Hopefully, in the next few days, you receive a paycheck protection program loan, or PPP loan.
Good job for getting that done. Seriously. Your initiative may help you comfortably march through the next few weeks of the COVID-19 pandemic.
But a bit of sort of bad news. Your Paycheck Protection Program loan—let’s start calling it a PPP loan–includes a day of reckoning. Roughly 2 months from now, you need to explain to the bank and the Small Business Administration how you spent the money.
And your explanation—both your accounting records and your documentation–will determine how much of the loan the bank forgives.
Example: You borrow $100,000 using a PPP loan and do a good job on the PPP loan accounting? You don’t need to pay the loan back.
Example: You borrow $100,000 using a PPP loan but do a bad job on the PPP loan accounting? You do need to pay the loan back.
Accordingly, this blog post discusses how to do good PPP loan accounting. The post also discusses how to appropriately document the loan transactions. And then the post provides some practical ideas related to you not losing forgiveness.
The laundry list format usually works pretty well. So I break the discussion that follows into a list of tips…
PPP Loan Accounting Tip #1: A Good Payroll System (Probably a Payroll Service)
Mostly, you receive forgiveness for your PPP loan based on your payroll costs over the eight weeks that follow you receiving the loan funding.
The formula limits the forgiveness you receive for non-payroll-costs to less than 25%. (Restated another way, to get a $100,000 of forgiveness, you need at least $75,000 of payroll costs.)
Accordingly, you really want a good payroll system at least over the eight weeks your PPP loan covers.
For this reason, I suggest you upgrade to a good payroll solution if you don’t already have one. Like the system offered by one of the payroll services companies. ADP. Paycheck. Gusto. Or someone else like this.
No, no, I understand. In the past, the ad hoc, informal payroll approach you’ve used? Sure, that worked. Sort of. Mostly.
But with the PPP loan forgiveness formula, your business must accurately account for its payroll costs, including timing and amounts. This is no job for an amateur. Not even if you’re trying to save a few hundred bucks.
And just to say this? I have no horse in this race. No backdoor deal, no economic incentive, nothing prompts me to push you to call one of the payroll companies.
I just want you to avoid screwing up your payroll costs. Period.
PPP Loan Accounting Tip #2: A Real Accounting System
A related suggestion: Maybe you should also use the whole PPP loan thing as the prompt to step up to a real small business accounting program: Quicken, Xero accounting, QuickBooks, FreshBooks, and so on.
By the way, full disclosure: I sort of have a horse in this race. I’m the author of QuickBooks for Dummies.
But seriously, I’m not trying to gin up my book royalties with this statement. I’m thinking about the damage of you goofing up the accounting for things like the other, non-payroll costs you get forgiveness for: rent, utilities, and the interest on mortgages and other loans.
PPP loan accounting Tip #3: Track the Funds Flow
Okay, another accounting-y tip: You want to set up a way to track the disbursements that result in forgiveness. And this may be the most important action you take.
Two good approaches exist here, I think.
One approach I saw an attorney recommend in a news article (I can’t now locate that article. Otherwise I’d give the attorney credit.) You may want to set up a new bank account for the PPP loan money. And then, what you can do is, pay amounts that trigger forgiveness from this bank account.
With a separate bank account, you can easily show the forgivable spending clearly comes from the PPP loan funds.
And if setting up a separate bank account for the PPP loan funds doesn’t work? Yeah, I think you use whatever features your accounting software provides to carefully segregate PPP loan transactions.
QuickBooks, for example, provides a feature called “classes” that you can use to track all of the transactions that connect to a PPP loan.
Note: This comment for the accountants: Nonprofits often use QuickBooks’ “classes” to do fund accounting. So, classes should prove adequate for showing the flow of funds for a PPP loan.
Tip: If you use QuickBooks classes, you would probably use a class like “PPP loan” to tag the income and the spending related to the PPP loan. The payroll costs, rent, utilities and mortgage interest funded with the PPP loan proceeds would be classified as “PPP loan.” The PPP loan’s “cancellation of debt” income would be classified as “PPP loan.”
PPP Loan Accounting Tip #4: Over-document Owner Compensation
Your small business should receive funding for paying the business owner’s payroll or compensation (up to $8,333 a month).
And the S corporation shareholder-employee W-2 wages easily get accounted for. (You just look at the wages amounts shown in your payroll records and tax filings.).
The owner compensation received by a sole proprietor or a partner, however, gets problematic.
Here’s how you handle this trickiness according to the additional eligibility criteria the Small Business Administration published on April 14, 2020..
Use the 2019 owner compensation information to document the appropriate 2020 pay rate. In other words, use the Schedule C from the sole proprietor’s 2019 tax return to document the owner’s payroll cost. Or use what a working partner’s K-1 shows in boxes 1 and 4a.
Let’s say for example this amount equals $52,o00 for 2019. Exactly. So, $1,000 a week. (I’m trying to make the math easy.) That amount equals the owner’s weekly compensation.
Then? Within the eight-week period in 2020 that the PPP loan forgiveness formula looks at? I think the sole proprietor or partner takes a $1,000 a week draw.
Just to make this point, the sole proprietorship or partnership probably loses money over the eight weeks. That’s the terrible economic reality of trying to run a business during a pandemic.
But for purposes of forgiveness, you count the owner draws during the eight weeks as payroll. Even if in 2020, firm actually loses money. (As the Small Business Administration notes in its discussion of how to treat sole proprietors and partners, this approach allows the firm to replace the owners compensation using the 2019 “pay rate.”)
PPP Loan Accounting Tip #5: Document Every Disbursement
A final tip? Document the dollar amount, timing and deductibility of every disbursement.
So, like you’re being audited by the Internal Revenue Service. And by a really suspicious auditor.
For example, for payroll costs? Document the dollar amount and the payment date with actual copies of the payroll checks or electronic payment receipts. And be sure you have any other appropriate documentation too: Timecards? W-4s? Payroll reports from the payroll service company? You see the pattern.
For employee health insurance which also counts as payroll? Same sort of stuff. Use checks and electronic payment receipts to prove the dollar amounts and payment dates. Use the monthly insurance company statement to document the deductibility.
Retirement plan contributions? Yeah, treat those like employee health insurance.
For any rent, mortgage interest, and utilities services? Again, use the actual checks or electronic payment receipts to document the amounts and dates of payments. Then collect copies of the actual rental lease, the mortgage or bank loan agreement, and the utility service contract.
This note about non-payroll costs: The legal agreement for the rent, the mortgage or the utility services needs to have been in entered into before February 15, 2020.
