If you’ve received a PPP or EIDL loan for your business - congrats! Your next task is to properly record and track the receipt and spending of those funds. This is especially important if you hope to receive loan forgiveness.
In order for you to receive loan forgiveness, you will need to make sure you are 1) spending your funds on the right things and also 2) tracking and proving your spending.
(This is meant to be a basic overview - please check with your CPA for further guidance and your bank for the full terms of your loan.)
Here are five main takeaways:
1) Consider opening a separate business checking account to track these funds.
Transfer the exact amount of your loan into that account. Do not put any other funds into that account (ever).
Do not spend or transfer any money from this new checking account except for approved payments, and then only in exact amounts with documentation showing the amount and use of the funds.
It is not required to open a separate account, but since forgiveness will rely on accurate documentation, this is an easy way to track spending of the loan money. If you don’t open a separate bank account, consider starting a PPP loan tracking spreadsheet and keep detailed documentation.
2) Record the deposit of your loans and advances.
When you receive your money, you (or your bookkeeper) will record it as either a loan or advance on your books. Note: this is about to get really nerd-y, so if your eyes start glazing over, continue to the next section)
Loans are recorded as liabilities. For example: PPP Loan Payable.
Advances and loan forgiveness are recorded as Other Income and noted as non-taxable money. For example: EIDL forgiven advance - nontaxable.
Once you apply and receive forgiveness, you (or your bookkeeper) will move the forgiveness amount out of “loans” into an Other income account. For example: PPP loan forgiveness - non-taxable.
3) Determine which of your expenses are eligible for loan forgiveness:
75% spending on payroll costs: Salaries and Wages, health benefits, 401ks
25% spending on other expenses: mortgage interest, rent, utilities (which include phone & internet) *
These cannot be brand new expenses - they have to have been in place before Feb 15, 2020
Forgiveness is eligible on expenses incurred within 8 weeks following receipt of your money
4) Track spending of your funds:
If you use Quickbooks Online and you know what class tracking is/have class-tracking capability, use this to track all expenses from your loans.
Or keep a spreadsheet to track all expenses within the 8-week period.
However you track your expenses, the important thing is that you are able to produce documentation of how you spent the funds. This means: payroll summary reports, rent receipts and utility receipts.
5) For self-employed:
Your loan was based on your 2019 net profit, instead of payroll records. Therefore, you don’t need to spend 75% on payroll. Instead, 8 weeks of your 2019 profit can be automatically forgiven. You will want to calculate that based on your 2019 profit.
For the remainder of your funds, you’ll want to track as detailed above.
Tanya is a professional bookkeeper who works exclusively with photographers. To schedule a one-on-one to see if Tidy Books can help bring clarity and organization to your business, click here.