Congrats! You’ve applied and received PPP (Paycheck Protection Program) funds. Now what? Let’s learn about PPP loan forgiveness and how to account for the funds on the books.
First, the basics of the PPP funds as a recap.
PPP Loan basics review
The maximum PPP loan amount is 2.5 times your average monthly payroll expenses, up to
$10 million. PPP loan amounts used for payroll, mortgage interest, rent, and utility payments during the 8-week period starting with the loan origination date will be forgiven and excluded from your taxable income.
Did you get that part? The loan proceeds are NOT taxable income if they are forgiven.
However, you MUST use at least 75% of the funds towards payroll or owner pay as a sole proprietor. The remaining 25% can be used on specific expenses including rent, utilities, mortgage interest, and interest on other loans originating prior to Feb 15, 2020. As full-time travelers, you may have some utility expenses which can include phone and internet expenses. That’s one plus.
Here’s a calculator I created to help you determine percentages and amounts that can be forgiven. Feel free to make a copy and edit it for your situation. It is prefilled with example numbers. Update the yellow boxes for your personal situation and it should help you determine what’s forgivable and what’s not.
Are PPP loan forgiveness expenses deductible?
If you obtain PPP loan forgiveness, can you still deduct the expenses you paid with the loan funds?
Sorry guys. I have bad news.
The IRS released Notice 2020-32 which tells us the answer is no.
Therefore, any expenses forgiven as part of the PPP loan are not deductible expenses on your tax return.
Are you with me so far?
To sum it up, the IRS says you can’t take a tax deduction for the business expenses you used to qualify for PPP loan forgiveness. The key benefit of the PPP loan is that you can have the loan forgiven, essentially putting free cash in your pocket. Your inability to deduct the expenses that created that non-taxable loan forgiveness takes away some cash due to loss of tax deductions, but you are still well ahead with the PPP loan from a cash-in-hand perspective.
PPP Eligible Expenses
Here are PPP guidelines copied directly from the Treasury.gov website.
What can these loans be used for?
You can use the proceeds from the PPP loans on the following:
- Payroll costs, including benefits
- Interest on mortgage obligations, incurred before February 15, 2020
- Rent, under lease agreements in force before February 15, 2020
- Utilities, for which service began before February 15, 2020
What counts as payroll costs?
Payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 for each employee)
- Employee benefits including paid time off, parental, family, medical, or sick leave; severance for dismissal; payments for group health insurance premiums; and payment of any retirement benefit
- State and local taxes assessed on compensation
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 for annual income
PPP Loan Bookkeeping
Now that you’ve received your PPP loan how do you handle the recording of the income and expenses on the books? This is an important part of making sure you can prove what you used the funds for with excellent record keeping.
Set up the Loan Account
First off, add the loan as a liability. This should be created on the Chart of Accounts. You can add it as “Other Current Liability” or “Long Term Liability” to your books.
Here’s a little video to show you how to create a new account using Quickbooks Online.
If you use Wave, here’s a little video to show you how to create a new loan or line of credit account.
Write a check for the fund repayment in the future
Next up you’re ready to start recording PPP fund spending. Before we go any further, let’s write a check for the fund repayment.
Yes. The idea is that the loan is forgiven, but we’re going to use this check to keep things clean on the books. Write a check from the business checking for the full loan amount of the PPP loan. Make the check payable to the PPP Lender directly from the business checking where the funds were originally deposited. Make the check number PPP check. You’ll see why we are doing this a little later.
Date the check 8 weeks after the funds were direct deposited into the checking account. You can see my loan calculator to get this date or simply add 56 days to the day of deposit. This is your PPP check and we’re going to clear all the funds against this check.
For example: The business received $25,000 in PPP funds on May 4, 2020. Write a check payable to the PPP Lender for $25,000 and date the check 6/29/2020.
Here’s what it will look like so far in your checking register.
Now it’s time to start spending those PPP funds.
How to enter the spending of PPP funds
Record your spending on payroll and eligible bills as usual.
The change in procedure would be to add each eligible expense as a negative against the PPP check. The goal is to get the PPP check that we wrote earlier to be $0. There’s a little extra work here but I think you’ll be happy with the end result.
Let’s look at an example.
You run payroll and have a $5000 payroll expense which is allowable against PPP funds. Run payroll and record it as usual. Then edit your PPP check to reduce the PPP amount by the payroll total. Here’s a screenshot to show what that looks like in Quickbooks Online.
As you spend the PPP loan funds, the PPP check balance will go down. The balance of PPP funds will show on the check so you can know if you’re spending all the money and exactly what it was spent on.
Reminder: for payroll spending, employer-paid expenses including Social Security and Medicare do not count as expenses for the PPP funds. Payroll service fees and independent contractor payments also do not count as eligible expenses for PPP funds.
If you have state taxes, those are eligible. I know it’s confusing. Think of it this way. The following payroll expenses are allowable expenses for the PPP funds:
- state taxes
- wages including employee-paid taxes
Hopefully, you’ll have the PPP check down to $0 after the 8 week period is up and you can then begin the process to ask for forgiveness. Doing these actions will show you exactly what you used the funds for and make it easier to get through the forgiveness process. You’ll need a copy of each payroll report to show the payroll costs as well as any vendor bill paid with PPP funds.
Having the expenses broken out in your bookkeeping will also prove helpful when it comes to tax time since those expenses are not deductible. Remember, we talked about that earlier.
You can also use the spreadsheet provided earlier to record all expenses which will help make sure you are organized and ready to apply for forgiveness.
PPP loan forgiveness
Once all the PPP funds are used up, your lender will ask you to show how you spent the PPP funds. The loan will either be forgiven in full, or the lender will disallow some expenses and require a portion of the loan to be repaid. Remember, it’s only 1% interest so it’s okay if you end up having to repay some of the PPP loan.
1. If entire PPP loan is forgiven
If $25,000 in PPP funds were received, and all $25,000 were spent on allowable expenses, the entire loan will be forgiven. YAY! Happy dance here.
To clear the balance of the PPP Funds Liability Account we created earlier, you can either write a $0 check or create a Journal Entry to reverse the loan liability. Let’s take a look at that in Quickbooks Online.
Write a check.
First, create an “Other Income” account in your chart of accounts called, PPP Loan Forgiveness. Then go to your check register and write the check. PPP funds $25,000 and PPP Loan forgiveness -$25,000. Here’s a little video to show you what it looks like in Quickbooks Online.
If creating a Journal Entry, use the following:
Debit: PPP Funds
Credit: PPP Loan Forgiveness
If you’re not comfortable with a journal entry, then the check route is the best option for you.
2. What if only a portion of the loan is forgiven?
If only a portion of the loan is forgiven by the lender, say $20,000 of the $25,000, then make the Journal Entry or $0 check for $20,000 and $-20,000. You’ll still have a liability for that loan account of $5,000.
You’ll also be able to count the interest paid on that loan as an expense on the books.
Paying off your PPP balance if necessary
For some businesses, receiving only partial loan forgiveness isn’t a bad thing. The terms of PPP loans are incredibly generous. With only a 1% interest rate and loan payments deferred for six months, a PPP loan is the lowest-cost source of capital that any business could hope to obtain.
Keep that in mind when using your PPP funds to keep your business running through these tough times.
What’s still confusing you about handling your PPP funds?