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The Paycheck Protection Program or PPP is a loan program embedded in the CARES Act and was set up to encourage businesses to maintain wages and salaries and pay rent and utilities during the COVID-19 crisis.

The loan can be completely forgivable if you can prove you spent the funds on the right things.

What can you use these loans for?

You should use the proceeds from these loans on:

• Payroll costs, including benefits
• Interest on mortgage obligations, incurred before February 15, 2020
• Rent, under lease agreements in force before February 15, 2020
• Utilities, for which service began before February 15, 2020

What counts as Payroll Costs?

• Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
• Employee benefits including costs for vacation, parental, family, medical, or sick leave; severance pay; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
• State and local taxes assessed on compensation
• For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee

All expenses that fall under those categories are eligible for forgiveness. The following conditions will also apply:

8 weeks of coverage

Eligible expenses are those that are incurred over eight weeks, starting from the day the first payment was made by your lender.

This is not necessarily the date on which you signed your loan agreement.

Depending on your payroll schedule, you may want to adjust the timing of your payroll date to accommodate as many payroll cycles as possible.

For example, if your PPP loan gets deposited in your bank account on April 15, you could only use the funds on expenses incurred during the eight weeks following April 15.

The 75/25 rule

At least 75% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs.

 

Staffing requirements

You must maintain the number of employees on your payroll. Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

• The 8-week period following your initial loan disbursement, (A)
• 2/15/2019 to 6/30/2019, (B1)
• and 1/1/2020 to 2/29/2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you are a seasonal employer, you must divide by B1.

• If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
• If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

Pay requirements

You must maintain at least 75% of total salary.

This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.

If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

Rehiring grace period

You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness. You have until June 30th to do so.  

The content below will show you how to set the PPP up in Sage 50.  If you need assistance please contact us at 1.800.339.8224

Let’s assume that you applied for and received a PPP loan for $100,000 on 04/10/20. The example that follows is one way to record the loan and expenditures.  

Setting up the loan account

For optimal record keeping, it is recommended to create a separate cash account, both in Sage 50 and at the bank, to deposit the loan proceeds and track the related COVID-19 expenditures. A separate account is more audit-friendly, avoids comingling of funds and creates a clear audit trail. This will aid in maximum loan forgiveness.

 Create new accounts for tracking the loan

Open a new bank account and deposit the loan funds. Then, set up a new cash account in Sage 50:

 

Create a new liability account for the loan. Until you know how much of the loan will be forgiven, it must be tracked as a liability.

 

Set up the loan vendor

Set up the PPP lending institution as a new vendor and enter the loan liability account as the default expense account.

 

Record receipt of the loan proceeds

When you receive the money, deposit it into your new bank account and record the transaction in Sage 50 using the Receive Money window.

 

Accounting for other loan costs

Although interest and principal payments are deferred for 6 months, interest should be accrued at the stated rate of 1% in case some or all the loan is not forgiven. 

Obtain a statement from your lender showing a schedule of the accrued interest.

For this accrual we took (.01 X 100,000) / 12 months = $83.33 per month

The loan was granted on 04/10/20 so we owe 20 days accrued interest at 04/30/20:

(83.33 / 30) X 20 days = $55.56

 

Recording Loan Expenses

Continue to use your regular Business Checking accounts to pay expenses just as you normally would. If you have payroll direct deposit, it is not necessary to change the established cash account. But after payment of each expense, make a transfer from your PPP cash account to your regular business checking account as reimbursement for the allowable expense. Move the funds in real life and in your software.

In Sage 50, you can use the Write Checks transaction to record the transfer. Add a description that labels the expense as a PPP expense such as “PPP Transfer for electric bill”

Here is an example of transferring cash back to the Payroll Account after issuing the 04/15/20 payroll:

Tip: Do not combine a transfer for utilities and for payroll in a single transfer; do a separate transfer for each – one transfer per expense. Use your judgement on what does make sense to put into a single combined transfer. This combination makes sense: payroll wages + payroll taxes. This combination does not make sense: Payroll + Utilities + Rent in a single transfer. Instead, make three separate transfers.

Here is an example of a utility payment from the Regular Checking account: First, pay the bill as you normally would.

And here is the reimbursement from the PPP loan proceeds:

You can track your spending by viewing the pertinent accounts on the General Ledger report:

Note that all the activity regarding PPP loan expenditures is shown in the PPP cash account.

The PPP loan balance remains unchanged. If the loan is forgiven, you will reclassify all or part of the loan balance to Other Income.

 

The Account Reconciliation report can also be used to view the cash activities:

 

At the end of the 8 weeks, you can apply for loan forgiveness. Applications for loan forgiveness will be processed by your lender. After you submit your application, your lender is required by law to provide you with a response within 60 days.

These are the required documents you will need to collect and provide with your PPP forgiveness application:

• Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
• Payroll reports from your payroll provider
• Payroll tax filings (Form 941)
• Income, payroll, and unemployment insurance filings from your state
• Documents verifying any retirement and health insurance contributions
• Documents verifying your eligible interest, rent, and utility payments (cancelled checks, payment receipts, account statements)

If the loan is forgiven, you can zero-out the loan balance and reclassify it as Other Income. In this example, we used a Payment transaction to reclassify the entire loan balance:

This removes the loan balance from the liabilities and recognizes it as income.

 What happens if your loan is not forgiven?

• Your lender may allow you to provide additional documentation so they can reevaluate your request.
• Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 2-year period.
• There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.