By Mark Banks, CPA, CFE, MAFF
The first hurdle was to apply and receive the Paycheck Protection Program (PPP) loan. The next step was to maximize loan forgiveness. Still, the work is not over.
Thankfully, the federal government recently loosened many of the regulations covering PPP loans to give businesses more flexibility to spend the money and to qualify for loan forgiveness.
Here are eight ways the federal government made it easier to use PPP loans and three recommendations for tracking how the funds are spent to help ensure maximum forgiveness.
- The eight-week covered period for spending loan funds is now 24 weeks from the date the loans are funded. Borrowers with loans taken before June 5 can retain their eight-week covered period.
- Employers must spend 60% of the loan on payroll costs for maximum forgiveness – a drop from the original 75%.
- Repayment can occur in five years instead of the original two years for loans received after June 5. PPP loans received prior to June 5 still have the two-year repayment window; however, borrowers and lenders can mutually agree to modify the loan maturity.
- The safe-harbor, or rehire, provision was extended to Dec. 31 from the original date of June 30.
- The full-time equivalent provisions now have additional exemptions for employees who terminated their employment for various reasons or reduced their hours.
- The deferral period for principal, interest, or fees has been extended to the date the forgiven amount is remitted to the lender.
- Borrowers must apply for loan forgiveness within 10 months after the last day of the covered period. The deadline to apply for forgiveness was not previously defined.
- Borrowers can get employer payroll tax deferral regardless of their PPP loan forgiveness status.
Track the PPP Loan to Ensure Maximum Forgiveness
It’s critical to properly maintain all appropriate documentation for all allowable PPP expenses. Documents may include the following:
- Payroll tax reports filed with the IRS.
- Payroll reports – reflecting gross wages and paid time off – for each pay period for the eight or 24 weeks following the loan origination.
- Health insurance premiums paid by the company under a group health plan, including owners of the company.
- All retirement plan funding by the employer.
- Copies of all lease agreements for real estate and tangible personal property along with proof of payment.
- Copies of all statements of interest paid on debt obligations incurred before Feb. 15, 2020, indicating payment amounts and proof of payment.
- Copies of canceled checks, statements, or other evidence of utilities paid during the "covered period."
Third-Party Confirmation of Expenses
Keep third-party documentation of expenditures, such as payroll vendor reports, bank statements, and utility bills. These documents are critical in confirming and verifying the financial information you create.
Establish a Separate “Chart of Accounts” for PPP-Related Expenses/Payments
Keeping a separate accounting of the PPP funds helps you manage the funds and may assist the bank in reviewing your forgiveness application.
To keep an accurate set of accounting statements for the PPP loan, set up a few standard accounts and entries for the receipt, use, and forgiveness of the loan. Below is a list of journal entries that you and your entity may be able to use to allow for the accurate record keeping of the PPP proceeds.
Loan Proceeds Received
- Debit cash (either existing bank account or newly created account)
- Credit long-term debt – PPP loan
Note that we believe it is unnecessary to record a current portion of the loan at this time, as this amount is unknown.
When the PPP Funds Are Used
- Debit cash (operating or payroll)
- Credit cash (new PPP account)
Note that this is only necessary if you create a separate bank account for the PPP loan funds.
Payment of Operating Expenses
- Debit expense
- Credit cash (operating or payroll)
Amount of Forgiveness Determined
- Debit long-term debt – PPP loan
- Credit current portion – long-term debt
Note that you must reclass the current portion after you identify the amortization amount/period.
Recording of Forgiveness – Delayed Until 13th Month
- Debit long-term debt – PPP loan
- Credit other income
Unfortunately, there is no one single list of supporting documentation or best practices an entity can implement regarding PPP forgiveness. However, implementing the practices above can assist you with the tracking and management of the PPP loan throughout the coverage period.
Mark W. Banks, CPA, CFE, MAFF, is a member of Boyer & Ritter LLC’s COVID-19 task force and practices within the firm’s forensic, litigation, and consulting group. He can be reached at email@example.com.
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