PPP - Loan Forgiveness

Paycheck Protection Program Loan Forgiveness

Once you receive the Paycheck Protection Program (PPP) loan proceeds, it is important to correctly track and document everything to ensure you qualify for and receive the potential loan forgiveness aspect of the program (either in-part or in-full).

*Note: The below is current from facts/information as of April 28, 2020. If additional guidance is issued that changes anything, we will update this blog post.

LAST UPDATE - 6/25/20

BASICS OF THE PPP LOAN FORGIVENESS

Here are some of the basics related to the loan forgiveness aspect of the loan.

1. The 8-week forgiveness period starts on the day the PPP funds are deposited into your account. An alternative payroll covered period may be used for borrowers with a bi-weekly or more frequent payroll (for payroll costs only).  **NOTE: A 24-week forgiveness period can now be chosen in lieu of the 8-week forgiveness period.
2. The forgiveness will be based upon actual qualified costs incurred and paid during that 8-week period.
• Qualified costs: payroll costs - salaries/wages/commissions/tips, employee benefits, state and local taxes on compensation; mortgage interest [obligation incurred before February 15]; rent [lease agreement in force before February 15]; and utilities – water, electricity, gas, telephone, internet [service began before February 15]
• There could be repercussions if funds are used for something other than qualified costs…so just don’t do it. 😉 
3. The loan forgiveness potential is reduced if full-time equivalent employees drop or salaries and wages decrease by more than 25% for any employee <$100,000 annually. Also, 75% or more must be used on payroll costs (only 25% or less can be used for mortgage interest, rent, and/or utilities). **Now 60% must be used on payroll costs, with 40% available to use for the other qualified costs.
4. Any amount not forgiven can be repaid, or kept as a loan with a 1% interest rate due in 2 years from the initial loan date.

HOW TO RECORD IT IN QUICKBOOKS (AND WHAT TO DO IF YOU HAVE A NEW PPP-SPECIFIC BANK ACCOUNT)

So now that you know some of the basics of the loan forgiveness, let’s go over how we will track everything in QuickBooks.

How to track the loan in QuickBooks if the funds were deposited into your current bank account:

1. Record the loan proceeds deposit as a liability called “Paycheck Protection Program Loan”
2. Track the expenses in their usual expense accounts OR create new expense accounts for each PPP type
• I believe it is acceptable to use the same expense accounts as before, since the Profit & Loss report could be generated for the exact 8-week forgiveness period. However, creating new expense accounts (i.e. PPP – Utilities, PPP – Rent, etc.) is certainly fine as well if that’s what you prefer. 😊
• 5/1/20 update - the IRS has stated that forgiven expenses are NOT tax deductible. For this reason, it may be easier to track in separate expense accounts. You could create one expense account called "Paycheck Protection Program Expenses" with sub-accounts for payroll, mortgage interest, rent, and utilities. 
3. Once the loan is forgiven, create a Journal Entry for the forgiveness portion. It will debit the Paycheck Protection Program Loan liability account and credit a new other income account called “Paycheck Protection Program Loan Forgiveness”
• If the loan is fully forgiven, the liability should now be $0
• If the loan was partially forgiven, the liability should now equal the part of the loan that was not forgiven

How to track the loan in QuickBooks if the funds were deposited into a new bank account set up specifically for the PPP:

