The great news for so many of you is that the second round of PPP funding appears to be quite successful as we have heard from so many that they are in the process of receiving their funds. We are so pleased that this second round has been such a success for small businesses as it was originally intended.
We have received an abundance of emails from clients with the burning question of the day: NOW WHAT?
We are here to help and provide you with the most up to date guidance and advice that we can offer to all of you. Our capacity is limited to address each of you individually, so we have are providing you with some detailed points to help you manage the process on your own should you choose to do so.
- Utilize a separate bank account to manage your PPP funds so that the utilization of these funds will be crystal clear in preparing your reporting.
- Create a separate section of your books to capture the expenditures that are being paid for with PPP loan funds. In QuickBooks, this would be accomplished by setting up a separate class. In others, the utilization of a separate department or section of your chart of accounts that is specifically for PPP funds utilization would be most helpful.
- Record the loan proceeds as a loan payable within your liabilities. Upon completion, the portion forgiven will be transferred to a non taxable revenue account called “PPP Loan Forgiven” that should be set up as a below the line income item below your net operating income. The remaining balance will be required to be repaid within 18 months after the completion of the forgiveness process at 1% annual interest.
- Spend your funds in accordance with the requirements to maximize your loan forgiveness. A minimum of 75% needs to be spent on payroll, payroll processing fees, state unemployment, health insurance premiums, and employer retirement contributions. No more than 25% can be spent on Rent, Utilities (still awaiting guidance on their definition of this beyond the traditional Electric, Water, Gas, etc. and we presume that phone and internet will most likely be included) and interest on debt obligations in place before February 15, 2020.
- Expenses are CASH BASIS so it is not what period the payroll was for, it was when the payroll was paid, for example.
- Your 8 week spend of the funds starts upon receipt of the funds.
- Loan forgiveness requests will be due within 30 days of the completion of your 8 week spending period.
- Loan forgiveness will be submitted to your lender, not to the SBA as originally indicated.
- The lender will have some discretion in how they review your application and apply the rules prior to submission to the SBA. We do not anticipate that the SBA will have the capacity to double check every loan. Most likely only large loans will be scrutinized (just as the large loans in round 2 were scrutinized for funding).
- Each lender will likely ask for somewhat different information as yet to be determined.
- Each borrower should be prepared to submit every receipt, invoice, and applicable payroll register for the 8 week period. While you may not be asked for all of this data, you also may be asked for every bit of it. We recommend keeping a separate electronic folder (or paper folder if you are old school) with copies of every items paid for with your PPP funds that supports your accounting for the loan forgiveness.
- We recommend that each borrower ALSO keep a spreadsheet that supports the expenditures paid for with PPP funds. It will serve as a summary of all applicable funding utilization if you do not keep a set of books (like our single member LLC S corporation clients without employees) or to back up the entries in your books. It is some work to do and it may be necessary to support your forgiveness.
- Maximum loan forgiveness will be based on keeping extremely thorough records and accounting for your loan. Do the work now instead of waiting until the end before you must submit your forgiveness request.
- Forgiven loans will generate debt cancellation income. Unlike other circumstances, this is non taxable to the recipient.
- Expenditures covered by the forgiven loan will not be tax deductible. You will still record your expenses, and we are anticipating that the tax return forms will include the places for us to put the non taxable income and non tax deductible expenses.
- At tax time for 2020 tax returns you will need to supply us with the necessary information that supports your total loan and the resulting forgiveness achieved. It is possible that the bank or the SBA will provide an equivalent to a 1099C for debt cancellation, however this is speculation. Some semblance of reporting will most likely accompany your forgiveness that we would need in order to complete your 2020 income tax returns.
This is bound to be more difficult for larger or more complex companies, and simpler for small ones without formal books. If you choose to mange this process on your own and the accounting is incorrect for the loan utilization and resulting forgiveness, the time to correct your books at year end will not be included in your engagement and will be considered out of scope, requiring a pricing adjustment for us to correct your books accordingly.
We are still working on completing the tax returns that are in house from tax season, thus our ability to consult with every client on an as requested basis is going to be limited. We must reserve our consultative time available to those of you that elect to engage us in assisting with this process in a turnkey fashion. We are offering a consulting and advisory package to manage the PPP loan process up to and including the forgiveness submission. If you would like more information on this package, please email Marianne (Marianne@phocuscompanies.com) or Seth (Seth@phocuscompanies.com) and we will go over what information we will require to provide you with an up front price for your package.