You Have Your PPP Loan, Now What?

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:

• For accounting purposes, set up this separate bank account and a PPP note payable in your general ledger. You will record the proceeds deposited into the bank account with an offset to PPP note payable.
  • This is a 2-year loan and it will be considered both a short-term and a long-term debt. As such, once you receive your loan amortization schedule, you should consider breaking out the amounts due between current and long term in your financial statements.
• Document the date of receipt on the PPP funds. This is important because this is your start of the eight-week period. Any eligible expenses paid within the eight-week period will factor into the forgiveness calculation.
• Pay for all eligible expenses out of this bank account. For any items paid, keep support for these disbursements. You will need the support for the forgiveness submittal.
  • Payroll costs
    • Cash compensation per employee is limited to an annualized amount of $100,000 for the eight-week period.
  • Rent
    • For leases in force before February 15, 2020
  • Utilities
    • Electricity, gas, water, transportation, telephone, or interest access for services in place prior to February 15, 2020
  • Interest payments
    • Mortgage debts incurred before February 15, 2020 (shall not include prepayments)
    • At this time, it’s unclear whether other non-mortgage interest on lines of credits, working capital loans, or certain inventory-based loans like floor plan can be counted as eligible expenses for forgiveness.
  • As a reminder, your non-payroll items (rent, utilities, and interest) can be no more than 25% of the total forgivable portion of your loan. Be sure to track your eligible expenses as you could be in for a surprise if you use your PPP loan proceeds primarily for non-payroll items.
  • Deferred rent and/or deferred loan payments would not be eligible expenses. They must be incurred and paid within the eight-week period to be an eligible expense.
    • This is an area to manage proactively for your forgiveness calculation. If you choose to not take advantage of your landlord’s offered delay in rent payment or your lender’s allowed deferral of a loan payment, you need to determine if these expenses will be eligible for forgiveness when considering the fact that only 25% of non-payroll costs can be forgiven.

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.