Note: The additional eligibility criteria published on April 14 indicate for a sole proprietor, a deduction should appear on the sole proprietor’s 2019 Schedule C in order to be a permissible expenditure during the “eight-week period following the first disbursement of the loan.”
One other point: Only the interest on the mortgage or business loan qualifies for forgiveness. So, you want to have a monthly statement or bill from the lender that breaks the payment into interest and principal.
Three Closing Comments
Let me throw out three quick comments to close…
First, do verify that your payroll schedule “runs” enough payroll within the eight weeks following the PPP loan funding to get you maximum forgiveness. Most small businesses use cash basis accounting. Which is fine. But that may mean the payroll for the last two weeks of the eight week period of forgiveness falls outside the eight weeks.
Second, make sure you quickly rehire any employees you need in your full-time employee headcount to qualify for full forgiveness. I talk about how reductions in employee headcount reduce forgiveness in the paycheck protection program loans: a small business lifesaver blog post. See that blog post if you have any questions.
A third and final tip? Stay alert to additional guidance the Small Business Administration provides as to how the forgiveness works. We have pretty good information about the math already. But surely the SBA will provide additional instructions. If the rules change, you may want to make changes to your payroll or other forgivable spending in order to optimize.
Other COVID-19 Blog Posts
If you’re still trying wrap your head about the paycheck protection program, this blog post is a good place to start: Paycheck Protection Program Loans A Small Business Lifesaver.
Interested in learning about the other tax breaks for small businesses related to the COVID-19 pandemic? See this blog post: COVID-19 Small Business Tax Breaks and also our discussion of the employee retention tax credit, which is an alternative to the PPP loan.
Finally, if you need to first figure out just what counts as payroll cost for the PPP loan formulas, this discussion should bring you up to speed: Paycheck Protection Program Loan Formula.
I kid you not. I was asked by a colleague to ask you this question. He said I have a personal relationship with you. What????? Humor on Good Friday. PPP pays for the right expenses and is forgiven. Are those expenses deductible? Ex IRS agent and accountant common sense in me says no way. Your thoughts?????
The statute says the COD income is excluded. That’s clear.
But given that’s case, can the amounts you spend for payroll etc. really be deductible? It would seem not… but if they aren’t, why does statute say to exclude?
In other words, no reason exists to say “okay, just exclude” if you don’t get to deduct.
So ever willing to say things in public other practitioners are too smart and careful to utter: I think since statute says “yeah, go ahead and exclude” you exclude… and you still count the spending as deductions.
P.S. I think if we regularly talk on the phone and correspond by email, that counts a personal relationship, right? I see it that way! 🙂
Unfortunately, as of yesterday, payments to active LLC members are not included as part of the basis for PPP loans offered by Bank of America. The base is limited to salaries reported on the 2019 Form 940.
Yes, people have started to talk about that. I think that’s wrong. But to be fair to the bank, the statute isn’t written in a way that clearly says a partnership can be a business too. Someplace else in one of these other blog post threads, I copied the relevant statutory language, explained why I thought eventually banks will lend to partnerships and count partner SE earnings as payroll costs. But I admitted you might not want to risk a $30K loan in hopes of getting a $40K loan… when delay might mean money runs out before people agree partnerships can be businesses too. And so you only get zero.
How to document >2% shareholder SE Healthcare reimbursements to shareholder employee as “payroll costs” (for S-Corp, done right with the W-2 last year)
They show in box 1 of your W-2.
I talked about this in the Paycheck Protection Loan Formula blog post. (BTW, if you add W-3 box 1 to the elective deferrals in box 12, you get the right number which include the SE health insurance costs.)
That is good and is followed every year. But question was after getting the loan, how to properly document this for forgiveness purpose (W2/W3 – will be in 2021, prior to needing documentation for forgiveness).. Currently this amount is given out as a reimbursement to officer at the end of the year (along with proof of payment being made by officer).
For PPP proof purposes, should this amount be included on the paystub for the six week duration? Would that satisfy as proof that this was a payroll+healthcare expense?
I think you need transactions within the eight weeks. And you want really good explicit documentation. Cancelled payroll checks dated inside the eight weeks, for example. And for the insurance, whatever paperwork you can find to document that. Maybe monthly health insurance bills from insurer? Maybe these are actually even bills to shareholder-employees? Since her or his policy may be an individual one?
I don’t use QuickBooks for my home building accounting but that’s pretty impressive that you wrote the “QuickBooks for Dummies” book.
🙂
So I have a question… If I did not fire or lay off any employees previous to my PPP loan, If I have managed to find a new way for my company to perform services during our mandatory shutdown but need an additional employee to assist with these services, do I have the ability to hire a new person and have their payroll count in my PPP forgiveness portion of the loan as well?
I think that works. Your PPP loan amount is determined by looking backwards. Your forgiveness about is determined by looking at the payroll costs and then those other costs during the eight weeks after funding. The only ripple effects of payroll during the eight weeks are when you have reduced your headache or dramatically reduced wages.
there’s actually a question on the updated PPP application that asks the number of jobs created so I would believe those costs are absolutely includable.
I understand that 75% of the amount forgiven has to be payroll. However, say you borrow $100,000 for payroll, and $500,000 for rent, mortgage interest, and utilities. Given this scenario I calculated that $133,333.33 would be forgiven. Assuming my math is correct, does the balance borrowed ($500,000-$33,333.33) just convert to a 1% loan? But I can still have $133,333.33 for given?
Allan
I think that works. You just want to think about whether you get impacted by the “forgiveness adjustments” that come from any headcount or pay rate changes.
BTW I edited the sentence in the blog post above to make clearer how the 75% thing works. The original language was not clear. Sorry.
What prevents sole shareholder/officers from just increasing their payroll during the 8 week period to take advantage of 2.5x forgiven amount?
You could probably do that a little bit… I.e., you could maybe move owner salary from $4333 a month to $8333 a month. ($8333 a month is that $100K max annual pay rate.) But you’d have to consider that reducing employee headcounts or pay rates will reduce the forgiveness amount.
Got it. I actually wish they had language inserted to say this shouldn’t be done…
Does forgiveness have to be calculated on a strict cash basis? For example, what if you pay rent quarterly (or semi-annually, or annually) and the payment does not fall within the 8 week period? Would 8 weeks of the amortization expense of prepaid rent count as forgiveness? If not, perhaps rent could be escrowed to a 3rd party (e.g., an attorney or perhaps the lessor)? This same issue could appear with loans that have quarterly payments (or interest due at maturity).
