PPP loans can only be used for certain expenses. If you use your loan for anything other than these expenses, you will not qualify for full loan forgiveness. So how exactly can you use your funds? What are the PPP spending requirements?

PPP eligible expenses include:

• Payroll Costs including
  • Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee
  • State & Local Taxes on Compensation
  • Employee Benefits: Includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave

If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000 annually qualify as payroll costs.

Note: These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes: Tax Forms: Form 941 quarterly tax filings and Form 944 annual tax filings; Payroll Registers, which ideally should be from the last 12 months, and Business Bank Statements: Should be from the last 12 months

If you’re an independent contractor or sole proprietor, documentation proving payroll costs include: Tax Forms: 1040 Schedule C and 1099s; Income and expense reports

Other documentation may be acceptable — ask your chosen lender for additional details about how they’re handling PPP allowable expenses

• Mortgage Interest: PPP loan can be used to pay mortgage interest. Mortgage interest obligations must have been incurred before February 15, 2020, to be a qualified expense.

Make sure to have documentation showing the mortgage interest that was paid. Acceptable documentation includes receipts, bank statements, account statements, and canceled checks.

• Rent: If you rent your commercial space, you can use a portion of your funds to cover rent over the next two months. To be considered a qualified expense, a lease agreement for the property must have been in effect before February 15, 2020.

Again, you need to keep all documentation proving your funds were spent toward this qualified expense. So, don’t forget to hang onto your account statements, receipts, bank statements, and canceled checks.

• Utilities: A portion of your loan can be to cover your utilities – which the SBA defines utilities as electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.

You’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.

One last thing to note is that you must use at least 60% of your loan to cover payroll costs to be forgiven. The remaining 40% can be used to pay mortgage interest, utilities, and rent.

The new round of PPP loans expands the list of qualified expenditures on which you can use the 40% of your loan that isn’t dedicated to payroll. These qualified expansions include:

• Software: Since the onset of the pandemic and its mandated shutdowns, more and more of us are working from home – and many businesses that have had to start taking and processing orders online that had previously been done in person. This paradigm shift has several associated costs such as cameras, software and the like.
• Property Damage: Yes, that’s right, property damage – stemming from periods of civil unrest – can be a portion of your expenditures. These of course, need to be proven and accounted for.
• Necessary Supplier Costs: this is another major addendum from Round One payments to the current Round Two: the new relief recognizes the importance of restocking critical supplies to keep your business running. Keep records of these expenditures – although your business should already be doing so.
• COVID-related Protective Measures: If your business is fortunate enough to have stayed open during these times, e.g., grocery stores, food service, gas stations or civil services, it has likely had to implement some changes to stay compliant with mask orders and social distancing guidelines; these may also include putting up shield guards and plexiglass barriers – and now they are included in potential PPP forgiveness.

Dunham Tax Professionals continues to stress the importance and value of consulting a professional for expert guidance and additional information. Please feel free to contact us to make an appointment. We’re here to help.

So, you’ve submitted your SBA Paycheck Protection Program – PPP – application and you might have even received your loan proceeds, but that does not mean there is nothing left to be done: It is critical for you to closely manage and account for your PPP loan proceeds, not just for cash flow purposes but for accounting purposes in order to apply for your PPP loan forgiveness. The amount of documentation you will ultimately need for the forgiveness component of this loan will be substantial, so get your process in place now to shorten the turnaround of this.

For accounting purposes, it may be a good practice to set up this separate bank account and a PPP note payable in your general ledger: The idea here is to record the proceeds deposited into the bank account with an offset to PPP note payable.

Keep in mind that this is a 2-year loan and it will be considered both a short-term and a long-term debt. As such, once you receive your loan amortization schedule, you should consider breaking out the amounts due between current and long term in your financial statements.

Remember to document the date of receipt on the PPP funds. This is important because this is your start of the eight-week period. Any eligible expenses paid within the eight-week period will factor into the forgiveness calculation.

Pay for all eligible expenses out of this bank account. For any items paid, keep support for these disbursements. You will need the support for the forgiveness submittal.

• Payroll costs
• Business Rent or Mortgages
• Utilities owed for the business – E Electricity, gas, water, transportation, telephone, or internet access.
• Interest Payments

It is noteworthy that your non-payroll items (rent, utilities, and interest) can be no more than 25% of the total forgivable portion of your loan. Be sure to track your eligible expenses as you could be in for a surprise if you use your PPP loan proceeds primarily for non-payroll items.

If you opt to not open a separate bank account for their PPP money, that is fine, but the same processes of documentation are recommended and isolating ultimate loan funds will be a bit more complicated.

Lastly, consider how to account for the forgiveness of this PPP loan on your books. For tax purposes, loan forgiveness is not taxable. For book purposes, loan forgiveness will ultimately be income (either through a reduction in operating expenses or more likely being recorded as other income). Keep in mind that loan forgiveness like this will most likely be considered an extraordinary item in your profit and loss for the year and will influence employee compensation that is driven by net income. Each company will need to evaluate the impact of loan forgiveness on a case-by-case basis.

As always, Dunham Tax Professionals wants to point out that our blogs serve to give you an idea of some of the basics, and that if you have more in-depth questions or concerns, it’s always best to consult with a professional. Give us a call and or set up an appointment today. We’re here to help.