1. Create a new bank account called “Paycheck Protection Program Bank Account” (or something similar)
2. Record the loan proceeds deposit as a liability called “Paycheck Protection Program Loan”
3. There are three options for how to treat the qualified expense payments with the new PPP bank account and the normal operating bank account.
• a) Make all qualified expense payments withdraw directly from the new bank account (thus you would pay payroll, mortgage interest, rent, and utilities directly out of this account)
• b) Continue to pay qualified expenses out of your normal operating account, but make bank transfers/write a check from the PPP bank account to your operating bank account for each qualified expense
• For example, if you have payroll costs of $5,000 come out of your operating account on Friday, you could also generate a $5,000 transfer from your PPP bank account to your operating account. You are essentially having the PPP bank account reimburse the operating account. 
• c) Continue to pay qualified expenses out of your normal operating account, and make no transfer out of the PPP bank account
4. Whichever method in 3 above you use, you can track the expenses in their usual expense accounts OR create new expense accounts for each PPP type.
• I believe it is acceptable to use the same expense accounts as before, since the Profit & Loss report could be generated for the exact 8-week forgiveness period. However, creating new expense accounts (i.e. PPP – Utilities, PPP – Rent, etc.) is certainly fine as well if that’s what you prefer. 😊
• 5/1/20 update - the IRS has stated that forgiven expenses are NOT tax deductible. For this reason, it may be easier to track in separate expense accounts. You could create one expense account called "Paycheck Protection Program Expenses" with sub-accounts for payroll, mortgage interest, rent, and utilities. 
5. Once the loan is forgiven, create a Journal Entry for the forgiveness portion. It will debit the Paycheck Protection Program Loan liability account and credit a new other income account called “Paycheck Protection Program Loan Forgiveness”
• If the loan is fully forgiven, the liability should now be $0
• If the loan was partially forgiven, the liability should now equal the part of the loan that was not forgiven
6. Depending on which method you chose in 3 above, you may still have funds sitting in your PPP bank account. Once you know the forgiveness portion, you could transfer the remaining PPP bank account balance into the operating bank account [if fully forgiven], use it to pay off the remaining loan [if partially forgiven], or keep it as-is to continue to pay qualified expenses or pay off the remaining loan in the future [if partially forgiven]

WHAT WILL I NEED TO PROVE THE LOAN FORGIVENESS AMOUNT?

Each bank may have a different set of documents and supporting information they request to determine the loan forgiveness. But in general, we believe you will want to have the following ready to submit to your bank after the 8-week period (or 24-week period if you elect that timeframe) (as applicable for your qualified costs):

1. Payroll reports from your payroll processor for all payrolls processed during the 8-week period
2. Report that shows number of full-time equivalent employees and pay rates (may be taken care of from #1 above)
3. Invoices/receipts for utilities paid during the 8-week period
4. Lease agreement for rent paid during the 8-week period
5. Mortgage payment receipt/document that shows the breakout between principal and interest for payments during the 8-week period
6. A listing that summarizes all qualified expenses paid out during the 8-week period
• A report(s) can easily be run out of QuickBooks for this
• You could also track it in an Excel worksheet if you want to consolidate everything in one location/use as a double-check
7. Bank statements with check images or cancelled checks that show the outgoing charges for each item in #6 above

OTHER CONSIDERATIONS

Timing of qualified costs being paid

You will want to calculate the 8-week date range once the funds are deposited. Then you will know the last day that a qualified expense can be paid to be eligible for forgiveness. Depending on the timing of the deposit vs usual expenses, you could miss out on some forgiveness if you don’t plan properly. The goal is essentially to have ~2 months bills covered for each qualified expense type.

For example, if your loan was deposited into your account on April 20, the 8-week period will run from that date through June 14. If your utility bill usually drafts on the 17^th of each month, it would only be set to pay out one bill during that timeframe on May 17^th. You could look into temporarily changing the payment date to the 14^th (or before) so that you would pick up both May’s and June’s payments.

Taxability of loan forgiveness and deductibility of expenses

Oftentimes when a loan is forgiven, it will become taxable income to the recipient of the forgiveness. However, this is not one of those times. The Act specifically says that the loan forgiveness of the PPP will be excluded from gross income.

But are the expenses used to compute that forgiveness deductible? This answer is less clear. While we hope that the expenses will be tax deductible, there is the potential that they will not be. And even if they do end up being tax deductible for federal income tax purposes, it could vary from state to state on whether they are deductible for state income tax purposes.

• 5/1/20 update - the IRS has stated that forgiven expenses are NOT tax deductible. It will take legislation from Congress to overrule this.

To sum up: use your loan proceeds on qualified expenses, have an understanding of how the loan forgiveness could be reduced, KEEP DOCUMENTATION FOR EVERYTHING, and contact your PPP lender to see what specific guidelines they have created.

As always, feel free to reach out to us at Arndt & Company with any questions!

Thank you!

Kayla Weaver, CPA

Disclaimer: This article is not intended to be tax advice, and it does not cover all possible scenarios and/or rules within the tax code. Please contact Arndt & Company or your CPA for further information or clarification.