Blog Post by Megan Genest Tarnow | The Mobius Group | May 14, 2020

Congratulations! You’ve gotten the happy news that you or your client’s Paycheck Protection Loan (PPP) application has been funded! If you’re like my clients, the thought that hits you shortly after “HOORAY!!” is “How do I need to track this to ensure that it is forgivable??” 

While the wording is less than transparent to mere mortals, it appears from the FAQ document issued by the SBA on April 8th, that the forgivability of your loan is based on your payroll costs over an eight week period from the date the funds hit your bank account. You can find that here, way down at #20.

75% of it must be spent on payroll costs, which, according to this fact sheet from the US Treasury,  includes salaries, wages, tips, commissions, employee benefits, health insurance premiums, retirement benefits, state and local taxes assessed on compensation. One thing that seems specifically left out of this list is the employer portion of social security and medicare taxes. 

Based on the same fact sheet mentioned above, you must also maintain your FTE headcount, to either the average monthly FTE level for February 15 – June 30, 2019 OR January 1 through February 29, 2020.  You have until June 30, 2020 to restore your full-time employment and salary levels if they were reduced between February 15 and April 26 of this year.

The other 25% can be spent on interest on your mortgage, as long as the building was purchased prior to February 15, 2020; rent, as long as the lease was in force before February 15, 2020; and utilities, as long as service began – you guessed it! – prior to February 15, 2020.

Even though the interest on this loan is incredibly low at 1%, as good stewards of our resources, we want to do everything in our power to ensure the full amount is forgivable to our organizations. So — how are we going to do that?

Spreadsheets may be necessary for some calculations, such as confirming that FTEs were maintained over the loan period and prorating wages for employees making over $100,000 in salary, but tracking EVERYTHING in a spreadsheet doesn’t seem like the best use of our time, especially since we’re already using an incredibly powerful tracking tool in QuickBooks Online. Let’s consider how we can track this information directly in QuickBooks Online so we’re ready when the time comes to apply for forgiveness.

The first thing we’ll need to do is account for the receipt of the funds. The cash will hit your bank account, of course, but it will also be a liability, at least to start.

Create a Long-term Liability account called PPP Loan. While I recommend that income always be recorded through either a sales receipt or an invoice, this loan is not yet income to your organization. It can be added directly to a deposit or even coded from the bank feed. Just be sure to use the PPP Loan liability account you created, instead of a revenue account. 

Next we need to determine how to keep track of how we used the funds. 

It seems to be a basic human impulse, when confronted with a unique, one-time situation like the PPP Loan, to want to come up with a unique, one-time solution. 

Instead, we need to step back and ask, “What are we trying to do here?” Start with the end  in mind. We want to be able to prove to our lenders that, over an eight week period beginning on the date when the loan funds landed in our accounts, we spent 75% of those funds on allowable payroll costs and the rest in a few specific areas. 

This doesn’t need to be rocket science.

  • Determine which of your expense accounts are allowable under PPP.
    • Only certain types of expenses can be forgiven under the PPP, so you will want to make sure that your chart of accounts is set up to capture them. Because the employer portion of social security and medicare taxes appears to be excluded, even as state and local employment taxes qualify, a single account called “Payroll Taxes” is going to be problematic. Create sub-accounts of Payroll Expenses for Salaries and Wages, FICA, Unemployment, as well as other applicable local taxes. Set up individual accounts for other specific employee benefits such as medical insurance and retirement contributions. 
    • You probably have accounts for rent and utilities already, or mortgage interest if you own a building. Continue to track these expenses by vendor, so that you can prove consistent expense from prior to February 15, 2020 through the end of your eight week period.
    • Because a key principle is that you should not need a calculator to know the total you’ve spent on something like payroll, I don’t like the idea of creating expense sub-accounts specific to the PPP. I’ve seen suggestions to create Salaries – PPP in addition to your existing Salaries account. This makes sense if you need to prorate the wages of employees earning more than $100,000 per year. If this is your situation, I recommend creating an account for non-PPP eligible wages. 
  • Create a customized Profit & Loss (Statement of Activities) report
    • Start with a Profit & Loss (Statement of Activities) report
    • Set custom dates, beginning with the date you receive your loan funds and ending eight weeks later. A quick Google search for “What is eight weeks from…” will help you find the end date.
    • Select column: % of Column
    • Filter for Distribution Account, choosing the specific accounts you have determined are eligible for the PPP
    • Filter for Customer: Unspecified
    • Edit the Header to read PPP Expenses
    • Save the Customization
  •  Create a customized Profit and Loss Detail (Statement of Activities Detail) report
    • Start with a Profit & Loss Detail (Statement of Activities Detail) report
    • Filter for Distribution Account, choosing the specific accounts you have determined are eligible for the PPP
    • Same story: If all of your payroll taxes are going to a single account, either take action NOW to break them into sub-accounts as described above (honestly, you should just do this. You really should. It’s not harder, and it gives you better information for planning and budgeting. Just do it).  Otherwise,  know that you will need to export your QuickBooks reports to Excel, grab your payroll reports for the period, and do some calculations to remove employer social security and medicare expenses. It may be easier with this detail report, as you can delete the rows with non-allowable expenses, if they were memo-ed in a way to allow you to easily tell what they were for.
    • Filter for Customer: Unspecified
    • Edit the Header to read PPP Expense Detail
    • Save the Customization

Between these two reports, and some outside calculations regarding FTEs, you will have the information you need to apply for forgiveness. Full stop.

