You got the Paycheck Protection Program Loan (PPP Loan), you put it on your books, you recorded all your expenses, and now your 8-weeks are up. It is time to start down the road to loan forgiveness. Here’s what you need to make it happen.
Documentation
This is where having a plan in place to collect and keep any documentation that relates to the use of the PPP Loan funds comes in handy. This is a list of documents you will want to begin collecting and have ready for when you submit for forgiveness:
Documentation of employees on payroll and their rates for the periods used.
Payroll reports from your payroll provider.
Payroll filings (Form 941)
Income, payroll, unemployment insurance filings from your state
Documents showing any retirement or health insurance contributions
Documentation verifying utilities, rent and mortgage interest in place prior to 2/15/20
Documentation verifying payment of utilities, rent, and mortgage interest (account statements, payment receipts, cancelled check).
Contact your lender to see if there are any other documents they will need to help in the forgiveness decisions.
Application
Once you have collected the documentation, it is time to fill out the application and submit it to your lender. I recommend being in contact with your lender during this process. If they offer assistance in filling out the application, take full advantage.
Here is a copy of the Forgiveness Application pulled from the SBA website.
How to account for the forgiven amount
The bank will determine what is forgiven. Once a decision has been made, it will be time to add records to your Quickbooks Online so your books reflect lender’s determination.
Step 1: Add an income account to your Chart of Accounts called “PPP Loan Forgiveness - non-taxable”
Find and click “Chart of Accounts” in the left menu under “Accounting.”
Click “New” in the top right of the screen.
Under “Account Type,” select “Other Income.”
Under “Detail Type,” select “Other Miscellaneous Income.”
Under “Name,” type “PPP Loan Forgiveness - non-taxable.”
Click here to see a screenshot of what your screen should resemble.
Click “Save and Close.”
Step 2: Create a journal entry to move the amount that was forgiven out of the loan account and into the other income account you just created. You do this because you no longer owe that amount and your books should reflect you had income (in this case non-taxable) coming from something outside the scope of normal business.
Click “+New” in the top left of the screen.
Find and click “Journal Entry” in the menu options.
Under “Journal Date,” select the date of the loan forgiveness.
Under the “Account” column in the first row, select “PPP Loan.”
Under the “Debit” column, put the amount the loan is to be reduced (the amount approved for forgiveness).
Under the “Account” column in the second row, select the “PPP Loan Forgiveness - non-taxable.”
Under the “Credit” column, increase the income account the amount approved to be forgiven.
Under the “Description” column, make a detailed note for the reason of the transaction.
Click here to see a screenshot of what your screen should resemble.
Click “Save and Close.”
The amount forgiven is now no longer considered a loan to be repaid and your non-taxable loan forgiveness is reflected on your books.
What to do about the amount that was not forgiven
Hopefully you used your entire loan and all of it was forgiven. If that is not the case, you will still have a loan on your books that needs to be paid back. There is no early pay penalty. So, if you have the means to do so, feel free to pay off the debt immediately.
If you do not have the means and must make payments, then remember to do so monthly and on time. When adding the payment to Quickbooks Online, be sure to have one line of the expense showing the amount going to the principal and the second line on the expense showing the amount going toward interest expense. Here’s a quick step-by-step on how to add a loan payment:
Click “+New” in the top left of the screen.
Find and click “Expense” in the menu options.
Under “Payee,” type in the name of the lender who holds your loan.
Under “Payment Account,” select whichever bank account you paid from.”
Under “Payment Date,” select the date the check was written.
Under “ Payment Method,” select “Check.”
For the “Category,” select “PPP Loan.”
Under “Description,” type in a description that makes it clear it is the principal portion of the payment.
Under “Amount,” type in the amount of the payment going toward the principal.
In the next row down, for the “Category,” select “Interest Expense.”
Under “Description,” type in a description that makes it clear it is the interest portion of the payment.
Under “Amount,” type in the amount of the payment going toward the interest.
Be sure to note any reference numbers that will help with clarity.
Click here to see a screenshot of what your screen should resemble.
Click “Save and Close.”
That is how you go forward with the unforgiven portion of the loan. Make payments, be on time, and be sure to reflect the principal portion of the payment as well as the interest portion. Also, make certain you match these transactions when going through the checking account bank feed. Adding will cause duplication, matching will ensure clean and accurate books.
Parting words
Forgiveness of the PPP Loan is very much dependent on your ability to keep accurate records and provide the correct documentation. Put yourself in a position to maximize forgiveness by having a plan in place to follow the stipulations of the loan. Be sure to maintain accurate bookkeeping records. Collect and save ALL documentation that is relevant to the loan and the use of its funds. If you do all this, you will go into your forgiveness application process in prime position and minimize the amount you need to repay. After you know what is forgiven, follow the above steps to ensure the books reflect the action and begin paying off what was not.
Remember you can always reach out and schedule a free consultation to see how I can simplify your life when it comes to your business books.