How To Account For Your PPP Loans
With the pandemic-related liabilities recently surfacing, securing yourself a loan from the Paycheck Protection Program could be an ordeal. If you’ve got one already established, this is an accomplishment in itself. These loans, as the name implies, are for the benefit of small businesses that are struggling with keeping their payroll running smoothly.
Securing a PPP loan will guarantee an uninterrupted cash flow within your business for two months. The good news is that applying for a loan forgiveness program may be less traumatic than you might’ve originally thought.
Why Is Tracking Expenses So Important
Tracking your business expenses is crucial because it’ll enable you to qualify for the loan forgiveness program. The loan forgiveness program dictates debtors to meet set criteria for waiving the debt. Your inability to meet these criteria will most certainly result in turning your loan into a permanent liability until it’s paid off.
As you track payment, ensure that the funds disbursed are in accordance with the loan forgiveness policy. You’ll be able to submit your report in a timely fashion without getting distraught over the overwhelming work that last-minute tallying can result in. To begin, start with a separate account for the PPP fund and maintain your tracks in a journal.
What Expenses Qualify Under PPP
The aim of the Paycheck Protection Program is, you’ve guessed it, to ensure payment for small business employees and keep their names from getting struck off the payroll. Your loan expenses, therefore, must be spent in this regard. The expenses that qualify under PPP include:
- Proceeds used to ensure payment to the employees and other payroll expenses (salaries, tips, and wages amounting to $100,000 per year, bringing the monthly forgivable payroll expense to around $15,000)
- Employee benefits comprising of vacation, parental, familial, or medical costs
- Proceeds to cover retirement benefits
- Proceeds that cover insurance premiums for the employees
- Local and state taxes as liable following employee compensation
- Mortgage, rent and utility expenses over the two months following loan procurement
One of the SBA’s (Small Business Administration) criteria is a balance between employee benefits and levels of compensation. That being secured, borrowers must also ensure that less than 25% of the PPP funds were expended over necessities other than the ones specified. Submitting for forgiveness will require a satisfactory record of keeping up with these criteria.
How To Account For Payroll Expenses
With the clear stipulations that are laid out for loan forgiveness, it’s imperative to track your spending very carefully. Doing this will prevent your loan expenses from getting lumped together with the other miscellaneous spending that’s inevitable in businesses.
As soon as your credit account receives the first PPP disbursement, your business will be ready to roll out payroll. In case your payment disbursement doesn’t align with the eight week period marked by the program, you may readjust employee payment dates. This will help to align your payment cycle with the eight-week payroll stipulations set by the SBA. Here’s how to make payments the right way for those who are a single-member LLC, a sole proprietor, or work in partnership.
- As A Single Member LLC: If you’re the sole owner of a limited liability company, transferring the PPP funds from your business account to your PPP sub-account will mark the act as running your payroll
- As A Sole Proprietor Or Partnership: In this case, allow the PPP funds disbursed to your account to flow out through K-1s and 1040s
- For Employees: The easiest method to keep your payroll running in case of the payment due to numerous employees is by maintaining a separate journal entry. Whether you own a PPP sub-account or not, the payroll expenses must always be marked as debited from your sub-account
In order to supplement business revenue and avoid any nature of altercation with the IRS, PPP loan borrowers must carefully track their spending.
Compliance in spending the procured loan with the policies and criteria specified by the SBA will prevent your loan from becoming a liability. On the other hand, an inept account of your business and payroll expenses poses the danger of conflating loan expenses with others, which is detrimental to your chances of applying for forgiveness.