I think what will trip people up here is the documentation required at the end of the eight weeks to get forgiveness. The statute talks about really detailed evidence. E.g., cancelled checks. So I think you want to explicitly create transactions within the eight weeks. And transactions that work according to your usual accounting method.
Also I would think accrual basis taxpayers are going to have some trouble here making their documentation understandable.
Sidebar comment: The employee retention credit statute includes a reference to IRC Section 448, an “accounting method” code section. I don’t see anything like that in Sections 1102 or 1106. But it would have probably been useful…
Regarding tracking the funds and documenting for purposes of forgiveness; I have 7 employees I pay biweekly (every other Wednesday). What if I do my next payroll run April 15, and then receive PPP funds April 22, and the 8 week clock starts running that day-April 22, ending June 17. My payroll run during the 8 week period would be April 29, May 13, May 27, June 10. We pay in arrears. technically the April 29 payroll run is for April 8-22, one week covers a period before funds were received and the 8 week coverage period..
I guess my question is does payroll run have to match the 8 week period precisely. Even if a company has to change their pay dates, so it matches.
If you’re a cash basis taxpayer, I think you want to adjust your payroll schedule so it clearly dumps 8 weeks of payroll transactions into the eight week covered period.
The “forgiveness” review the bank does isn’t going to be much better organized than the loan application review, I”ll bet.
What about accrual based companies??
I think may want to get cash transactions in the books in any case where accrual-based accounting methods don’t clearly trigger the transaction.
My company has received funding on our PPP loan and have set up a separate checking account for use. I cannot find documentation on this question:
When issuing payroll checks during the timespan of the PPP loan, are employee Federal taxes still to be withheld? If so, is the payment of these withheld taxes to be made from the PPP loan funds? And is this part of the forgivable payroll costs? Thanks for the helpful article.
I describe how the accounting works here: Paycheck Protection Loan Formula Explained and Illustrated.
But the employee’s gross wage amount–so if she makes $1K a week, that $1K–counts. The employeE payroll taxes withheld from the gross paycheck account don’t reduce the payroll costs..
What doesn’t count? The EmployeR payroll taxes.
I’m a shareholder in my S-Corp with my brother. We don’t pay ourselves a paycheck just pay our expenses through the company and have a K-1 to show income distribution.
Am I able to get a Paycheck Protection Loan?
What is the best way to go at this?
Sorry. To get a PPP loan, you need W-2 wages. So if you don’t have W-2 wages, you don’t have any “paychecks” that need protection. And you don’t get a logn.
P.S. As the IRS letter that accepted your S election indicated, you are required to pay shareholder-employees reasonable compensation on a W-2. You guys should that when you can restart your business.
I have an employee that has planned on retiring May 30th. Period. I have asked her if she will stay on until June 30th for the head count, but she refused. Any suggestions on how to handle this. We are on a cash basis, so the paycheck lag could account for two weeks, but is that kosher
to still count her as an employee because she hadn’t received her check yet?
Maybe you consider replacing her with a new person when she leaves? So you get full forgiveness?
I received the PPP Loan fund. Can I use the same Loan GL account number to record this new Loan?
Seems like it’d be better to set up a new loan account…
Looks like my PPP money will be issued to me in a week or less. During the 8 week period, for my employees who make more than $100,000 do I need to limit their pay to a weekly amount that does not exceed $100,000, even though they make more? Could I use other company funds to make up the difference?
Yes. Using other funds fine. E.g., you don’t need to reduce people’s wages to $100,000 on annual basis
Can the company pre-pay expenses and bonuses in order to make sure the PPP money is used up in 8 weeks? For example, if my group medical premium for the employees is 5,000 per month, can I pay 20,000 instead so I have a credit going forward? We are on cash basis.
I wouldn’t do that. But I can’t cite some bit in the statute of SBA guidance.
For what it’s worth, I think where you have flexibility is paying employees (but probably not owner employees). For example, I think a closed business (like a restaurant) could and should use PPP loan funds to pay employees sitting at home watching netflix.
If there are employees that have been laid off that won’t come back to work can you replace those employees with someone new at a similar pay rate and hours per week?
Yes, I think so.
Thanks for all the great info!
Question: Would it be worthwhile (or risky) to retroactively file my income as salary (payroll) instead of owner draw, on order to be eligible for the PPP?
I am the sole owner (and sole “employee”) of an LLC filing as an S-corp, the only source of income for our household. I have not yet filed my 2019 return. Every Friday in 2019, I transferred the same specific amount from my business account to my personal account. I could report this as W2 earnings and use the documentation to support my PPP application. I recognize that I would have to pay the associated taxes and some penalties or late fees. I’ve heard arguments both ways – 1) that it would be worth the work to better my chances of securing the loan or 2) it would be too much hassle and would raise too many flags for the IRS.
What do you think? Thanks!
You’re supposed to pay shareholder-employees reasonable wages. And it sounds like you haven’t been doing that. So that’s erroneous. You probably know that.
As far as correcting your error, I think that’d be a good idea regardless of its effect on your PPP loan.
The maybe happy coincidence is, you’ll also be able to create a monthly payroll amount that supports a PPP loan.
One reality. If you pay Matt the employee (say) $4K a month in wages and top that off with health insurance and a pension, you’d maybe at $6K a month. So the loan equals $15K. And the payroll taxes will eat up $7K before the penalties.
Are H2B visa wages eligible for payroll costs under the PPP? Our H2B workers receive W2’s for wages for the 9 months that they work and live here in the US. They are in their homeland for 3 months only.
I don’t think so. Sorry. The PPP loan formula doesn’t count as payroll costs, “any compensation of an employee whose principal place of residence is outside of the United States.” I don’t possess practitioner-level knowledge of H2B visas. But aren’t they really only temporary residents?
Our company (S corp) is deemed an essential business and we have been open and keeping our employees working and on the payroll. We were wondering if we would be eligible to file for the payroll protection loan with the SBA now, in case our business can no longer pay our guys in the future, For example if things go on much longer and our business suffers while trying to stay open. We’re not wanting to take advantage, but would like to be in a position if things get worse to keep our employees paid. What would you suggest….
Sounds to me like a loan would support your business and be appropriate…
Steve,
Thanks for all the info here. Very helpful. I own and operate a retail business with 5 locations in Philadelphia. We had close to 70 FTE going into the pandemic. What happens if come June 30th you have given the opportunity for all of your employees to come back to work and Half of them decided they don’t want to return to work? Are you penalized?
