Hopefully, many of you have now received PPP loan monies or been recently approved. Congratulations!
The next step in the process once you receive your funds is to make sure that you are tracking the use of funds appropriately, and of course, using the funds as intended. One major component is that the SBA requires that you use at least 75% of the funds received for payroll costs specifically. Remember that forgiveness is based on your use of these funds within the first eight weeks of receiving those PPP funds (the “covered period”). Let’s quickly review the types of expenses that will qualify for forgiveness:
- payroll costs
- utilities (electricity, gas, water, transportation, telephone or internet access)
- interest payments on debt or mortgages
For rent, utilities, and interest payments, note that it is only eligible if you incurred those expenses before February 15, 2020. So if you had these in place before then, you could include in your “forgivable” cost calculations.
Now, let’s dig into how to track these costs so you are ready to apply for forgiveness when eligible to, and so that you can plan on how much of the monies you received will likely be forgiven. This is where proper bookkeeping makes this all much easier! Your financials will naturally capture your activity. For expenses other than payroll costs, you will provide documentation of payment and documentation of the expense itself. For documentation of the payment, you may use a canceled check (or check image) if you paid by check, or a confirmation of electronic payment if you processed payment electronically. For documentation of the expense itself, you will provide the vendor bill as documentation. For rent payments, we recommend being prepared to give the appropriate page(s) from your lease since most landlords do not provide monthly bills. Of course, for payroll costs, the documentation will be more rigorous, but still quite manageable. Please see details for each situation below: If you are a sole proprietor, with no employees:
For sole proprietors without employees: Your PPP was based on your 2019 Schedule C, line 31 income. That stated your 2019 total “payroll cost.” When you are ready to apply for forgiveness, you will be allowed to claim the equivalent of 8 weeks of that 2019 “payroll cost.” So for calculation purposes, you can simply divide your 2019 Schedule C, line 31 by 52, and then multiply by 8. You may be asked to submit your 2019 Schedule C as documentation, but note for many of you this was likely already provided at the time of application. Nonetheless, we anticipate nothing more will be required when you are eligible to apply for forgiveness.
If you are a sole proprietor, with employees: Your portion of the payroll costs will be calculated as stated above. Also, you will include documentation and calculations per the details indicated below for employee payroll costs.
If you are a business with employees: Your requirements to apply for forgiveness will be very similar to what you had to gather for the original application for the PPP. You should be prepared to provide payroll journals/reports for the covered period. You will also likely be asked to submit Form 941(s) as well to complete your documentation.
It appears that the payroll costs you can claim for employees will include whatever is paid during the covered period (8 weeks since receipt of funds). So in some cases, you may want to alter the timing of your payroll to ensure you can claim the appropriate payroll costs in full.
Note, though, that when you apply for forgiveness, you will also need to demonstrate that you maintained payroll headcount and wages. To prove that you maintained headcount, you will be asked to calculate the baseline average monthly FTE. Calculations for this may vary by lender, but mostly you determine how many full-time equivalent positions you had historically. Then you will need to demonstrate that you maintained this same level during the covered period. If you are not able to fully restore your headcount level during this crisis, just note that the percentage decrease will reduce the forgiveness in your headcount. You will also need to report any reductions in wages during the covered period, using a similar methodology of comparing prior pay rates to the pay rates during the covered period. If you have wage reductions, you will similarly limit your forgiveness by the percentage decrease in wages.
At ZümiFi, we are generally recommending that clients track their PPP related expenses in a dedicated spreadsheet. In some cases, we see clients using classes in QuickBooks Online to track. That can certainly be helpful, but may not support the various calculations that need to be made. We also encourage clients to coordinate with their CPA should there be any question about what is included in Utility costs. Generally, we expect the definition of Utilities for PPP purposes to directly mirror what is allowed for IRS income tax purposes, so your CPA can provide that clarity if it is not readily apparent in your circumstances.
The most important thing is to understand what is likely to be forgiven for your specific loan and to plan accordingly. Whatever amounts are not forgiven will simply be a loan with a two-year term and a very low-interest rate. For some businesses, that is precisely what they need. If you want help tracking and calculating this, give ZümiFi a call! We are here to help you keep great books, track these expenses, and stay on top of how the PPP can benefit your business!
- San Francisco – The 2020-2021 business registration deadline has been postponed from June 30, 2020 to September 30, 2020
- California – State income tax filing deadline has been extended from April 15 to July 15
- Federal – Federal income tax filing deadline has been extended from April 15 to July 15