Tracking the use of your client’s Paycheck Protection Program loan funds
Note: The information contained in this article only applies to certain small businesses and other eligible organizations that have received Paycheck Protection Program (PPP) loans. For example, if a PPP loan recipient filed, or will file, a 2019 IRS Form 1040 Schedule C, other rules apply. Information is current as of May 12, 2020.
Let’s explore how you can track this information directly in QuickBooks® Online for your client, so that your client is better prepared when the time comes to apply for loan forgiveness.
When your client’s loan gets funded
1. Create the PPP loan’s long-term liability account
The first step is to track the PPP loan itself. In the Chart of Accounts, create a Long-Term Liability account for the PPP loan.
2. Deposit the funds
Once the money hits your client’s bank account, create a Deposit in QuickBooks Online by Adding it (not Transferring it) in the Banking Feed, or going to +New > Bank Deposit. Assign all the fields as follows – note that this example includes ALL of the options discussed later in the Additional QuickBooks Online Features for Tracking section. You might not use or see all of these options in your company’s workflow:
- Deposit account: The bank account or sub-account you’ll use to track the remaining balance for your client.
- Date: The disbursement date from your client’s lender – the first day of their 8-week period.
- Received from: QuickBooks Capital, or your client’s Lender.
- Account: The PPP Loan Liability account. This tracks the total balance of the loan.
- Description: Any notes you want to remember and track.
- Ref No: Put the loan number here.
- Amount: The amount of the loan your client received.
- Client/project: If you’re using Projects to track the loan, use this field.
- Class: If you’re using Classes to track the loan, use this field.
During the 8-weeks after disbursement of your client’s loan
Categorizing PPP-related expenses
Assign your client’s PPP designations as you create Bills, Expenses, and Checks, or pull them in from the Banking Feed. Note that assigning designations to the Checking sub-account can only be done inside the transaction details – see below.
- Payee: The vendor.
- Payment Account: The bank sub-account you’re using to track the remaining loan balance for your client.
- Tags: If you’re using Tags to track the loan, assign the PPP tag.
- Category: The Expense account.
- Description: Any notes you want to track.
- Amount: The amount of money your client spent.
- Client/Project: If you’re using Projects to track the loan, use this field.
- Class: If you’re using Classes to track the loan, use this field.
Identify your client’s forgivable payroll separately
If you have been grouping Payroll Taxes into one lump expense category on a P&L for your client, you’ll need to break those out by creating State and Federal Payroll Tax Expense subcategories in your client’s Chart of Accounts. Depending on your client’s payroll provider, you may need to work with their support team to add this mapping to your QuickBooks Online file.
Your client’s employer share of federal employment taxes, such as employer-side FICA (Federal Insurance Contributions Act), are excluded from loan forgiveness and should be recorded separately.
Your client will also need to exclude:
- Individual employee cash compensation of in excess of $100,000 per year, and
- Qualified sick and family leave wages covered by sections 7001 and 7003 of the FFCRA
If you don’t want to make permanent changes to your client’s Chart of Accounts to accommodate these restrictions, you’ll need to export your transaction details to a spreadsheet to confirm you’re within the 75% range, excluding monthly salaries over $8,333.33, with a cap of $15,385 total for each salary over $100,000.
When your client is applying for loan forgiveness
Run your client’s reports
Remember, accountants may not submit an application for loan forgiveness on behalf of their clients. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.
At the end of the 8-week period after disbursement, your client may apply for loan forgiveness.
- Create a Profit and Loss Statement for your client’s 8-week period.
- If you used Tagging (described below), initiate the report from inside the Tags tool, instead of the Reports Center.
- If you used Classes (described below), click the Customize button to Filter using your PPP Loan Class.
- If you didn’t use Tagging or Classes, instead Filter the report by Distribution Account to include only your client’s relevant Expense categories (Utilities, Rent or Lease, Mortgage Interest, Payroll Wages, State Taxes).
- Turn on the % of Column option to make sure your Payroll Expenses that are eligible for forgiveness are at least 75% of the total funded.
