I received my Paycheck Protection Program Loan. Now what do I do?
Many of our clients have received their Paycheck Protection Program (PPP) Loan and are asking us for procedures on accounting for the loan, maintaining the documentation, and navigating all the related twists and turns involved with the program’s requirements and ultimate loan forgiveness.
Remember one key factor: Your lender will ultimately be responsible for approving the loan forgiveness, which will be submitted to the SBA for further approval. Lenders are great at processing loans, but they have never had to deal with most of the accounting concepts and documentation required to determine loan forgiveness. As a result, it is your job to make it as easy for them as possible. Organization of the information and complete documentation will be the key to success.
We have outlined what we consider to be best practices, absent guidance from the SBA and Treasury as of May 13, 2020.
- Although not required by any guidance, we recommend putting the loan proceeds in a separate bank account. This will help the lender more easily track movement of the cash.
- Establish new general ledger accounts for the PPP loan (a liability account) and the new PPP bank account (a cash account). Eventually, you will need an Other Income account titled “PPP loan forgiveness.” Some people recommend having separate expense accounts titled PPP wages, PPP rent, PPP utilities, etc. This is a level of detail we do not consider to be necessary, but if it works for your system that is fine. Remember, it is ultimately the documentation that is going to support your costs and not an accounting report.
- Develop a spreadsheet to track all expenses by week for the 8-week covered period and by category of covered expenses (payroll, health insurance, rent, utilities, etc.)
- Establish a digital or paper file where you can accumulate all the supporting documentation required for loan forgiveness. When you pay these costs, enter the information in your spreadsheet from Step 3 and put a copy of the supporting documentation in your file, while maintaining the original documentation in your normal accounting filing system.
- When covered costs are paid, transfer the “covered” amount from the separate PPP bank account to your operating account. For payroll, this would be the amount of gross wages only, not the net pay plus the tax deposits made. Why? Because the tax deposits include employer portion of Medicare and Social Security, which is not a covered cost.
- With most of our clients, we recommend having a standard timing for paying all expenses other than payroll (weekly, bi-weekly, or semi-monthly). When these expenses are paid, enter the covered amounts into the spreadsheet developed in step 3 and transfer the total covered expense amount from your PPP bank account to your operating account.
- Once your lender has approved the amount for loan forgiveness, you will reduce the liability account and increase the PPP loan forgiveness (other income) account.
- Any remaining amount not forgiven will be considered a loan subject to your lender’s promissory note documentation and will remain in the PPP loan liability account.
The above overview of best practices will help you organize the accounting process for the PPP loan and facilitate proper accounting and documentation required for this program.