The last few months have been an exceptionally trying time for many businesses.  With mandatory closures and social distancing, many are struggling to support their businesses, and one another, as we navigate uncharted waters.  With the approval of COVID-19 as a disaster for SBA Economic Injury Disaster Loans (EIDL) and the introduction of the Paycheck Protection Program (PPP), smaller to mid-sized businesses without bookkeeping support are struggling to decipher the requirements, while ensuring they are recording the funding properly and maintaining the necessary documentation for potential PPP Loan forgiveness.  With so much information published daily, this task can become overwhelming.

 

There are a few important things to consider when recording the funding for either loan program.

 

The EIDL comes with an advance, or grant portion, that does not require repayment and should be recorded as non-taxable 'Other Income'.  The loan portion of the EIDL is not forgivable and should be entered into the company’s books as a long-term liability.  And while for many, the ultimate goal of the PPP is loan forgiveness, it is a loan and should be treated as such until the lender provides confirmation that it is forgiven.  Some banks may require the PPP funds to be held in a separate account from which to pay the approved expenses from.  Borrowers should confirm with their individual lenders on their particular loan requirements and read the loan documents thoroughly. 

 

In order to achieve loan forgiveness, the borrower of the PPP loan will be required to submit proof that the funds received were used explicitly for the approved expense categories:

  • Payroll costs
  • Payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020
  • Utility payments under service agreements dated before February 15, 2020; with no more than 25% of the total loan amount to be utilized for non-payroll expenses. 

While it is still unclear the exact system businesses will use to submit the documentation for loan forgiveness approval, we know that borrowers must be able to provide thorough documentation. 

 

Most of the popular accounting software programs offer ways to track expenses using things such as class tracking, however for more basic users, especially business without a bookkeeper or an accountant, this is not something they are familiar with and attempting to use these features may quickly become confusing.   Instead of over complicating it, the advice I provided my clients is to keep it simple. 

 

The key to PPP loan forgiveness is going to be providing proper documentation.  To achieve this, business owners must have a clear audit trail and well-documented transactions.  The easiest way to do this, if you have not established a separate bank account for PPP only expenses, is to keep a basic spreadsheet detailing each transaction.  Some suggested “Dos and Don’ts” would be:

  • Do not over complicate things, simply record each transaction that is done using PPP funds. 
  • Do include important payment information such as: date, payment method (& check numbers were applicable), payee, amount, and expense category.  This will ensure you are keeping a running total of the amount used, while also giving yourself a checklist of sorts to match documentation to. 
  • Do ensure that every item on the list should have a corresponding receipt, invoice, or be reflected in a lease or mortgage document. 

Many accounting firms have developed excellent tracking sheets for PPP loan forgiveness, so be sure to reach out to yours.  These PPP loan forgiveness worksheets take the expense list you are keeping and perform a “use test” on them to calculate where your business falls for proper expenditures for potential loan forgiveness.  Many include a workspace to also calculate employee headcount at the specified timeframes per the PPP, including wages for those time periods, which will all be considered when seeking loan forgiveness.

 

How each business owner manages the paper documentation requirements will vary.  For my clients, we already utilize either digital file sharing via a secure provider or through one of the many available receipt management software programs.  It is a personal preference, but our end goal is all the same:  maintaining the documentation in an easily accessible manner for when we need to provide it to the lenders.  The same principles apply to day to day record keeping to ensure accurate records in the course of regular business events such as an audit or seeking investment partners.    

 

By maintaining a proper paper trail and utilizing a PPP Loan Forgiveness calculator, the borrower has placed themselves in better position to apply for maximum loan forgiveness by helping expedite the process when the time comes.  It is important to remember that there is still a great deal of uncertainty surrounding the PPP loan forgiveness process.  With that in mind, business owners benefit by ensuring that they maintain open lines of communication with their lenders and accounting professionals.  As new guidance is delivered to us daily, reaching out to your lenders and accountants for regular check-ins helps increase your odds of successful loan forgiveness.

 

In speaking with Erik Blaushield, CPA, Partner at Bisceglia, Steiman & Fudeman, LLP in Worcester, MA, he confirmed that “Not only is recordkeeping essential to ensuring that you maximize the benefits of your PPP loan, but the calculation in determining how much of your loan is forgiven is equally as important.  When the banks and the SBA try to determine how much of the loan is forgiven, they are going to want to see that you used the proceeds appropriately.  If you have an accurate calculation of how the proceeds were used, along with the proper documentation, this will make things smoother when it comes time for loan forgiveness.  I recommend contacting your CPA or accounting firm to make sure the calculation is done correctly.”

 

We are in an ever-evolving landscape for businesses.  And each day new and updated information seems to be released on the management and navigation of these loans.  Ultimately one thing is clear.  Maintaining simple and clean books and records will allow the business owner the best chance at not only potential loan forgiveness, but business survival.   Now more than ever, the need for accurate bookkeeping is being highlighted.  To be a successful small business owner, you must know your numbers.  By using this time, and these loans, to incorporate effective habits for better bookkeeping practices, you help ensure that your business is prepared for whatever unforeseen circumstances may arise in the future.