The roller coaster ride of the Cares Act, and more particularly, the Paycheck Protection Program (PPP) has ended abruptly. You’ve received the funds in your bank account, and now you want to know… what do I do now? Many of you are worried about qualifying for the maximum amount of loan forgiveness, but unfortunately, we do not have much in the way of guidance from the SBA on this. These recommendations are our interpretation of the statute, and the limited guidance issued so far:
- Keep accurate records. It will be important to show at least 75% of the money you received is being used for payroll expenses. To simplify proving out the use of funds, you have two options:
- Option 1: Make sure you are keeping accurate bookkeeping records with payroll expenses and non-payroll costs accurately recorded with names to the proper expense category, and with a note indicating the use of funds. Be sure to keep track of the amount spent to ensure that you are using all funds within the 8-week period, and make sure non-payroll costs do not exceed 25% of the loan.
- Option 2: Segregate the loan monies into a separate savings or checking account within the same bank you received the funds. As you process payroll over the next 8 weeks, you should transfer the funds amount needed for each payroll into the operating account for which those expenses will be incurred. If your bank allows for you to put a note on the transaction, indicate the transfer is for “Payroll Costs, PPP Use of Funds”. At the end of the 8 weeks the total of the transfers should zero out the total amount in the segregated account, this will reflect appropriate use of funds.
- Focus on the clock. Remember, you have 8 weeks from the date the loan is funded to spend the money on qualifying purposes. Planning out your payrolls in advance can be critical to determine if you will have all funds spent by the deadline. If not, you may need to use some of your funds for non-payroll approved expenses such as rent, utilities, interest, etc.… prior to the deadline.
- Remember the 25% rule. You cannot use more than 25% of the loan proceeds to pay for items that are not related to payroll. Although you can pay rent, mortgage interest and utility bills, if more than 25% of the loan proceeds are spent, that excess will not qualify for forgiveness.
- Hire back your employees. The potential amount of forgiveness is reduced for borrowers who made workforce reductions after February 15th unless those workforce reductions are restored by June 30. The most conservative way to calculate a potential reduction to your forgiveness is to total the average number of employees you had during the period from February 15, 2019 through June 30, 2019, and compare against the 8-week period following the date you were funded. Your forgiveness will be reduced by the percentage your headcount falls below the 2019 average.
- Restore wages to normal. If you cut any of your employee’s pay by more than 25% what the earned in the first quarter of this year, that cut in pay will result in some of the loan not qualifying for forgiveness unless you restore wages to normal by June 30th. Make sure you restore these employees to their normal wages during the 8-week period you are utilizing PPP funds.
In order to ensure you have a solid set of books which reflect requirements, and provide for the maximum likelihood of loan forgiveness… in addition to the list above, make sure you do the following:
- Record the PPP as a long-term liability on your books, create a new account called “SBA PPP Loan”. Remember, the loan term is 2 years which requires you to classify this loan as long-term. The loan will only be converted to NON-TAXABLE income once you’ve received confirmation of forgiveness.
- If you selected option 2 from point one, book transfers from your segregated account to the operating account with notes indicating the use of funds both in the bank (if possible), and as a description on the books. At the end of the 8 weeks, the total amount of the transfers should equal the total amount spent and the amount you were funded.
For Self-Employed Individuals
If you are self-employed, don’t have employees and received funding through the PPP… your loan was based on your net profit, not 2019 payroll records. Therefore, you do not need to spend 75% of the loan on payroll. Instead, 8 weeks’ worth of your 2019 net profit can be automatically forgiven, being treated as replacement profit.
If you need help with bookkeeping during the 8 weeks of the PPP loan, Varo Team is here to help! We’ll do your bookkeeping for as low as $150/month. LEARN MORE
Written by Giuseppe Salamone
Contributor Helen Kakouris