Bookkeeping for PPP funds

I have had several of my clients ask me about how to book the PPP funds they received, so I decided to create this page for them and any other church employee that may need some guidance on how to account for those PPP funds. Please note that there is a BIG debate going on in the "accounting" world regarding the best way to record and track the PPP loan and forgiveness. So check with your CPA or accountant first and. see which method they prefer. The following method is the one most accountants agree is the best way...

Step by Step Instructions for Accounting for the SBA PPP Funds

Bookkeeping for PPP funds

The SBA (Small Business Administration) PPP (Paycheck Protection Program) was created to help small businesses, nonprofits, and churches continue to pay their employees through this COVID-19 pandemic. I’m not going to go into all the details of the program as most of you have probably either already applied for it, received the funds, or decided you did not need it. However, the SBA did put out a FAQ for churches and PPP: Faith-Based Organizations and PPP

What I do want to help you with is how to do the bookkeeping for the PPP funds =)

Since the PPP funds you received are actually considered a loan, you will want to set it up accordingly.



Setting up Accounts and Eligible PPP Expenses

Step 1: Create a long-term liability account. Title it whatever you want, but for demonstration purposes, we will call it: SBA PPP Payable. 

Step 2: Assign the deposit to that liability account. For those of you that manually record your accounting you will debit your bank account and credit SBA PPP Payable (liability account).

Step 3: Track eligible PPP costs for the 8-week period following the date the PPP funds were deposited into your bank account. 

NOTE: In QBO, you can use the “donor” function or classes to track those eligible PPP expenses. In Aplos, I am using a tag to track them. I also found a pretty awesome forgiveness tracking worksheet on another accounting site: PPP Loan Forgiveness Workbook

Eligible PPP costs 

1.  Payroll costs:

  • salaries, wages, and housing allowances ($100,000 max per employee—gross earnings) Note: there has been some debate on whether or not minister’s housing allowances could be used to figure the amount approve for and for the forgiveness part, but the SBA clarified it in their PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) (Question #32) 
  • Employee benefits (e.g., vacation, sick leave, health care benefits, retirement benefits)
  • State and local taxes (FICA payroll taxes matched are NOT included)

One item I am unclear on and hope the SBA provides more guidance on is the exact “timing” of the “covered” period in regard to the payroll costs. For right now, I am assuming that the "covered" period is the day the PPP funds were received, so I am “splitting” the first and last payroll for some of my bookkeeping clients. For example, if a church received their PPP funds on April 15th and their payroll period covered April 12th to the 18th, we are splitting that payroll to allocate only 4 of those 7 days to the “PPP tracking”. I’ll keep you updated here as soon as I confirm those guidelines =)

2. Other costs:

  • Interest on mortgages (for loans incurred before February 15, 2020)
  • Rent (under lease agreements pre-February 15, 2020)
  • Utilities (if service began before February 15, 2020)

NOTE: when it comes to figuring the rent, mortgage interest, and utilities eligible “forgiveness” costs…don’t forget that the PPP was created to keep your employees on your payroll, so you must use at least 75% of the funds for payroll costs. That means only 25% or less of those funds can be used for rent, mortgage interest, and utilities…in regard to figuring the forgiveness part. (Update: June 5, 2020....Congress passed the Flexibility Act which changed the 75% to only 60% and extended the "forgiveness" time period from 8 weeks to 24 weeks. See more on how that affects. churches here: New PPP Flexibility Act Further Modifies Key Program Features)

The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099, 1099-NEC, and 1096.

If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.

QuickBooks for Churches & Church Accounting Combo Bundle

Recording Interest and Forgiveness

Step 4: Record accrued interest.

Interest starts to accrue from the day your church receives the PPP funds.

The interest rate is 1% and loan payments are deferred for six months with interest accruing during the six-month period. However, if you keep all of your employees and their pay stays the same or is not reduced more than 25%, the SBA will forgive part or all of the principal amount of your loan, plus accrued interest.

Most small churches are on a cash basis when it comes to their accounting (count expenses when they are actually paid not when they accrue or happen). If that is the case with you, you can skip this step as you will record the interest when you record your loan payments … if you have to “pay back” any of the PPP =)

If you are larger church and use accrual basis accounting, you will need to record the accrued interest.  You can use the following formula to calculate the accrued interest for the PPP loan:

PPP Accrued Interest = Loan Amount X 1% X (# of days from the date of the loan to the end of the month / 365)

Most accrued interest entries are recorded at the end of the month. That entry would involve debiting your Interest Expense account and crediting your Accrued Interest Payable account (which is a liability account). See more on debit and credits.

For example, a church receives $200,000 in PPP funds on April 15th. You would…

Debit: Interest Expense for $82.20 (200,000 X 1% X (15/365) 

Credit: Interest Payable for $82.20

For the month of May, your accrued interest would equal $169.86 ($200,000 X 1% X (31 / 365). For June, your accrued interest would be $164.38 ($200,000 X 1% X (30 / 365). Do the same for the rest of the months.


Step 5: After you have applied for and been approved for all or part forgiveness, you will record that amount “forgiven” by debiting that long-term liability account where you originally recorded the PPP funds and credit an “Other Revenue” account.

You will want to set up that income account to appear separately on the income statement/statement of activity as a non-operating item. It will hopefully be an account you will not ever have to use again, and you don’t want it “messing” with your budget next year =) 

Step 6: The remaining amount will be treated just like a regular loan. Every time you make a loan payment, you would assign the principal part to the liability account to reduce the remaining balance over the repayment period and assign the interest to the interest expense account.

Note: there is no penalty to pay off the loan before the 2 years are up, so if you have PPP funds still left…you may want to pay off the balance with it…if possible =)



References:

Patriot Payroll's article: PPP Loan Accounting 



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