Half of my clients have now been approved for PPP loans and their main question is “What should I do to qualify for PPP Loan Forgiveness?”
This is a great question and I want to share with you my thoughts and recommendations on the matter because I don't want you to lose this opportunity.
You need to keep in mind two important things that will allow the forgiveness of the loan, allocate properly the money and keep track of it to prove the lender you did the right distribution of funds.
The amount of your loan that is forgiven is equal to the amount you spend during the 8 weeks following loan origination toward eligible expenses, including:
· Payroll costs (With the exclusion of Payroll Taxes, Processing Payroll fees, Contractor’s pay, NR Employee wages)
· Interest on the mortgage obligation incurred in the ordinary course of business (as long as the mortgage was signed before February 15, 2020)
· Rent on a leasing agreement
· Payments on utilities, including electricity, gas, water, transportation, telephone and Internet access for service that began before February 15, 2020
· Additional wages paid to tipped employees
Any expense outside of those areas won't be eligible for forgiveness and your interest rate will be as low as 1% and is due 2 years from the date of funds received.
The first step is recording the PPP Loan as a Long-Term Liability, this is until you get to know how much of the loan will be forgiven.
Most financial advisors recommend creating a separate account to keep track of the expenses, however, nowadays going to this process might be tedious. I want to guide you in some alternative ways.
1. Creating a PPP Bank Sub-Account in QBO
You can create a Bank Sub-account to allocate the funds you received which will allow you to keep track of the current balance and the expenses paid with the funds without affecting your bank account. If you decide to go this way keep in mind you will have to follow certain procedures to avoid duplicate transactions.
· Create the sub-account in the Chart of Accounts to your Regular Bank Account
· When transactions related to the loan show up on your bank feed, exclude them
· Create a Journal entry to register the Bank transactions using the sub account instead of the regular bank account and the type of expense paid.
Receive Original Funds
PPP Bank (Sub-Account) $25,000
PPP Loan Payable $25,000
Any time you are going to register a new expense you want to pay with PPP Funds you will need to recreate the same steps: exclude the transaction from the bank feed and create a journal entry recording the expense against the PPP bank account.
Using PPP Funds
Wages / Rent / Utilities $5,000
PPP Bank (Sub-Account) $5,000
This won't affect your reconciliation since all the transactions are going to fold down under the main bank account.
If the loan is forgiven (or part of it) you need to reduce the liability.
Loan is forgiven
PPP Loan Payable $25,000
Other income non-taxable PPP $25,000
2. Tracking the use using a spreadsheet
Keep a spreadsheet to record the use of the funds if you feel the previous method is confusing.
We have created this template to track the expenses. Please make a copy. You won’t be able to use it unless you make a copy for you. In this template you will enter your expenses by week for the 8 week period.
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