Congratulations. You've filed all the paperwork for your PPP (Paycheck Protection Program) loan, and within a few days you'll hopefully have the money in the bank. Now is the time to start planning how you're going to make sure that you use the funds correctly.
The most attractive part of the PPP loan is that it is forgivable if you use at least 75 percent of it for payroll costs. That sounds easy enough, but keep in mind that the loan will be underwritten by your bank, and when the time comes to account for how the funds were used, you can rest assured you will need to show solid documentation. There are also many nuances to how you will need to account for the use of the funds. Messing up on any one of these can cost you dearly when it's time to account for the use of the loan proceeds.
This is where many small businesses will get into trouble, especially if they don't have good payroll, bookkeeping, banking, and software practices in place. Which is why it's a good time to get your act together; to be blunt, you really do not want to screw this up.
Here are a few things to keep in mind to make documentation as easy and complete as possible. And while it may be obvious, I'll say it now and again later: Be sure to have a CPA review and guide your every step along the way.
1. Get a payroll service.
If you're not already using a payroll service, now is the time to get one. For example, services such as Paychex automatically sent out spreadsheets to their clients that had all documentation and calculations needed to apply for and justify the basis of a PPP loan. These are not expensive services. If you have only a few employees, they can be less than $100 per month. You should have a payroll provider even if you are the only employee.
When it comes time to show that at least 75 percent of the PPP funds were used for payroll, there will be no digging through records and bank accounts; it will all be there at the push of a button.
2. Toss the shoebox.
If you're not using an online accounting system, it's time to put that in place, as well. Products such as Quicken or FreshBooks make your life infinitely easier by providing reports that can instantly give you the numbers you'll need, such as leases, mortgages, home office deductions, health insurance, and employee benefits, which will need to be accounted for in calculating loan forgiveness. For example, employee health care insurance costs paid by the company can be included as part of the 75 percent requirement.
3. Keep your PPP funds separate.
Put the PPP funds into a separate account. This way you can track the use of the funds precisely, even if it means transferring them from one account to another, for example, to fund payroll. To be clear, there's no requirement to do this, but you want to make sure you track this money with the same degree of diligence that you would if you thought the IRS was going to audit your books.
4. Be obsessive and track everything.
Set up a redundant file to track everything in obsessive detail. For example, copies of pay stubs, health insurance invoices, entries in a check register for anything related to payroll, commissions, costs for health care benefits and premium payments, interest on mortgages, rent and utilities, interest on debt you took on before February 15, 2020, and, if you have one, an SBA EIDL loan made from January 31, 2020, to April 3, 2020.
5. If you're self-employed, make sure you're paying yourself a salary.
If you have an S corp, keep in mind that you will need to pay yourself a salary for your compensation to be applied to the 75 percent requirement for loan forgiveness. Many S corp owners take out distributions during the year for some portion of their compensation. While that is a benefit of an S corp, it is does not constitute payroll compensation as far as the PPP is concerned. However, keep in mind that the PPP program does exclude payroll over $100,000 for any individual making more than that for the year. You should consult with your accountant on how to handle your 2020 salary so you can claim the maximum amount toward the 75 percent threshold.
6. Get a CPA. No really, get one now.
I can't say this forcefully enough: Get a CPA. You may be proud of the fact that you do your own tax filings, payroll, and bookkeeping, but this is not an area where you want to risk making a wrong decision. The guidance for the PPP seems to be changing daily. Little mistakes can cost you big. For example, if you operate on a cash basis and make payroll outside of the eight-week period after your loan is funded, you could end up losing the benefit of forgiveness. Many online accounting systems include access to CPAs as part of their platform. Whatever you do, be sure to do it under the guidance of a CPA to help you maximize your benefit from and adherence to the terms of the PPP loan.
The PPP program is one of the greatest investments we've ever made as a country for small business. But, as with so many government programs, knowing how to play by the rules is essential in using it to your best advantage.
For further guidance, go to the U.S. Treasury's site, which details the latest information on the PPP, and always consult a certified public accountant. Thanks to Steve Nelson, CPA, for providing some of the above tips.