Yes, I think you will be penalized. Because of the headcount reduction. You’ll need to do everything you can to try to get back to “normal.”
Hi. Thank you for posting this. There is so much about the forgiveness aspect of this loan that is very vague. We pay payroll semi-monthly on the 1st and the 16th. Our loan started and was funded on 4/13. Our employees have been working reduced hours. Should we pay their full wages in the 4/16 payroll? And then because of where the start date of the loan falls, 8 weeks ends on Monday 6/8. Should we run an early payroll for the one we would normally run on 6/16? The loan amount was based on 2 months of an average monthly payroll and is too much if we can’t get 2 months worth of payroll in the eight weeks because of the timing…
You want to pay people for eight weeks of work within the eight week period that the forgiveness formula looks it. I think you pay it explicit and easy to document. BTW, also note that two months is more than eight weeks. Eight weeks is 56 days. Two months is probably 60-ish days.
We are a small company that has applied and been granted a PPP loan. We have shortened hours and have been using the employee’s PTO time to keep their salaries the same as before the cut hours. When I start into the 8 week payroll if I continue to use the PTO will that time be counted for the forgiveness ? Does it matter How we pay the salary as long as they are paid the full amount ? Can’t find the answer to this ? anywhere.
You can use PPP loan for PTO. That works. I would do your payroll in a very usual, super-orthodox way. Don’t do it in way that some banker might look at and become confused.
Thank You Steve. I use QuickBooks Payroll so no worries there. Thanks for the work you put into this site… We appreciate it.
My husband and I are a sole proprietorship. We had to lay off 3 employees in march due to the lock down and lack of work. 1 fte 2 part timers plus me. I am also an ee and take a very small wage on the payroll. My husband takes a draw. We applied for the PPP but have not heard yet. I’m being hopeful and asking the question now. If we are approved, we will hire back our 1 fte. Since both my husband and I will be working more hours in the 8 weeks, can we increase my salary, and his draw? would those funds fall under the forgivable amount? Will this look bad if we do not hire back the 2 pt ees? We would probably have to lay them off again at the end of the 8 weeks as I do not see our business recovering that quickly. If in the past we took the draw on the first of every month, will we have to keep the same date? Our payroll was every two weeks, is the forgiveness based on when you pay it out, or when the expense is incurred? Same kind of question about the rent, can you pay it weekly so that you get the most out of the forgivable portion?
The forgiveness formula checks if there’s been a reduction in the headcount of full-time employees, so not rehiring those part-timers shouldn’t make a difference. (But keep on top of the rules in case they change or evolve.)
Per the current law, I think you can probably bump your pay without penalty (though keep in mind that $8333 per month limit). I don’t know (no one does) how your husband’s draw works. I’ve speculated on these pages how it might work. But I think that’s trickier.
One other thing to keep in mind. The spirit of the thing is that you rehire the employees you let go. So I think any time you deviate from that–the government obviously is giving you this money for free–you bear a bit of risk. Given that, it might make sense to just rehire the part-timers too. Again, you’ll be paying them not with your money… but with Uncle Sams.
Good afternoon. I have a company with 3.5 members of the management team. We have a varying number of employees depending on how much work we have for our customers. We are a 501C3. We have been approved for a PPP. I have 2 questions:
Is the half-time person’s pay eligible to be a part of the forgivable portion? They are management, and they were half-time prior to February.
They state that health insurance is an eligible expense for being forgivable; what about workers’ compensation or life insurance?
Thank you.
I think the half time person’s pay works. So does the health insurance. The life insurance doesn’t. Probably neither does the worker’s compensation? But I’m not as sure about the last one. (It might be considered a state payroll tax.)
I am sorry, one more question. I asked our bank about the five payrolls in 8 weeks versus the four, they were not sure. We run our banks on accrual instead of cash, I think that helps us get the five payrolls in. What do you think?
I generally give my employees bonuses at the end of each quarter. Is it ok to use PPP loan funds for those bonuses? Someone told me the PPP funds could not be used for bonuses.
Ah, no, I think that’ll work… you might want to skim through the various forms of payroll that specifically qualify. I also think you want to keep your payroll really simple and easy to document.
Good morning, Great Post. As an executive in my parents’ company (LLC) I receive very low wages throughout the year, then I receive a bonus at the end of the year according to our profits. If I’ve read correctly, I can bump my pay during this period as long as my total pay for 2020 doesn’t exceed my total pay for 2019, and my weekly pay doesn’t exceed the 100k per annum mark. My husband, is plant manager, but not an executive. Could his pay exceed his last year’s pay (neither of us were over the 100K mark last year anyway – rough year ) since he is not an executive?
I would be cautious about raising the pay of family members in order to get a bigger PPP loan or in order to maximize forgiveness. I didn’t see anything in the statute or the guidance that prohibits this… but you’d want to be sure you honor the spirit of the PPP. Which is to maintain employment without headcount cuts and without dramatic pay cuts.
My issue is that we based our loan on actual payroll from 2019. And, we’re maintaining all our employees… but with me drawing typically only a little more than minimum wage weekly with a variable, but usually large, bonus at the end of the year, we could possibly have to end up paying interest if I don’t bump my salary now. I’d just like to recoup some of the bonus that I might not get this year. There is a good possibility that we won’t have much profit at the end of the year, but we might – our payroll only makes up a small percentage of our expenses, most is raw material, and those prices are swinging wildly.. The question about my husband refers to if we actually do manage to squeak out a profit at the end of the year, should we not pay him a larger bonus than last year. Probably not, according to your answer… which is fine…. I’m just planning ahead.
We are maintaining all of our employees and replacing the ones who quit or are fired, but we are seeing a downturn in orders (we’re an essential business). It’s all so up in the air right now, that we thought it would be best to get the PPP so that we could keep our well-trained employees as long as possible should things go to pot.
I’m part of a law partnership – a pure pass through where all partners receive a K-1 with zero guaranteed payments. We applied for the PPP loan on the understanding that we could NOT treat payroll (really monthly draws) to partners as “payroll” under the CARES Act. That is, we borrowed only payroll for our employees (associate attorneys and staff) up to the $100k cap. Our loan has been approved by the bank and the SBA but not yet funded to our account.
The new guidance makes painfully clear that we could / should have included up to $100k/year in draw payments to partners as payroll. This concerns us because we could have taken more under the loan, but MORE WORRYING that it might appear we were gaming the system in some way if we now (as the new guidance seems to mandate) treating draw payments to partners as payroll for purposes of documenting our future forgiveness application.