But maybe this isn’t enough for you. It seems too easy. You want to DO something, set up something special in order to track the PPP funds. Let me walk you through the thought process that brought me back to this simple solution.

We have several fields in QuickBooks Online available to track detailed information. Obvious options are accounts, classes, projects, locations, and tags. We’ll go over these one by one.

Create new accounts.

I’ve seen it suggested to create a new expense account called PPP to track applicable expenses. While this clearly lets you know what can be forgiven under this program, it creates larger problems for your ongoing tracking and reporting. We need to know the “natural category” of our expenses in order to manage the organization day to day.

Verdict: not acceptable.

What about creating a new bank account specific to the PPP, and using it to pay eligible expenses? I’ve heard this proposed, and understand the impulse to keep PPP funds separate from your other cash, especially when money is tight. It goes against my principle of avoiding long-term solutions to short-term problems, but if you choose this route, know that it rapidly gets complicated. Will you change the account your payroll expenses pull from just for these eight weeks? Will you continue to pay expenses out of your existing account, then transfer funds from the PPP account to cover them? You’ll need to ensure that you exclude federal taxes from the amount you transfer, as those are not eligible. This approach tracks the balance you have to spend, but doesn’t help you document your expenses when it comes time to apply for forgiveness. You can print the register, but there isn’t a way to run a report on expense categories filtered by bank account. 

Verdict: not acceptable as a stand alone solution.

Creating a sub-account of your existing bank account raises similar concerns. You’d have to ensure that federal liability payments (not allowable) came out of the primary bank account, while state unemployment came out of the PPP account, and most third-party payroll providers combine these in a single transaction.

Verdict: not acceptable as a stand alone solution.

Create a new Class.

Could we use classes? We could. Class can be assigned on a line item basis. We could include state and local taxes while excluding social security and medicare. … but. Nonprofits need to track expenses by function: Program, Admin and Fundraising, and Classes are the recommended use for this. Payroll costs covered by PPP cross function. The long-term need for a clean Statement of Functional Expense supersedes the eight-week requirement to track expenses for the PPP.  

Verdict: while this would work for small businesses who don’t need to report expenses by function, it is not acceptable for nonprofits.

Create a Project.

How about Projects? Can’t we use Projects?? There is a lot to like about creating a Project specific to the PPP. While the loan funds aren’t income and Project reports won’t be able to reflect the balance, many nonprofits are familiar with using Projects to track restricted grants, and there is a lot about the PPP that functions like a restricted grant. 

Projects are assigned on a line item basis, so we can code wages to PPP while ignoring social security and medicare. Projects by design are temporary, and we’ll be able to mark it “complete” at the end of the covered period.

In order to create a Project, we first need a Customer (the lender) and then the Project itself (PPP). Few payroll providers track to Project, so it will have to be added manually on a transaction by transaction basis. Batch Reclassify doesn’t impact Customer:Projects.

Verdict: Projects will work, if you are willing to manually edit your payroll transactions. It is an appealing option if you have salaries covered by other funding sources and want to be sure you are not double-dipping. It makes you feel like you are “doing something” specific to track these funds. It is also unnecessary, as you can simply filter the Custom Report for Customer: Unspecified to achieve the same result.

Create a Location.

While many people are unfamiliar with this newer option in QuickBooks Online, I really like using Locations to track the two nonprofit net asset categories of Without and With Donor Restrictions. A key aspect of this field is that it is a source field, meaning that each transaction can only have a single Location. We could create PPP as a sub-Location of Without Donor Restrictions, as this is a LOAN and has no donor. Depending on the way tax expense flows from your payroll system, you could again run across the issue of FICA expense being co-mingled with allowable state and local taxes. Most payroll services don’t support Location, so you would have to reclassify your transactions to assign Location.

Verdict: Location may work, depending on the way you enter payroll tax expense. It will also require manual adjustments, but is supported by Batch Reclassify. Seems like overkill for an eight-week tracking requirement, and goes against the principle of avoiding long-term solutions to short-term problems.

Create a Tag.

Some users also have access to Tags, which are rolling out to all users in the coming weeks. Tags, like Location, can only be assigned to a transaction as a whole. They must be assigned manually, and are not available through Batch Reclassify.

Verdict: Tags, if currently available in your file, can work, depending on the way you enter payroll tax expense. You are able to run a report filtered to tag, and also see tagged expenses in the Tag Center. It also allows you to feel that you are “doing something.”

While there are several ways to approach this problem, most of them require adding something to both the datafile and our workflow, without actually adding value to our tracking. 

We all have a tendency, when faced with something new and kind of scary, to want to create a special and unique solution. The reality is, you are capturing the information you will need to report how you spent your PPP funds. The loan is covering key expenses you already had. It’s covering – dare I say it??  – OVERHEAD. Don’t overthink this. 

GO ON AND DO THE WORK.

 

Much of the content for this post was originally created on behalf of Intuit, and was included in this article for the Firm of the Future.

 

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