- Save the Customization for this report so you can return to it later.
Follow these same steps to run a Profit and Loss Detail Report to show a transaction list by account.
Export these reports to PDF for sharing, and to an .xls file for further analysis.
Again, remember the client’s share of certain federal payroll taxes are excluded from forgivable payroll costs, as are qualified sick and family leave wages covered by sections 7001 and 7003 of the FFCRA. Both must be omitted from your calculations. Depending on whether you chose to track your client’s payroll taxes separately, you may need to drill into your Payroll Taxes Expense category, export it to Excel, and break out the payroll tax payments.
If you’re subscribed to QuickBooks Payroll, another suggestion is to run a Payroll Tax and Wage Summary, export it to Excel, and exclude all Federal payments.
Documentation required to apply for loan forgiveness
To apply for loan forgiveness, your client will need to organize documentation, including:
- The number of employees on the payroll.
- Employee pay rates.
- Payroll tax filings.
- Payroll costs paid in the eight weeks following disbursement of the loan.
- Mortgage interest payments in the eight weeks following disbursement of the loan and documents, showing the mortgage was in effect before Feb. 15, 2020.
- Rent or lease payments in the eight weeks following disbursement of the loan and your client’s lease agreement (which must be dated before Feb. 15, 2020).
- Utility payments in the eight weeks following disbursement of the loan and documents, showing similar payments or service agreements dated before Feb. 15, 2020.
- Any advance received under the CARES Act EIDL Emergency Grant program.
Note: The above list is non-exclusive, and additional documentation may be required.
Once your client’s lender determines your client’s eligibility for forgiveness
Update your client’s PPP loan’s long-term liability account
If your client’s PPP loan is forgiven, in whole or in part, make a Journal Entry to move that amount to the appropriate Expense categories. Any expenses paid by the loan are not tax-deductible.
After that, use this account for any remaining loan payments. You may treat it like any other loan.
Additional QuickBooks Online features for tracking
While the instructions above will be helpful to demonstrate your client’s use of the PPP loan funds when they apply for loan forgiveness, there are a number of features inside QuickBooks Online that can also help you track the original loan and your client’s expenses.
You are probably using many of these in your daily workflow. The good news is that there’s more than one right way – you may choose one or more of these options that you’re not already using for other purposes.
Any of these tools can be used alone, or in combination:
- Custom Tags (not yet widely available)
Classes are available in QuickBooks Online Plus and Advanced. They allow you to filter your reports for related transactions. Classes are a good choice, provided that you are not already using them for something else.
Turn on Classes in Gear > Account and Settings > Advanced > Categories > Track Classes. Then, go to Gear > All Lists > Classes and create a Class called “PPP.”
Assign the “PPP” class to your client’s funding Deposit. Use the “PPP” class on all your client’s relevant bills, checks, and expenses for rent, mortgage interest, and utilities.
For your client’s Payroll Expenses, you may be able to assign them to the “PPP” class during your payroll run. If not, bookkeepers can use the Reclassify tool under the Briefcase in QuickBooks Online Accountant to assign the “PPP” class.
When your client applies for loan forgiveness at the end of the 8-week period after disbursement, run a Profit and Loss Statement for your client for the 8-week period, filtered by this “PPP” class, for a list of all of your client’s related expenses.
The Projects Center is available in QuickBooks Online Plus and Advanced. If you’re already using it in your workflow, it’s easy to incorporate PPP loan tracking in your regular workflow. If you’re not using Projects, take a look to determine if it’s a good fit for you. Projects likely will not be a good fit if you only use it to track your client’s PPP loan, but for some of your clients, taking this opportunity to discover the Projects Center may transform your workflow.
If you don’t see Projects turned on in your left navigation bar, turn it on in Gear > Account and Settings > Advanced > Projects. If you have Clients with sub-jobs, they will be converted to Projects under that Client.
Also, turn on Gear > Account and Settings > Expenses > Track Expenses and Items by Client.
