After you’ve filed for forgiveness, these expenses can be moved back into their usual categories. This is simply to help you streamline the reporting process.
Use the Class system
Tag an expense in your existing accounts – create a class for PPP and tag all expenses that come through and are related to PPP with this class. At the end of the 8-weeks you can run a report by class and all expenses that were tagged will appear. Super easy!
The 8 weeks will go by fast. We recommend that you set multiple reminders to check in and track your usage of funds to ensure that you are spending in the right categories, with the correct ratios (75% payroll, 25% other qualified expenses) and that you are on a spend rate that will result in dispersal of the maximum amount of funds possible within the 8 week time period.