PPP loans: Proper documentation and accounting

At the center of the rush to submit Paycheck Protection Program (PPP) applications, business owners’ main priority was obtaining the loan proceeds before funding ran out. And funding did run out – less than two weeks after applications opened. Luckily for small businesses, additional funds were approved on April 24, 2020, providing $310 billion in addition funding.

For those business owners who have secured PPP loan proceeds, their focus should shift to properly accounting for the funds. We suggest the following accounting best practices to properly account for the loan proceeds and expenditures.

1. PPP loan proceeds

Every company is different, and every general ledger is different. Some will find it beneficial to create a new general ledger cash account to track the funds, while others will be able to track the expenditures using the existing structure. However, in some way segregating the funds from the start will assist in providing a concise register of covered costs.

While there is no requirement to segregate the funds in a different bank account, co-mingling the loan proceeds with other funds may prove difficult in tracking and documenting qualified usage. Consider opening a new bank account or creating a new general ledger cash account, as an additional layer of segregation.

2. PPP expenditures

The Small Business Administration (SBA) has authorized lenders to determine the applicant’s eligibility for loan forgiveness. Given the lack of guidance by the SBA, it may be difficult to ascertain how detailed each lender will be when determining loan forgiveness eligibility. Therefore, it will be crucial to maintain a detailed ledger and documentation of PPP loan expenditures to support proper use. This will help prepare your company for a smooth loan forgiveness application.

Suggested support includes payroll registers, health insurance invoices, retirement benefit contribution calculations, lease agreements, utilities invoices and mortgage statements, as applicable. Once your company’s window opens to apply for loan forgiveness, you don’t want to be delayed in submitting the request because you can’t find the proper documentation.

Another important consideration is that the program clearly outlines that at least 75% of the forgivable portion must be spent on qualifying payroll costs. It would therefore be valuable to have an additional tracking mechanism to differentiate between payroll and non-payroll expenditures. This could be accomplished in several ways, including new general ledger accounts or a manual spreadsheet. For help getting started, check in with your Wipfli relationship executive to obtain an expense tracker template.

For many companies, payroll direct deposits are funded via an automatic withdrawal from an established bank account. If you did head down the path of creating a separate bank account for tracking these expenses, rather than having to change the funding source for eight weeks, you could simply reimburse the funds via a transfer from your new PPP bank account to your already existing payroll account.

3. PPP loan accounting

To properly account for the PPP loan, we suggest creating a “PPP Loan Payable” account on your trial balance to record the liability you assume upon receipt of your loan proceeds. This loan will remain a payable until either the bank provides a notice of forgiveness or principal payments are made. This is an important consideration, as simply paying forgivable expenditures does not affect the loan balance.

PPP loan forgiveness GAAP guidance

A common inquiry we are receiving relates to how and when the income should be recognized related to the loan forgiveness. Accounting standards clearly say that you only derecognize debt if the debtor legally releases itself from being the primary obligor. Based on this guidance, GAAP does not allow recording this income until you have received documentation that the loan is indeed forgiven. At that point, you would debit the loan account for the amount forgiven and credit an income account for that same amount.

The next question that comes up is, how do we show this on the income statement? In reading and interpreting appropriate sections of GAAP, it would not be appropriate to net the income with the related expenses. This situation does not meet the criteria to net items together on the income statement. So, then we have the question of whether it should be included in operating income or other income. While GAAP is less clear here, the general rule of thumb is that if the activity is more of a financing activity (which it appears to be since we recorded it as a loan), we would include it in other income, grouped with interest income and interest expense below operating income. Based on this guidance, it would be appropriate to record the income “below the line” as other income.

We expect further guidance from authorities in the coming weeks regarding the accounting for PPP loan forgiveness, in addition to the required disclosures.

In the meantime, if you have any further questions, please reach out to our team of financial advisors at Wipfli.

Also make sure to visit our COVID-19 resource center, where you can find more resources to help navigate the impact of the coronavirus.

Written by Reed D. Sellers, CPA, CCIFP, Senior Manager, WIPFLI.

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