Tracking the use of your client’s Paycheck Protection Program loan funds in QuickBooks Online

Note: Paycheck Protection Program (PPP) borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. 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.

The information contained in this article only applies to certain small businesses and other eligible organizations that have received PPP loans. For example, if a PPP loan recipient filed, or will file, a 2019 IRS Form 1040 Schedule C, other rules apply.

Let’s explore how you can track this information directly in QuickBooks® Online, 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 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 eight-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 your client’s loan forgiveness covered period

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.

1. Payee: The vendor.
2. Payment Account: The bank sub-account you’re using to track the remaining loan balance for your client.
3. Tags: If you’re using Tags to track the loan, assign the PPP tag.
4. Category: The Expense account.
5. Description: Any notes you want to track.
6. Amount: The amount of money your client spent.
7. Client/Project: If you’re using Projects to track the loan, use this field.
8. 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, are excluded from loan forgiveness and should be recorded separately.

Your client will also need to exclude individual employee cash compensation in excess of $100,000 per year, and qualified sick and family leave wages covered by sections 7001 and 7003 of the Families First Coronavirus Response Act (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 60 percent range, excluding monthly salaries over $8,333.33, with a cap of $15,385 if an eight-week covered period applies, or $46,154 if a 24-week covered period applies, with a 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 the loan forgiveness covered period, your client may apply for loan forgiveness.

• Create a P&L statement for your client’s covered 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, and State Taxes).
• Turn on the % of Column option to make sure your Payroll Expenses that are eligible for forgiveness are at least 60 percent 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

Your client’s PPP Loan Forgiveness Application must include the following documents verifying their payroll, full time employees, and non-payroll expenses:

Payroll expenses for the loan forgiveness covered period or, if applicable, the alternative payroll covered period:

• Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
• Payroll tax forms (or equivalent third-party payroll service provider reports) to demonstrate payroll tax filings reported, or that will be reported, to the IRS (typically Form 941, Employer’s Quarterly Federal Tax Return).
• Tax forms (or equivalent third-party payroll service provider reports) to demonstrate state quarterly business and individual employee wage reporting, and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
• Payment receipts, canceled checks, or account statements documenting the amount of any company contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
• If applicable, the 2019 Form 1040 Schedule C submitted with your application.

Full-time employees during the reference period selected by the borrower:

• Documentation verifying the average number of FTEs on payroll per month employed by the borrower during the reference period selected by the borrower for purposes of assessing whether a reduction of the forgiveness amount due to an FTE reduction was required.
• Documentation verifying the average number of FTEs on payroll on Jan. 1, 2020, and at the end of the covered period, for borrowers certifying that they did not reduce the number of employees or average paid hours of employees between Jan, 1, 2020, and the end of the covered period.
• Documents may include payroll tax filings reported, or that will be reported to the IRS (typically Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported to the relevant state. Note: Documents submitted may cover periods longer than the specific time period.

Non-payroll expenses:

• Business mortgage interest payments: Copy of lender amortization schedule and receipts or canceled checks verifying eligible payments from the loan forgiveness covered period; or lender account statements from February 2020 and the months of the loan forgiveness covered period through one month after the end of that period verifying interest amounts and eligible payments.
• Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks verifying eligible payments from the loan forgiveness covered period; or lessor account statements from February 2020 and from the loan forgiveness covered period through one month after the end of that period verifying eligible payments.
• Business utility payments: Copy of invoices from February 2020 and those paid during the loan forgiveness covered period and receipts, canceled checks, or account statements verifying those eligible payments.

Economic Injury Disaster Loan documentation

Although not specifically required by the PPP Loan Forgiveness Application, your client should be prepared to provide documentation of any advance received under the CARES Act’s Economic Injury Disaster Loan (EIDL) emergency grant program to their lender. The amount of any EIDL advance will be deducted from their forgiveness amount.

Please see the PPP Loan Forgiveness Application for a list of any additional documents that borrowers must retain, and the amount of time that such documents must be retained.

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 is 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:

1. Classes
2. Projects
3. Sub-accounts
4. Custom Tags (not yet widely available)

1. Classes

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 eight-week period after disbursement, run a P&L 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.

2. Projects

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.”

3. Sub-accounts

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 60 percent of loan proceeds were used for eligible payroll costs, and that no more than 40 percent 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 feature in the process of being rolled out, so you may not see it in your 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 eight-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 eight-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.

Final words

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 clients’ needs.

While there are several ways to approach this situation, most of them require adding additional information to 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.

This information is provided as a courtesy. Nothing in these materials is intended to, and does not, create an agency relationship with Intuit® Financing Inc. (d/b/a QuickBooks Capital), or any right to fees from QuickBooks Capital for any services you may provide to borrowers. QuickBooks Capital will not compensate any person or entity assisting a borrower without first having executed a written compensation agreement with both the borrower and agent, and by providing this information, QuickBooks Capital does not agree that it will enter (or has entered) into any written compensation agreement with any person or entity.

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 the 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.

This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a client’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.

Editor’s note: This article was originally published on Firm of the Future.