If you/your company was approved for a Paycheck Protection Program, there are a few things you need to do (this is all detailed further below):
- Create the Liability Account to record this deposit
- Know what documentation is needed for loan forgiveness
- Record the amount forgiven
- Decide what to do with any funds that weren't forgiven
What is forgiven? Well, this is a Paycheck Protection Program so the Employer’s cost to pay your employees is forgiven. Generally speaking, this loan is to mostly help the employees not the business. Other items may also be forgiven, such as utilities, rent and interest on mortgages (but at least 75% has to be for payroll costs) paid by the business. The key thing is that according to the SBA Website, “Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.” In other words - the number of employees and the gross salaries or wages cannot decrease during the loan period (8 weeks from funding). More information can be found on the SBA Website here: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#section-header-7
Please note - this procedure is a work in process and will be updated as we learn more about what reports the agencies want to support the loan forgiveness and how the approval process works. If you have any questions, please reach out to your accounting advisor or tax pro.
1. Create the Liability Account
To make things easy to track in QuickBooks Online, let's set up a new liability account for this loan. Naming this account "Paycheck Protection Loan Payable" will make it easy to remember what the account is for. Here's a quick video on how to set this up.
When you receive the funds, categorize the deposit to "Paycheck Protection Loan Payable".
2. Documentation for the Loan Forgiveness
You'll pull reports from Gusto to help support the loan to be forgiven. Currently there isn’t specific guidance on what type or reports will be needed. As we get more information and as Gusto makes updates on their end we will update our documentation here as well. For now, this is the most likely report to use:
- From the Gusto dashboard go to Reports
- Paycheck Protection Program Loan
- Change the Start date: This would be the date the loan was funded (the day the funds were deposited in your account).
- Change the End date: This would be 8 weeks from the funding date
Proof of payment of rent, mortgage interest, and utilities such as receipts, ACH, bank statements or wires. Utilities includes these following services, if they began February 15, 2020:
- Internet access
- The total of your non-payroll related expenses must not exceed 25% of the loan amount.
3. Record the amount Forgiven
This will be a two-part process. First, you need to make sure you have a Nontaxable Income account set up. Second, you'll do a journal entry to record the forgiven amount.
Nontaxable Income account
The Nontaxable Income account should be set up as an Other Income item. If you also received an EIDL grant, you should already have this account. If you did not receive an EIDL grant, then use the video below to make sure you set the account up properly.
Journal Entry for the PPP Loan Forgivable Amount
To record the amount of your loan that is forgivable, you will need to manually create a journal entry. To do this in QBO:
- In QBO, click on the + New Button
- Under Other, select Journal entry
- Date: Change the date to be 8 weeks from the funding date
- The rest should mimic this screenshot where the amount in both the debits and credits column is the amount forgiven
4. Decide What to do with Funds that Weren't Forgiven
If you received a larger loan than what is forgivable you essentially have two options on what to do with that money:
- You can return the funds and take the “loan” aspect of the money to $0.00
- You can keep the funds and have that money converted into an actual loan.
If you return the funds, the money should go out of your business bank account. Categorize that outgoing payment to your Paycheck Protection Loan Payable account. Once that is categorized, take a look at your Balance Sheet (change the date to Today). Your Paycheck Protection Loan Payable account should be $0.00. If not, you may want to reach out to your accounting advisor to help resolve the remaining balance.
If you keep the funds, the money will convert to a loan with a maturity of 2 years and an interest rate of 1%, according to the SBA website. When payments are made towards the loan, those loan payments will need to be split between the principal and interest portions. It would look something like this:
- On the bank feeds, click on the outgoing payment for the loan. Click the Split button on the right side of the screen.
- On the first row, input “Paycheck Protection Loan Payable” for the Category. For the amount, put the principal amount of the payment
- On the second row, input “Interest Paid” for the Category. For the amount, put the interest amount of the payment.
As always, if you need further information on this, please reach out to your accounting advisor or tax pro.