Next, add a new Client to your client’s QuickBooks Online for their lender. Then, add a Project underneath for the PPP loan.
In every relevant Expense and Journal Entry, assign the SBA:PPP Loan Client/Project on the appropriate line items.
When it’s time for your client to submit reports for loan forgiveness, you can open up the PPP Loan Project and click on Project Reports. The Project Profitability Report is a Profit and Loss Statement filtered for just the PPP loan “Client.”
Some banks may require your client to open a second checking account to separate the PPP loan funds and track their depletion. Another option in QuickBooks is to create a sub-account of your client’s checking account. Use the sub-account to track the loan proceeds deposited into checking and then spent by your client. This will allow you to track your client’s spending by glancing at their Balance Sheet.
NOTE: These methods help you track depletion of loan proceeds for your clients, but they don’t help you confirm that at least 75% of loan proceeds were used for eligible payroll costs, and that no more than 25% of loan proceeds were used for eligible non-payroll costs. You would have to ensure that employer-side federal payroll tax payments (which are not eligible for forgiveness) came out of your client’s primary bank account, while state unemployment came out of the PPP account. Most third-party payroll providers combine these in a single transaction.
Another drawback to sub-accounts is that your client’s Banking Feed won’t naturally allocate to this account. You will need to manually edit transactions created using the Banking Center, and assign it to the sub-account, instead of the actual checking account.
4. Custom tags (not yet widely available)
Tagging is a new QuickBooks Online feature in the process of being rolled out, so you may not see it in your QuickBooks Online file at this time. If you have Tagging, create a “PPP” Tag and use it in all of your PPP-related Expense transactions. At the end of the 8-week period after disbursement, go to Gear > Tags and run a Profit and Loss Report for your PPP Tag.
One consideration is that there’s only one Tag per transaction, so if any of your client’s Expenses include splits unrelated to the PPP loan, this feature won’t work for them.
Special considerations for nonprofits
There may be drawbacks to the above options for your clients that are nonprofits. Before selecting a method to track your client’s PPP loan, be sure to consult with them about the pros and cons of each approach, as they will need to certify to the final reports when submitting their application for loan forgiveness.
Some have suggested creating a new expense account called “PPP” to track applicable expenses. However, this might create larger problems for nonprofit tracking and reporting. Nonprofits need to know the “natural category” of expenses in order to manage the organization day to day.
Sub-accounts are not helpful as a stand-alone solution because of the difficulty of separating Federal and State Payroll Taxes.
While Classes make sense if you’re not already using them for other things, nonprofits typically already use Classes to track expenses by function: Program, Admin, and Fundraising. Also, qualified payroll costs under the PPP will fall across several functions. The long-term need for a clean Statement of Functional Expense may be more important to the nonprofit than tracking the use of the PPP loan proceeds for the 8-week period after disbursement. So, consider what is most important for your nonprofit organization client.
Accountants with nonprofits as clients may be familiar with using Projects to track restricted grants. While PPP loan proceeds aren’t income and Project reports won’t be able to reflect the balance, many Projects are assigned on a line item basis, so nonprofit companies can code wages to the use of the PPP loan, while ignoring Social Security and Medicare. Since a Project is temporary by design, you are able to mark it “complete” at the end of the covered period.
Projects are an appealing option if your nonprofit client has salaries covered by other funding sources and want to be sure there is no double-dipping.
Keeping accurate records is essential for your client to receive PPP loan forgiveness. Unfortunately, there is not a single QuickBooks report that creates a summary with a running balance for purposes of helping your client be prepared to apply for PPP loan forgiveness.
The variety of tools in QuickBooks Online allows you to create a tracking workflow customized to your client’s needs.
While there are several ways to approach this situation, most of them require adding additional information to both the datafile and the workflow, without actually adding value to ordinary operational tracking. It is possible that a spreadsheet may be your most straightforward solution, assuming you enter all transactions into QuickBooks Online and your books are up-to- date.
Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly and the above information may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation. The resources described above are made available to businesses within the United States of America.
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