The Paycheck Protection Program (PPP) was introduced as part of the CARES Act to support small businesses during the economic challenges caused by the COVID-19 pandemic. The program offered forgivable loans to businesses that used the funds for qualifying expenses like payroll, utilities, and rent. Proper accounting of PPP loans and their forgiveness in QuickBooks is critical to ensure compliance with tax regulations and to maintain accurate financial records.
This guide will walk you through the process of recording, tracking, and accounting for PPP loans and their forgiveness in QuickBooks.
1.
Understanding PPP Loan Forgiveness
The PPP loans are forgivable if businesses adhere to specific guidelines:
- At least 60% of the loan must be used for payroll expenses.
- The remaining 40% can be used for utilities, rent, and mortgage interest.
- Businesses must maintain employee and compensation levels during the covered period.
If the forgiveness criteria are met, the loan amount used for eligible expenses will not need to be repaid, making it essential to track the usage of funds accurately.
2.
Initial Setup in QuickBooks
A.
Recording the PPP Loan
When you receive a PPP loan, record it as a liability because it is initially considered a loan until forgiveness is granted.
Create a New Liability Account:
- Go to Settings > Chart of Accounts > New Account.
- Choose Account Type: Long-Term Liabilities (or Other Current Liabilities if repayment is within a year).
- Enter Name: PPP Loan.
- Save the account.
Record the Loan Deposit:
- Go to Banking > Make Deposit.
- In the Received From field, select the PPP Loan liability account.
- Enter the deposit amount and choose your bank account.
- Save and close.
3.
Tracking PPP Loan Expenses
Properly categorizing expenses paid with PPP funds ensures accurate reporting for loan forgiveness.
A.
Set Up Expense Categories
Create subaccounts under the appropriate expense categories:
Payroll Expenses:
- Include gross wages, employer-paid health insurance, and retirement contributions.
Rent, Utilities, and Mortgage Interest:
- Subdivide these accounts if necessary to track expenses related to PPP funds.
B.
Record Expenses
When recording expenses paid using PPP funds:
- Go to + New > Expense.
- Select the bank account from which the payment was made.
- In the Category Details section, allocate the expense to the appropriate account (e.g., Payroll, Rent).
- Add a Memo to indicate that the expense is PPP-related.
- Save and close.
C.
Use Classes for Tracking (Optional)
If you’re using QuickBooks Online Plus or Advanced, you can assign a class to all PPP-related transactions:
- Go to Settings > Account and Settings > Advanced.
- Turn on Track Classes.
- Assign a specific class (e.g., PPP Loan) to track eligible expenses.
4.
Applying for Loan Forgiveness
Before you record loan forgiveness, confirm that you’ve applied and received confirmation from your lender.
A.
Prepare Supporting Documents
Gather the following to ensure compliance:
- Payroll tax filings.
- Bank statements showing eligible payments.
- Lease agreements and utility bills.
B.
Categorize Non-Forgiven Amounts
If part of the loan is not forgiven, the amount will remain as a liability and should be repaid per loan terms.
5.
Recording Loan Forgiveness in QuickBooks
When your lender confirms forgiveness, you need to remove the liability from your books and account for it as non-taxable income (consult a tax advisor).
A.
Create an Income Account
- Go to Settings > Chart of Accounts > New Account.
- Choose Account Type: Other Income.
- Enter Name: PPP Loan Forgiveness.
- Save the account.
B.
Record Forgiveness
- Go to + New > Journal Entry.
- Date the entry on the forgiveness approval date.
- In the first line:
- Account: PPP Loan (liability account).
- Debit: Loan amount forgiven.
In the second line:
- Account: PPP Loan Forgiveness (income account).
- Credit: Loan amount forgiven.
- Save and close.
6.
Handling Non-Forgiven Loan Amounts
If part of the loan is not forgiven:
- Keep the unforgiven amount in the PPP Loan liability account.
- Set up a repayment schedule:
- Go to + New > Expense.
- Record payments to reduce the liability balance.
7.
Reconciliation and Reporting
Regularly reconcile your accounts to ensure accuracy.
A.
Reconcile Bank Accounts
- Go to Banking > Reconcile.
- Select your bank account.
- Match PPP transactions with your bank statements.
- Save and finish.
B.
Generate PPP Reports
- Go to Reports > Profit and Loss Statement.
- Filter the report for PPP-related income and expenses.
- Export the report for your records or for submission to your lender.
8.
Tax Implications of PPP Loans
While forgiven PPP loans are generally non-taxable, tax regulations may vary. Ensure:
- You’ve consulted a tax advisor.
- You’re aware of any state-specific tax implications.
9.
FAQs About PPP Loan Accounting in QuickBooks
Q1.
Can I Track PPP Funds Separately?
Yes, use classes, tags, or create separate bank accounts to track PPP funds distinctly.
Q2.
What Happens if My Loan Isn’t Forgiven?
Unforgiven amounts remain as a liability and must be repaid per loan terms.
Q3.
Is Loan Forgiveness Taxable?
Forgiven PPP loans are generally non-taxable federally, but check state guidelines.
Q4.
How Do I Correct Mistakes in PPP Accounting?
Review and adjust transactions via the Chart of Accounts or journal entries.
10.
Best Practices for PPP Loan Accounting
- Documentation: Maintain thorough records of all PPP-related transactions.
- Accuracy: Double-check entries to avoid errors.
- Reconciliation: Regularly reconcile accounts to match bank statements.
- Consult Professionals: Work with a tax advisor or CPA for compliance.
Conclusion
Accurately recording PPP loans and their forgiveness in QuickBooks is crucial for financial transparency and compliance. By following this guide, you can ensure that your records are accurate and well-organized, making it easier to apply for forgiveness and handle potential audits. Regularly review your transactions and consult a financial expert to navigate any complexities.
