Yippee!! I Received the Paycheck Protection Program Funds. Now what? Think Before You Spend!

by | Apr 15, 2020 | Cracking the Tax Code with Christy | 0 comments

Your Paycheck Protection Program loan funds are finally here.  Think before you spend them!

Remember:  to get a portion or all of the loan forgiven, you’ll have to prove that the funds went to approved expenses.  Also remember: even weeks of self-quarantine with a family of 5, no toilet paper, and lots of top ramen and syrup for breakfast has in no way prepared you for the arduous task of getting together the documentation you’ll need to submit to your banker to avoid repayment.

Don’t wait until the night before the deadline to start your recordkeeping.  Here’s what you must do immediately when those PPP funds arrive:

1.Call all rehires and laid-off employees and get them back to work, or use this opportunity to hire better qualified workers.  You can also consider converting true contract workers to employee status. Remember: you need the same number of full-time employees or full-time equivalent employees that you had in the look-back period (February 15 to June 30, 2019). Hopefully, you’ve prepared for the return of your staff as I recommended in my previous blogs.

2. Make sure that the bank account receiving your loan proceeds (the “PPP account”) holds $0 before the deposit is made.  You’ll have 8 weeks from the date of deposit to use the funds for the allowed expenses.

3. Get ready to apply the PPP rules for allowable expenses:

  • At least 75% of the loan must go toward payroll costs, including gross wages; employee vacation; parental, family, medical, and sick leave; group continuing health care benefits; employer contributions to retirement plans; and state unemployment taxes.
  • Up to 25% of the loan can be used for expenses such as interest on mortgages and other secured debts, rent, and utilities.  Cancel all existing auto pays for these expenses, so you can ensure you have a very easy paper trail.

4. Mark your calendars:  set reminders for the 28th and 56th days following the receipt of the funds so you can assess the percentage of loan expended and the types of costs paid. Plan accordingly to pay allowable expenses for the remainder of the 8-week period.

5. Add the PPP account information (if you set-up a new bank account) to your Quickbooks or other accounting software, so payroll and vendor reports can be generated easily.

6. Close out and pay all payroll liability from your last payday until the day the funds are deposited into your PPP account.  Do not use PPP funds for old payroll.  For instance, the bank just called to tell me my PPP funds are available, but I ran payroll only 2 days ago.  Now I need to run payroll again. (In my defense, I’m a tax attorney, not a clairvoyant, and really had no way of knowing 2 days ago exactly when the funds would be dropped into my account.)  The payroll will start fresh on the same day the 8-week period starts, so producing payroll reports for the period in question will be a cinch.

7. Ditto for the business’s 401(k) plans or other retirement programs.

8. If your bank sucked like mine and you had to go to a different bank to obtain the PPP loan, you’ll need to order checks for that brand-new account.

9. Next, change your payroll software data to reflect that you’ll be paying payroll through electronic transfer from the PPP account, or make sure you have a sufficient number of PPP account checks to write for payroll.

10. Ready a file for the 8-week period in question.  You should already have one file for your payroll; now get a second one started for the documents you’ll be giving the banker.  Every time you produce payroll, print out an extra copy to drop into the PPP file.  Ditto for other allowable expenses.

As a tax attorney, I will reiterate: the reporting process will be many times worse than enduring an IRS audit. To ensure that your loan is forgiven, you’ll have to spoonfeed the accounting information to your banker like you spoonfeed creamed peas to a toddler:  efficiently, quickly, and accompanied by language understandable by a 2-year-old.  

Call us if you need help! Not only can we help you audit-proof your books for the forgiveness, but we can also teach you how to audit-proof your books for an IRS audit. Because they are coming. How else do you think the federal government is going to fund this PPP program?