In Part One of our two-part series on PPP Loan Forgiveness, we focused on the partial SBA guidelines and the major outstanding questions that still remain for forgiveness criteria. Yesterday, the second tranche of the PPP Loan program officially restarted and the hope is that many of the businesses left out of the first wave will receive funding this time around. So with this in mind, we want to help you take actionable steps today to ensure you have proper records of your PPP spend.
Regardless of what final SBA guidance says, you can be proactive in documenting spend over the next eight weeks. Here are five steps to take today to maximize your loan forgiveness:
Step 1: Establish a PPP Class and/or Tracking Category in your Accounting System
If you use Quickbooks Online or Xero as your cloud-based general ledger, we recommend setting up a class (QBO) or tracking category (Xero) for the “PPP” expenses.
By setting up a PPP Loan class, you will be able to appropriately tag all eligible expenses made using PPP funds. Once tagged, you will be able to quickly run a PPP Loan Report that will track and measure each specific payment in a single report. This will serve as your summary report for your PPP lender with all appropriate transaction details.
If you need help setting up classes and tracking categories, follow instructions below:
How to turn on class tracking in QBO
Setting up Tracking Categories in Xero
You can also create a summary report manually with a Google Doc or Sheet. By investing some time on the front end to establish class tracking in your general ledger, it will be more efficient but the point is you will need a summary report that documents all activity.
Step 2: Establish a Dedicated Shared Documentation Folder
Once you’ve received PPP funds and have payroll runs coming up, establish a shared folder in whatever file repository that you use (Google Drive, Dropbox, 365, etc.) to store all of your documented support.
Step 3: Save Invoices and Payment Support for Each Expense
At the end of each week, you should run a PPP transaction report that was created in Step 1. For each transaction in that report, you will need to save appropriate documentation supporting the expense. We recommend that for each transaction you save each of the following:
- The invoice or report for the expense, and
- The payment evidence for the expense – either canceled check or bank statement image of the cleared transaction.
Here is our recommendation for specific documentation by expense type:
Payroll – Compensation and Wages
- W-2 Payroll Summary and Payroll Summary by Employee report every time you run payroll
- Payroll Register following each period that details the pay to each employee and the total cost of your payroll
- Bank statement image of the payout that will tie to your payroll register
Healthcare and Retirement Benefits
- Payroll registers that show employer-paid breakdowns
- Healthcare premium invoices
- 401k and other retirement cost invoices
- Canceled checks or cleared transaction image for payment support
Rent/Mortgage Interest Payment
- Screenshot or download the ACH transfer bank image with the date and amount clearly listed
- Cleared check image if you pay by check
- Lease agreement with additional support on your lease payment amount
Utilities
- All invoices received for utilities **Note as of now gasoline used for company cars/trucks are not eligible for covered utility expenses**
- Screenshot all credit card statements or other methods used to pay utilities that clearly shows the payment was made for utilities
*Note for Bill.com or other third-party AP automation tool users – When processing payments for rent, utilities, insurance, etc during the forgiveness period, make sure to time your payments appropriately so that these are the only payments made on a given day. Because Bill.com draws the funds from your bank account in bulk, it will cause a headache to explain it later to your bankers how the system works. Save yourself the time now by just processing 1 payment on those days to make the draw agree directly to the supporting check amount.
Step 4: Calculate your FTEs for all applicable periods with support
There are three key periods for calculating your average FTEs:
- 8 weeks following PPP funding
- Feb 15, 2019 through June 30, 2019
- Jan 1, 2020 through Feb 29, 2020
For each of the periods above, you should pull your payroll details to calculate your average FTEs in those periods. Number 1 will be your numerator. Numbers 2 and 3 will be used for your denominator in your forgiveness reduction calculation. For 2 or 3 use the calculation that is most beneficial to you.
For example, as the language currently instructs, if your average FTEs for the period Jan 1, 2020 through Feb 29, 2020 was 10 and your average FTEs for the 8 weeks following PPP funding was 9, then your forgiveness reduction would be 10% or 90% of the amount eligible for forgiveness would be forgiven.
Note as we mentioned in our last post, the criteria to calculate an FTE is one of the major outstanding questions, specifically on calculating hourly employees. Additional guidance on the forgiveness calculation is needed to verify the reduction amounts if you do lay off employees during this time period.
Step 5: Staying in business and keeping people employed is the goal! Maybe full forgiveness isn’t?
From the onset of the PPP, lenders generally agreed that the majority of these loans would be fully forgivable. What has unfolded over the last few weeks brings a bit more uncertainty on that front as everyone awaits further guidance.
First, the PPP forgiveness period is only 8 weeks. The loans were for 2.5x of average payroll costs, which would be the equivalent of 10.83 weeks. So the math inherently will leave room for non-payroll costs. For many white-collar service-based companies, payroll costs grossly outweigh their rent and utilities, which will leave them with additional funds available following the forgiveness period.
Second, the pandemic did not go away. It is still very much a part of our lives and is expected to be for another 12-18 months. For industries that have been hardest hit, such as restaurants and hospitality, 8 weeks will likely not be enough as patrons come back slowly. For industries not expecting to re-open immediately, they should consider the opportunity to have a high quality 1% interest loan for a 24-month term, with payments deferred for the first 6 months.
These PPP funds’ value is far beyond just forgiveness. This program could provide a support mechanism for an economy to recover smart and efficiently. The funds can help keep businesses around for the long-term, and provide jobs for Americans for a longer period of time with a more deliberate reopen. The last thing we want is for companies to rush to spend this money in eight weeks only to lay off workers after June 30th.
Moving Forward
With a number of news stories coming out now how many large companies are taking unnecessary funds, ironically this will likely create additional oversight for small businesses on forgiveness. Use these five steps to ensure you are tracking PPP loan proceeds appropriately, creating optionality on forgiveness, and no major accounting headaches two months from now.
Use the Compass East PPP Calculator to estimate your forgiveness and your principal loan amounts and estimated loan payments following the forgiveness periods.
Questions? Finance and Accounting needs? Schedule a Free Consultation today!
John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com