Our inclination is to tell our bank ASAP that the new guidance means we need to submit an amended application. We could probably live with the smaller loan amount originally approved, but we think we should submit the full picture of 2019 and Q1 2020 payroll INCLUDING PARTNERS for purposes of establishing both headcount and baseline monthly payroll. Otherwise the bank and SBA will be comparing apples and oranges when they try to discern whether we cut headcount or spent at least 75% of loan proceeds on payroll.
Any different advice? Should we push to amend our application and borrow more? I suspect there are a lot of us in this boat with the new guidance having clarified midstream how partners are treated.
Hi Steve,
Thanks for all the details in this article. We have an employee who qualified for Emergency FMLA under the CARES act and received 54 hours of pay (prorated since she’s part-time). Can her wages be included in my payroll expense? We are also getting a tax credit for the taxes associated with these hours. Thanks
It sounds to me like you’ve got stuff that’ll really play into the PPP calculations. E.g., that family leave unemployment doesn’t count toward payroll costs. Also the employee retention credit means you can’t do a PPP loan.
Check the specifics of all of this stuff though.
Great article, I am however quite confused on owner draw’s and loan forgiveness. My CPA seems quite sure I can no longer pay myself my usual owner draw (we have an even split of owner w2 payroll and owner draw each month). He said if we continue to pay ourselves owner draw’s we will not be forgiven on the loan as they are looking at that as CEO bailouts or something.
So even if we moved the PPP loan into a seperate checking account and documented every expense, we can’t pay ourselves any owner draws for 12 months? It seems like that would not work for 90% of the S corporation small business owners out there. Any insight would be much appreciated
I think your CPA is right. If you’re an S corporation, only your W-2 wages (both for regular employees and shareholder-employees) count as payroll costs. The whole “owners draw” thing applies to sole proprietors and partners in partnerships.
Hi Steve;
I have already laid off most of my employees 2 weeks ago, I received my PPP loan but not funded as of today, and am wondering how soon I have to recall the employees back and what if the
employee-‘s decide they do not want to come back until the government gives the all Clear?
And lastly, what happens to his unemployment benefits that they applied for upon being laid off when i start paying them ?
The eight week time-clock starts when you get funding. So if it were me, I’d reach out to former employees today (or tonight?). Let folks know you’d like them to come back as soon as you have funding. And then cross your fingers all your come back the day you get money.
People who come back to work need to stop unemployment. Also, if someone won’t come back, you may need to hire a replacement. (Make sure you understand how a reduction in our full-time employee headcount impacts your forgiven. More info here: Paycheck Protection Program A Small Business Life Saver. )
Hi Steve,
Thank you for all your help. We pay every week.
I have one employee over 100k.
100k/52 =1,923.07 a week gross.
Should I use this gross weekly number Plus state tax
Minus all the fed taxes & fica to equal how much is forgivable?
I’m going to use a separate checking account and transfer only forgivable amounts over to my operating account as you suggested.
You just use that gross $1923.01 a week… plus the state taxes… plus any health insurance or retirement.
Thanks for all the great insights for what must be a very busy time for you! I wanted to clarify something discussed in the comments of “The 50 Percent Section 2301 Employee Retention Credit” blog post.
Some sources state that the ERC does not apply to wages paid to people with an ownership share in an s-corp. Here is the language I have found elsewhere: “Wages paid to anyone who owns, directly or indirectly, more than 50% of the employer will likely not qualify for the ERC.”
Personally, I am in that boat (husband and wife printing business formed as an S-Corp) so I would love for them to be wrong. Any thoughts?
Thanks for all the great insights for what must be a very busy time for you! I wanted to clarify something discussed in the comments of “The 50 Percent Section 2301 Employee Retention Credit” blog post.
Some sources state that the ERC does not apply to wages paid to people with an ownership share in an s-corp. Here is the language I have found elsewhere: “Wages paid to anyone who owns, directly or indirectly, more than 50% of the employer will likely not qualify for the ERC.”
Personally, I am in that boat (husband and wife printing business formed as an S-Corp) so I would love for them to be wrong. Any thoughts?
I have not followed the discussion of the employee retention credit as closely over last couple of weeks. I’ve been elbows deep in PPP loan stuff. But I don’t see that limitation in the statue. However, maybe it appears in guidance from the IRS that I haven’t yet gotten around to reading.
Do you have a good authoritative source you can point or link to?
I’m not sure about authoritative, but here are the three sources I found that raise the issue:
https://www.dbccpa.com/covid-19/cares-act-faq-employee-retention-credit/
https://clarknuber.com/articles/the-cares-act-employee-retention-credit-program-eligibility-requirements-and-definitions/
https://www.jdsupra.com/legalnews/guide-to-navigating-covid-19-federal-79143/
I tried looking for the restriction in the actual legislation and the guidance, but didn’t have any luck, so I don’t know what they are basing it on.
I would call those pretty authoritative. But for the record, I can’t find the primary source authority either that backs this up. Or maybe I’m just reading Section 2301 and the referenced code sections wrong? Like every tax code section, obviously, it references a bunch of other code sections (4980H, 3121, 3231, etc)
Hi! What a very helpful blog post! Thanks for taking the tune to do all this! We own a small general contractor company in WA. We averaged 5 FTE for 2018 (including my husband and myself). When they stay at hone was ordered, we put our 3 employees on standby. They are all currently collecting unemployment. My husband and I continue to draw our salary (total under $100k/yr.) we received approval for PPP yesterday, and expect to be funded shortly. Two questions: 1) is it enough to just use the classes feature in QB and just put the funds in our main business checking account, for easy access to expenditures? Or should we still open a separate checking account? I’m worried about having to switch the eligible expenses over then having to switch it all back after the 8 weeks. It’ll take two weeks to even get new checks! 2) how long can we hold off on bringing our employees back on payroll in order to get max benefit? I mean, we don’t have work for them to do right now, and I don’t want to abuse the privilege of this money. But I also don’t want to sabotage the funding of our salaries (we are still working, lining up jobs, doing the administrative stuff.) are we best off just hiring them back right away to pay them to stay home? Or should we wait until further into the 8 weeks to do so, as we get closer to (hopefully!!)having actual work for them to do. Thanks again!!!
The classes thing should work. As far as holding off on hiring employees, the issue is you’ll need to use 75% of the PPP loan within the 8 weeks after funding in order to get full forgiveness.
