This article was co-authored by Collin Kanelakos, Partner, Assurance Services.
So, you’ve submitted your SBA Paycheck Protection Program (PPP) application and you might have even received your loan proceeds, but important work still remains. It is critical for you to closely manage and account for your PPP loan proceeds, not just for cash flow purposes but for accounting purposes in order to apply for your PPP loan forgiveness. The amount of documentation you will ultimately need for the forgiveness component of this loan will be substantial, so get your process in place now to shorten the lag of this ultimate forgiveness.
We have had numerous questions from and conversations with clients on this subject, and one significant best practice is for recipients to isolate PPP funds into a separate bank account. This will provide a very good trail on the use of funds if questions ever arise. Here are some additional next steps and best practices:
If you opt to not open a separate bank account for their PPP money, that is fine, but the same processes of documentation are recommended and isolating ultimate loan funds will be a bit more laborious.
Another common question is how employee management (furlough vs. lay off vs. reduced hours vs. pay) affects the forgiveness portion of my PPP loan. In short, reductions in employee headcount (full-time equivalents) or reductions in pay not remedied by June 30, 2020 could have a negative impact on the amount of loan forgiveness. Congress' intent for providing these loans is for small businesses to keep employees working.
Lastly, consider how to account for the forgiveness of this PPP loan on your books. For tax purposes, loan forgiveness is not taxable. For book purposes, loan forgiveness will ultimately be income (either through a reduction in operating expenses or more likely being recorded as other income). Keep in mind that loan forgiveness like this will most likely be considered an extraordinary item in your profit and loss for the year and will have an effect on employee compensation that is driven by net income. Each company will need to evaluate the impact of loan forgiveness on a case-by-case basis.
As always, your LGT advisors are here and ready to help. If you have questions about this topic or any others, please get in touch right away.
Please reach out to any LGT advisor about your specific situation before proceeding and also for assistance with the process. Stay informed about future developments by frequently visiting our COVID-19 Financial Updates page.
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