Proper Accounting for the Paycheck Protection Program Loan

News related to COVID-19 is constantly changing, especially related to the stimulus payouts and Paycheck Protection Program. While our team is working hard to keep you up-to-date, keep in mind that some of the following information could potentially be out of date (depending on the time when you read this article). The information in this article reflects current circumstances on June 4, 2020.

If you’ve been following the progress of the Coronavirus Aid, Relief, and Economic Security Act (CARES), then you’ve seen that several iterations of this program have been rolled out in recent months. Some of the stimulus money went directly to families, while a large portion of the funds was earmarked for small businesses.

The Paycheck Protection Program is the most applicable option for businesses that were affected by the closures and shutdowns due to the pandemic. Were your cash flow and business sales affected?

Overview of the Paycheck Protection Program Rollouts

This loan program was designed to offer forgivable funds to small businesses across the nation. Initially, the first loans were offered starting in March 2020. This portion of the stimulus package provided $349 billion in the economy to support small businesses.

Even though it was a significant amount of money provided for small businesses, the economic fallout was so big that the funds were depleted in a short 12 days. When the money ran out, some business owners thought that they missed out on the available money. Those who were slow to apply for loans seemed to be on their own at that point.

Then, new funds were added to the Paycheck Protection Program in an updated proposal that was passed on April 24, 2020. This infused more cash into the fund, giving small business owners another opportunity to apply for this much-needed support to get through the lean months.

At this point, a portion of the Paycheck Protection Funds is still available, which means that you still have an option to apply if your small business is suffering due to the current economic situation. But some business owners have been hesitant to apply because of the strict regulations that determine whether the loan money will be forgiven. Business owners are concerned about the idea of piling on the debt, only to be left with the bill down the road. This large loan could be the final nail in the coffin that brings the business down.

So, additional legislation was passed in the House on Thursday, May 28, 2020, known as the Paycheck Protection Program Flexibility Act. Then, the Senate passed the program on Thursday, June 4, 2020. The next step was to pass the act to President Trump for the last signature needed to implement these updates.

The goal of this Paycheck Protection Program update was to make the money more accessible for small businesses. These proposed rule changes were designed to relax how the PPP funds could be used.

What You Need to Know About the Paycheck Protection Program Flexibility Act

The overall purpose of this updated Flexibility Act for the PPP is to make it easier for small businesses to use the money that is offered. The original terms of the loans were quite demanding, so it makes sense that many people were worried about the administrative burden that came with the loan funds.

The newest measures through the Paycheck Protection Program Flexibility Act soften the rules so that small businesses have more options in the way the funds are used. Here’s what you need to know about some of the changes that were passed through this new plan:

  • According to the rules of the original plan, 75% of the funds must be spent on payroll. The Flexibility Act drops this amount to 60% of the loan. The intention is to give companies an incentive to keep more employees on the payroll. Additionally, a larger portion of the remaining money can be used to pay rent, utilities, and other overhead costs as needed.
  • Originally, the distributed funds needed to be used within two months. This plan updates the use of these funds to six months.
  • The deadline to rehire workers has been pushed back to June 30, 2020.
  • Businesses that receive the funds have more time to repay the loans in the future.
  • If a business receives the loan, then they also have the option to defer payroll taxes if needed.

As of this writing, billions of dollars were still available in the fund. Even though more than 4.4 million loans were given in the first two rounds of the PPP, there is still money offered for companies in need.

PPP Loan Forgiveness

If you are a business owner who has accepted loan funding through the PPP, it’s important to know that this money isn’t a free-for-all offering. In a few months from now, you will need to show the Small Business Administration (which is overseeing the distribution of these funds) and your bank or lender how the money was spent.

It’s your responsibility to show that your company complied with the regulations of the loan. You need to have documentation and accounting records to back up your spending. This information will determine the amount of the loan that will be forgiven for your business.

To put it simply, if you received the loan money and you have a good accounting system in place, then there is a possibility that up to $100,000 (or more, depending on upcoming rule changes) could be forgiven. In this case, you won’t need to pay back the money.

On the other hand, poor accounting practices could result in you being held liable to pay either a portion or the full loan back. Right now is the time that every business owner needs to be proactive in maintaining the documentation and accounting strategy to provide evidence in favor of the loan forgiveness.

Accounting Tips for Your Paycheck Protection Program Loan

Here are a few things you need to think about as you are preparing your documentation related to how the loan money was spent:

  • Payroll Tracking: A large portion of the loan money must be used on payroll, which means that you need to have an accounting record showing your payroll costs during this time. As a simple example, if the Paycheck Protection Program Flexibility Act goes through, then you need to pay a minimum of $60,000 or your $100,000 loan on payroll. If you don’t already have a good payroll system in place, then it might be time to talk to an experienced accountant for recommendations.
  • Accounting Software: You need to be able to show how the money was used for business-related expenses. Most businesses already have good accounting software to track expenses and profits. If not, then act fast so that you can run the reports to show that you are spending the loan money on qualified business costs. One option is to set up a tracking category or tag in your accounting system to show the forgivable spending. Or, some businesses are choosing to set up a new bank account specifically for the PPP money.
  • Document Everything: Every penny that is received and spent must be clearly documented. Take this as seriously as if you are planning on an audit in the future. Not only do you need to record the dollar amount and purpose of the spending, but you should also have details about the payment date. Always keep copies of the electronic payment receipts or printed paychecks if needed. It can also be helpful to hold onto other supporting documentation, such as employee time cards, utility bills, mortgage costs, etc.
  • Professional Help: Most small business owners don’t have the knowledge or experience to implement an effective accounting system without assistance. If you want to minimize the likelihood of paying back your Paycheck Protection Program loan, then it is smart to invest in the services of a trusted accounting team. These professional services ensure that you’ve “dotted the i’s and crossed the t’s” for every detail of the loan money, which helps you avoid paying the funds back in a few months.

Ongoing Accounting Services

Not only does our team offer tax strategy and ongoing accounting services, but we are working hard to stay up-to-date with the latest changes in the industry. We know how much of a challenge it can be for small businesses to manage accounting and bookkeeping while juggling other business responsibilities.

The best thing you can do is invest in outsourced accounting services to oversee the financial management of your company. Whether you need support with your Paycheck Protection Program funds, or you are looking for assistance with tax strategy and other financial reports, we are here to help. Our team at Easier Accounting focuses specifically on the needs of small businesses, giving you access to industry experts who understand your unique needs.

You are invited to contact us at any time. Easier Accounting offers the support and services you need for your small business accounting systems. Call our team at (888) 620-0770.

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