Steve: Your note relating to a sole proprietor (see below) is unclear as to whether you’re talking about the owner’s draw or wage paid to an employee of the sole proprietorship. A draw is not deductible and therefore would not show up or be reported on Schedule C. So, I presume you mean a wage paid to an employee of the sole proprietor.
Note: The additional eligibility criteria published on April 14 indicate for a sole proprietor, a deduction should appear on the sole proprietor’s 2019 Schedule C in order to be a permissible expenditure during the “eight-week period following the first disbursement of the loan.”
So the additional eligibility criteria document you reference specified how the owners compensation thing works.
To calculate the average payroll cost you can include the owner’s Schedule C profit. E.g., if the business paid W-2 employees $62,000 for the year and then after those and other expenses the Schedule C form showed $52,000 of profit, the total payroll costs equal $120,000. The monthly average therefore equals $10,000. The loan amount equal equals $25,000.
For purposes of the loan forgiveness formula, that document you reference says that 8/52nds of that amount can be paid out as a draw and counted as owners compensation.
My company is a Single Member LLC and we just received our PPP loan. I own the buildings through a separate single member LLC and pay rent to that entity. Does this rent paid to a related entity qualify for use of the PPP proceeds?
I would think you ignore the SMLLCs and then treat the mortgage interest as a cost the leads to forgiveness.
I am an essential employee at a Doctors office. My hours have been reduced from 35 just 22 a week. I am thankful we are still working and still getting a paycheck but the bills are not going down and the paycheck is not enough. I am working morning hours (since we went to half days) then going home to teach my child virtually on line for school. Since my Doctor was approved and they have received funds with the PPP loan they are asking me to put back in 9 hours a day (even if its to clean the office) so I can get my hours in to get my original pay. That is super nice of them BUT I cant work 9 hours a day and go home to teach school at 6pm. Its not fair to my child nor me. I guess my question is do I have to actually work the hours to get paid? I’m not being selfish and believe me I want to work but cant they still pay me my 9 hours a day to help me out?? I thought that was the point of this protection plan to help protect us? I feel I’m stuck with limited pay because there’s just not enough time in the day to be a full time employee and a teacher to my child. Rant over.
Sorry for your dilemma. This pandemic creates all sorts of awkward issues for everybody.
BTW, the problem for your doctors office. The law says he needs to maintain his full time employee headcount in order to get forgiveness for the loan.
That reality doesn’t make things any easier for your family. But he’s not the person who made the rules. He or she is just trying to follow the rules.
Hello, I have a tenant that received a PPP loan He now wants to prepay NNN expenses. From what I’m reading he is unable to correct? Thank you
I don’t think you need to worry about that on your side. But I don’t think he should be doing that. That’s clearly bad accounting. Even if right now we don’t have explicit prohibitions you can’t frontload expenses…
HI Steve,
Others have asked a very similar question, so forgive me if this is redundant. It’s the 8-week period that is throwing me off. We received our loan on April 15th. However we do payroll once a month, at the end of each month. We also pay our other bills (rent, utilities) once a month and on different dates of the each month.
In order to follow precisely the 8 week window, would we have to write separate checks for EVERYTHING? (Meaning for our April payroll each employee would get a paycheck for Apr 1-14th, and another for Apr 15-30… Rent for April would need to be paid as two separate checks, one for Apri 1-14th, a second for Apr 15-30… etc.)
We run QuickBooks with assisted payroll (I think,, the one that calculates all the withholdings for you, but you still cut the checks yourself). Everything is set up for our monthly payroll schedule. I am just picturing how to tweak everything in order to cut these separate oddball checks.
Alternatively, would it be enough to run everything as usual, but then do pro-rating after the fact for illustrative purposes? E.g, show the paychecks for all of April but then calculate the portion that is for the PPP period (April 15-30)?
Thanks!
I would not prorate. I would make sure you have all the transactions clearly within the eight weeks.
You are doing great work in helping people during this situation..
We own dry cleaners..
We received PPP loan approval document today for our signature.. The 8 weeks clock start from the DAY WE RECEIVE MONEY into our bank acount not form the DAY WE SIGN the document, correct?
75% PPP loan amount we need to use towards employee payroll. Doe this include payroll tax too?
Which of the following expense we can use towards 25% remaining amount?
Utility,
Rent
Insurance? Commercial | Auto Insurance | workers comp insurance | Pollution insurance
We have temporarily closed our Business from March 18 but we have not laid off our two key employees. If we receive PPP loan money into our bank account on Apr 21, can we use loan money towards loan forgiveness for the period Mar 18 – Apr 20)?
Thanks!
I think time clock starts when you get money. You can include employee side payroll taxes and SUTA. But not federal employer side payroll taxes.
You can also include rent, utilities, and interest on loans but subject to rules.
Fantastic article with great details. And of course I still have questions.
We farm so income is on a Schedule F and also have a LLC. The farm is the two of us, husband and wife. We don’t write ourselves a paycheck. The LLC is husband, wife, and daughter all with 33.3% membership. We are going to file paperwork with our bank for when funds open back up. What should we include besides Schedule F and 1099 from LLC which we paid daughter her share of income as NEC. I don’t know if we should file now just in case or wait until a final determination is made for farmers.
I think you’re a partnership and file based on your self-employment income as shown on your K-1s. BTW I would apply now if you can. I think your group was penalized in many cases because banks didn’t know or sure they could lend to partnerships.
Great article, I hope you can answer this question:
It looks like I am approved and should be getting funded soon, however my type of business (youth sports) is going to take a while to take off again. I do not believe I’ll be even “open” in 6 weeks time…I think I understand the minutia about the payroll, etc, but my question is: what happens if I chose to pay other outstanding bills (landscape services for the sport fields, repairs for the building etc) or issue refunds for the programs that were suspended? Am I not allowed to do any of that? or simply won’t be forgiven? or am I “misusing” the funds – committing fraud…
I’ll appreciate input
You need to use at least 75% of the money for payroll, period. Further, if you reduce employee head counts (or pay rates) you’ll lose a percentage of the forgiveness.
So I think you can probably do what you want… but you’ll lose the “free money” benefit.
Hello what a good atrical, my company got approved for PPP (they have not announced it but someone leaked the info) we’re 47 employees and are an essential business but there is not enough work to keep us all busy so the few people that come in to their hourly job will get a 25 dollar incentive per day and the people that stay home will not get paid unless they have PTO/Vacation time. Are they trying to screw us over is there a way for them to allocate the majority of the 75% in payroll elsewhere and leave their hourly employees out?
