As of 04/18/2020

PPP Loan

  1. Cash in
    • Record the loan as long-term debt upon receipt
    • Record the forgiveness upon funding as Other Income (consider creating a separate GL account to separate it from taxable Other Income)
    • If you have opened a separate bank account, you will need to post the original entry to the account that the SBA had on file & then post a separate transfer
      1. SBA has given some guidance on how to ensure your loan is forgiven, but it is still in development. What we do know is that your bank statement alone will not suffice so complete and accurate financial records are crucial
    • Some of the note amount will need to be carried in the Current Portion of Long-Term Debt. Once further clarification of the rules is provided you will want to consult your CPA to help calculate the forgiveness.
  2. Forgiveness – documentation is KEY
    • A borrower of a PPP loan can be eligible for loan forgiveness up to the full amount of the loan and any accrued interest for costs incurred and payments made during the 8-week period after the lender makes the first disbursement of the PPP loan to the borrower, subject to proper documentation, on:
      1. payroll costs (as defined by SBA),
      2. mortgage interest on mortgages that had been in place prior to February 15, 2020,
  • rent with respect to leasing agreements that had been in place before February 15, 2020, and
  1. payment of service for the distribution of electricity, gas, water, transportation, telephone, or internet access for such services that began before February 15, 2020.
  2. Note, however, that (i) at least 75% of the forgiven amount must be used for payroll costs and (ii) the amount of the PPP loan forgiveness may be reduced if the borrower reduces the number of employees or salaries and wages (for employees with annual salaries of $100,000 or less by more than 25%).
  3. The reduction penalty will not apply to the extent the borrower restores their workforce count and salaries/wages by June 30, 2020.
  4. The FAQ issued on April 8, 2020 also clarified that the lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval, so lenders and borrowers do not have much flexibility in choosing when the 8-week timeframe begins.

EIDL Loan

  1. Cash in
    • Advance
      1. Record the loan as long-term debt upon receipt
      2. Record the forgiveness immediately as Other Income (since the amount of the advance is forgiven, regardless of whether additional loan amounts are taken)
    • Loan
      1. Record the loan as long-term debt upon funding
      2. Total loan amount decreased by the forgiven advance
    • Some of the note amount will need to be carried in the Current Portion of Long-Term Debt. Once further clarification of the rules is provided you will want to consult your CPA to help calculate the forgiveness.
  2. Forgiveness – immediately, but only for the amount of the Advance

Other CARES Act considerations

  1. No Double-dipping – You cannot take the forgiveness of the full PPP and
    • Forgiveness of the EIDL Advance
    • Qualified sick leave wages for which a credit is allowed under 7001 of the Families First Coronavirus Response Act
    • Qualified family leave wages for which a credit is allowed under section 7003 of the same Act
  2. PPP has many areas which require further clarification – the more detail you are able to have between February 15 and June 30th, the better prepared you will be when the answers to these and other unknown issues are finally available.
    • What does it mean when it says “costs incurred and payments made” within the 8-week covered period will be forgiven
    • How do the two “covered periods” interact?
    • Are payments made with forgiven funds deductible?
    • Can a business pay interest on non-mortgage debt during the covered period and have it forgiven?
    • Can self-employed taxpayers have mortgage interest/rent/utilities forgiven, or can’t they?
    • What are we doing about federal income tax withholding and payroll taxes?
    • Can a business have self-rental payments forgiven?
    • Can someone explain how we determine the required reduction in forgiveness amount if a business cuts employees?
    • How does the reduction in forgiveness caused by salary reduction work?
    • Who makes the call (SBA, Lender, IRS)?

The way you currently record things like paid-time-off may not be adequate to optimize the available aspects of the CARES Act. You need to work closely with your CPA to ensure you capture the information as fully as possible as going back in time to create the information may not be possible and the limitations of your accounting software and payroll providers may impact the reporting. For example,

  1. if your employee is eligible for Qualified sick leave wages for which a credit is allowed under 7001, but you pay it as regular paid-time-off through your payroll provider, it may not meet the correct reporting for the credit
  2. If you currently use “Classes” as a way to create customized reporting and you create a separate class specifically for COVID19, it will potentially falsely skew the original intention of those reports
Contact us.