*UPDATE: The passage of the Paycheck Protection Program Flexibility Act on June 5th has materially changed the requirements for PPP loan forgiveness. We have updated this blog to indicate where the requirements have changed. View the current forgiveness applications.
Perhaps the most attractive feature of the Paycheck Protection Program (PPP) loan is the promise of loan forgiveness. The original guidelines from the Small Business Administration (SBA) stated the loans used for payroll costs and other designated expenses would be forgivable if the loan proceeds are used to cover payroll costs, as well as most mortgage interest, rent, and utility costs over the 24-week period after the loan is made. Employee and compensation levels must be maintained. In the rush to distribute desperately needed aid to businesses, banks and lenders have been all over the map with applications, processes, and approvals. Major corporations with fewer than 500 employees per location made headlines as they received significant percentages of these loans intended for small businesses. In response to questions from reporters on this issue, Secretary of the Treasury Steve Mnuchin said the following in an April 21 press conference:
“I just want to clarify, because certain people on the PPP may have not been clear in understanding the certification. If you pay back the loan right away, you won’t have liability to the SBA and to Treasury. But there are severe consequences for people who don’t attest properly to a certification.”
Analysts have interpreted Mnuchin’s comments to imply that PPP recipients are going to be subject to scrutiny when it comes to loan forgiveness. If you’ve received PPP funds, you can smooth your way through the forgiveness process by keeping detailed, well-organized records of the ways you spend the money. Here are some planning and bookkeeping tips:
1. Understand what’s forgivable and what isn’t.
We said it above, but it’s worth repeating. In order to receive loan forgiveness, you must maintain your full-time employee headcount during the 24-week period following receipt of funds. It’s ok to bring back furloughed employees (or hire additional staff if laid-off workers refuse to return) in order to hit your full-time equivalent. If you’re unable to maintain your headcount, you must have a valid reason: your business was negatively affected by COVID-19, or you were unable to bring back furloughed employees/hire new employees.
If you have 1099 contractors on your payroll, those costs are not considered forgivable (even if they were used in the loan amount calculation). The SBA issued a specific clarification regarding 1099 contractors, stating that they aren’t included in loan forgiveness for the business because contractors and self-employed individuals have the ability to apply for PPP loans themselves.
In addition to payroll costs, PPP funds can also be used to cover mortgage interest, rent, and utilities, provided those assets/services were in place as of February 15, 2020. If your business leased a new location on March 1, its rent costs are not eligible for forgiveness.
2. Make a plan for spending the forgivable amount in 24 weeks.
The clock starts ticking on your 24-week time period as soon as the funds hit your bank account. Many businesses have experienced the loan money landing in their accounts unannounced as banks scramble to approve applications and distribute funds. Although it may sound obvious, you need a plan in place to make sure your spending aligns with that window of time. You may need to work with your payroll provider to run a special payroll in the event that your typical payroll periods straddle the loan-forgiveness period.
3. Include repayment of non-forgivable portions of your loan in your budget for the year.
It’s entirely possible that your total loan amount is greater than what will be forgivable in the end. Once you’ve calculated what’s forgivable and what isn’t, look at your budget past the 24 weeks to see how you’ll fit in loan payments. Unforgiven loans convert to a 5-year term at 1% interest.
4. Set up a new account in your bookkeeping software to account for the loan money.
By creating a new account, you can more easily track every dollar of loan money, as opposed to mixing it in with your general funds. When it comes time to apply for PPP loan forgiveness, you’ll have the records you need of exactly how you spent the money. Alternatively, you can open a new checking account with your bank for the loan and transfer funds each time you need to use them. If you decide to go that route, create a separate spreadsheet that accounts for each transfer so you aren’t trying to pull those expenses from your general ledger.
5. Organize related documents.
Save yourself the headache of going back through paperwork to find supporting documentation for loan forgiveness. If you made good-faith employment offers and they were refused, keep careful records. We recommend approaching this like an audit: the more organized you keep paperwork as events unfold, the easier time you’ll have gathering everything you need to submit to the SBA. If you’re still using paper in your business, this can simply be a system of folders. For businesses that are paperless, we recommend Hubdoc as our preferred document management system.
Our friends at CPAllianceTM have created an easy-to-use spreadsheet to help you track your PPP funds. You can download it here.
What do I do if my PPP loan isn’t forgiven?
If you stay organized, maintain the size of your payroll (or can justify a reduced headcount), and use your loan funds for authorized purposes, you should be able to take advantage of PPP forgiveness. However, even if that doesn’t work out, keep in mind that you’re still receiving advantageous loan terms. Use that loan to help power your business through the downturn, or even invest in growth.
For loans under $150,000, borrowers can use the 3508S Loan Forgiveness Application (Revised January 19, 2021)
Looking for the latest PPP information? Click here to visit our Paycheck Protection Program resource center.
About the Author
Kaneka Jackson is a Senior Cloud Accounting Advisor with GCT Technology & Accounting. She has worked in both corporate accounting and for CPA firms, and she’s passionate about helping businesses improve their accounting processes. As a Veteran of the U.S. Navy, Kaneka is all too familiar with the ever-changing landscape of government regulations. She has successfully guided many clients through the PPP application process and is looking forward to supporting loan recipients as they apply for forgiveness.