The statute loans employers money for payroll and a few other items. If they use it to pay employee payroll and those few other times, they don’t have to pay the loan back. If they don’t use it for payroll and those other items they do.
So your employer isn’t really screwing you if it doesn’t use money for payroll. But it does lose the “free money” benefit.
Hi, My bank has gotten my LLC a loan and papers have been signed. Since application the chance to include my wife’s and mine K1 ,line 1 and 4a has been started . Is there now or do you think there will be a chance to amend the application ? A difference of $30,000.00
I doubt it. The money is gone. (At least as of April 16.)
Our PPP loan was deposited in our account on April 17, 2020. The 8 week covered period is 4/17/20 to 6/12/20. We pay our employees semi-monthly. The loan will cover the 4/30, 5/15 and 5/31 payrolls. What about the 6/15 payroll? Can we include this payroll even though the covered period ends on 6/12/20.
I would pay people on 6/12 for wages earned through 6/12. I can imagine all sorts of confusion if you try to include a payroll that falls outside the eight weeks.
I run a small S-Corp with a cash accounting method. We received our PPP funding on 4/16. Normally, I run payroll on the 20th for the previous month. So on 4/20 I will run payroll for work done in March. Will this payment count towards forgiveness?
I plan to move up my payroll check date to the 1st so that on 5/1 we will pay April and 6/1 we will pay May. The last day in my 8-week period is 6/11.
Do I need to switch to bi-monthly or even weekly payroll so that both the check date AND period covered all fall within the 8-week block? I am worried that my check on 5/1 which will cover all of April will only be half-forgiven since my funding date was in the middle of April on 4/16.
The rules should let you use your usual method accounting. And if you’re a cash basis taxpayer, as long as you can get enough payroll runs within the eight weeks, you should be okay.
HOWEVER, the whole loan application process has showed us the banks and the SBA don’t really know how to handle these sorts of tax accounting questions. The loan forgiveness phase of this thing surely will be even worse than the loan application phase.
So if it were me, I would try to very explicitly make sure I had eight weeks of payroll incurred and paid within the eight weeks after funding.
Hi,
I have a 20 employee business and the business rents the property from my self. So i have my own written lease agreement. What is preventing from back dating my rental agreement and increasing the rent paid by the business? The reason being i always paid too little and want to make sure i can use up the 25%
That breaks the law, I think. But ask your attorney, I guess.
I am a sole proprietor LLC (Consultant) and began my business in January 2020. I read that I would establish my income for PPP with the earnings from January/February 2020. I invoiced 4 times in that period, but only received three payments before the end of February. The 4th fell into March. This reduces my income average for the two months by ~25%. I was invoicing upfront $5K every two weeks, beginning January 6th. Can I claim my income as $10K per month or does it need to be reduced to the $7,500 per month due to the timing of receiving payment? It makes a big difference for me in the loan amount (relatively speaking). Great article… thanks for the info!
First, it’s not your billings that’ll determine your payroll costs but your net income as shown on your Schedule C. So consider that.
Second, you can probably use accrual basis accounting on your Schedule C. (Talk with your accountant.) But that’ll mean more accounting complexity. Also it may not get you the result you need.
As a recipient of the PPP loan, if I make a payment towards my employees’ student loans during the 8 week lookback period, will this amount be counted as an eligible payroll expense towards the 75% forgiveness threshold?
https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf
The wording is not 100% conclusive to me..
> “Payroll costs include:
> Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit”
It boils down to whether this list is merely ‘inclusive’, or whether it is ‘exhaustive’…
Any insight would be appreciated!
I don’t think that works. I think you want to assume that if something isn’t specifically included, it doesn’t work.
An observation that connects to this: One of the problems for people applying for loans has been this: Banks don’t want to count some payroll-y cost as payroll until the SBA explicitly says “okay.” They aren’t being stupid by doing this. They’re applying the usual rule.
Hello, Thanks for the useful information.
For a sole proprietor who makes over $100,000 on the schedule C, I used $8333 for average monthly payroll to apply for the PPP loan. Can I pay myself $8333 two times during the 8 wk period (which totals $16666, or can I only pay myself 8/52 of $100,000, which is $15384?
Also, how do I document this check to myself for loan forgiveness documentation purposes?
Is a copy of the written check from the PPP business account to my personal account enough documentation?
You use the number 8/52nd. And though you want to stay on top of the fast changing rules, presumably checks that add up to the right amount, coupled with your 2019 Schedule C, should work.
Hi Steve,
Question on the covered 8 week period. I understand how this will work with payroll, but how will this work with monthly expenses such as rent & medical insurance premiums? We received our funding today, our 8 week period will end mid June. Do we need to prorate rent on a daily basis? Is there any way to squeeze in April, May and June rent for forgiveness? Our landlord allowed us to skip April rent and push it to the end of our lease. So we would pay April rent now, then May and June at the beginning of the month.
So great question. And right now, I don’t think we have good guidance. Maybe we won’t even get good guidance by the time you need to document your rationale for forgiveness.
I will say this. Lenders and the SBA surely will not be anymore organized in processing the forgiveness than they are in processing the loan requests. And it’ll be more work to calculate the forgiveness.
Accordingly, I think you document the heck out of your forgiveness-triggering payments. You can’t be too obsessive-compulsive in my mind. Further, you should assume little accounting-savvy on the part of bankers or the initial wave of SBA guidance.
I would run weekly payroll starting on the date of your funding.
If you have some non-payroll bill that falls partly within and partly outside the eight weeks, I would write separate checks. E.g., if only half your June rent qualifies for forgiveness, I would write a one check for the first half of June and one for the second and then ask landlord to help you out on the documentation.
Hi Steve,
You state here in several places that the employee’s side of the federal FICA and federal tax withholdings do not need to be excluded when calculating the forgiveable amount of the PPP loan. Do you have a source which says that? The only info I have from my lender is titled:
SMALL BUSINESS ADMINISTRATION
[Docket No. SBA-2020-0015]
13 CFR Part 120
Business Loan Program Temporary Changes; Paycheck Protection Program
RIN 3245-AH34
And it states on page 10-11, in “(g) Is there anything that is expressly excluded from the definition of payroll costs?”
“iii. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the EMPLOYEES’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from EMPLOYEES.”
I’d love it if this is wrong and you could point me to a source which states that you can include employees’ share of these items in the forgivable amount!
Thanks,
Bryan
Check out the additional eligibility criteria document published by the SBA at the treasury.gov website and linked to several times on these PPP blog posts.
Without any doubt, your lender’s information is out of date. (To be fair, it is nearly impossible to keep up on the changes in the guidance.)
P.S. There’s a footnote in the referenced document that explains why the SBA looks at gross payroll ALWAYS in spite of what the actual statute says.
Thanks! I did see the link that I think you are referring to for the US Treasury site, but the link no longer seems to be working. It just returns that I am not authorized to view that site. If you have the reference handy it would be greatly appreciated.
I am an S Corp.
Do Shareholder distributions qualify for forgiveness? I have paid these on a regular basis for many years on top of my salary.
sorry. reading through other posts. distributions are out.
Our nonprofit has applied for the PPP loan. How to we book this in accounting when received since it may/might all be forgiven? If a portion is not forgiven, when does it need to be paid back in full? If not until 2021, I assume I would classify this as a long term liability?
Next, as a nonprofit, how and where would we book the loan forgiveness? In nonprofit terms, does this now become a government grant or is it booked as a forgiven loan – and how would we book that in accounting.? We usually do not get loans forgiven –LOL.
Thanks for your help to this nonprofit during these dark days of Covid-19. Stay safe!
I am an S-Corp set up in 2006, I have been putting the money back into the business and not taken a wage. I am the only “employee” and “president”. Of the business….how can PPP work for me?
With no wages,the PPP loan formula returns “zero.” So you can’t get a PPP loan. Sorry.
This sort of makes sense, though, once you consider the legislative intent. Congress wanted to “protect” or “replace” paychecks. Your S corporation writes no paychecks.
Thank you so much for this helpful information. .
We are a SCorp landscaping business where my husband is 100% shareholder and I am an Officer. The first quarter was tough for us this year and we generally take a lower salary during that time anyway. We received PPP funds this week. Are we able to increase our salary and hire on additional part time employees as we usually do this time of year and still be eligible for forgiveness? Also, my loan document date is 5 days earlier than it was disbursed. From everything I have read, the 8 weeks begins on the disbursement date and not the date on the Promissary Note, correct? Finally, we also applied for the EIDL and have heard nothing, but the advance was deposited the day after we received the PPP loan. Will the advance effect forgiveness of the PPP and is it still ok to take the EIDL loan if they send approval in the future?
I don’t understand all of your info. (Check with the bank and the SBA documents at the treasury.gov website for details on the EIDL.)
But you doing your “usual” payroll now that it’s spring should work just fine. And the 8 week time clock does start with the funding.
PLEASE HELP!
Hi Steve,
I started a retail LLC established in July of 2019. ( I was employed full time by the state for a year and quit in October 2019 to start my business )
There are two 50% owners . Me (who does the day to day business activity ) and my partner ( investor with rights to day to activity )..
He has paid Me 6k average a month by transferring funds from his personal account to my personal account . We did not use quick books of any accounting and I did not report or pay taxes. Therefore we do not have payroll.
I also have not filed my taxes yet .
I do not know how to prove it.
What do I need to do to be eligible for the PPP loan ?
What do I apply under ? Sole Proprietor?
You have a partnership. The partnership should file a partnership return reporting the $6K-ish payments to you as guaranteed payments. Those guaranteed payments become your self-employment earnings and “count” as payroll costs.
Can you pay off your line of credit with your PPP loan and then draw from it for payroll??
I wouldn’t do that. I understand your thinking. And it’s a good idea financially. But in my opinion, you do not want to confuse the bookkeeping in that way.
I keep saying this, but the banks and the SBA have done a pretty crummy job of figuring out the bookkeeping on this PPP loan stuff. Think about the personalized service you’ve gotten as part of the application process (which was easy part). And then think about how much personal attention you’ll get regarding the forgiveness accounting…
I have an S-Corp in WA that employs four people, including myself as an owner receiving W2 wages. I did not apply for a PPP loan because of this statement in the loan application that required certification:
“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Even though we’ve been hit financially during this time due to the government Stay at Home order (paying employees who are working from home without a lot to do, paying rent on an office we can’t go to, Amazon orders that won’t ship for over a month so customers go elsewhere), I could not in good conscience certify that this loan is absolutely NECESSARY to support our ongoing operations. Is this a difficult time? Yes, but we have savings and can pay our costs during this time, so we can survive without this loan. I felt it better to leave the money for those small businesses that really need it.
However, it appears many, many businesses did not feel the same and have applied for and received PPP loans for businesses that were doing fine during this time and not in danger of closing. Was I just interpreting the “necessary to support the ongoing operations” clause too strictly? I didn’t think so, but it seems like these other healthy businesses are getting “free” money intended for small businesses that desperately need it.
Instead of a PPP loan, I was considering using the Employee Retention Credit. The terms require a full or partial suspension of your business due to government limits on commerce during this time (which we’ve had in WA) and don’t require me to certify the funds are necessary to support ongoing operations. It seems less stringent compared to the PPP “necessary to continue operations” clause. Since we have fewer than 100 employees, it’s okay if my employees continue to do limited work from home.
>Was I just interpreting the “necessary to support the ongoing operations” clause too strictly?
I think you were. The standard was not, for example, “absolutely necessary.” I said this in response to another question and comment… I think you consider the two pieces to this puzzle–the application and funding of the PPP loan and then the forgiveness of the loan separately.
Regarding getting the loan, the “standard” was basically “is the loan a good idea financially given the uncertainty?” Most businesses can honestly answer that question “yes.”
Regarding the forgiveness, the “standard” is basically “did you use the money to keep employees?” That’s a bookkeeping-type requirement.
What you seem to be suggesting–and by the way I agree with you–is that logically it would have made more sense to have some sort of hardship test for either the loan funding or at the very least the loan forgiveness.
One final comment: I think you not only did the right (morally correct) thing. I think you did the pragmatic thing. The chances someone actually got a PPP loan were pretty small, as we’re now seeing.
After we apply for and hopefully receive forgiveness on these loans how do we handle this money that is not taxable in our accounting we use quickbooks? Thanks, KaTina
I am guessing the forgiveness of the loan won’t be taxable. Despite what the thoughtful tax accountants say about this.
But right now, I wouldn’t worry too much about this. Hopefully we’ll get specific tax accounting instructions before tax returns need to filed.
For what it’s worth, if you record the forgiveness using a separate QuickBooks “other income” accounting like “PPP loan forgiveness,” that will flag the income for tax accounting purposes.
Hi again,
I think I may have found the document:
https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
on p. 5 there’s an explanation that would seem to indicate you can include the employees’ portion of the federal taxes.
Thanks.