Did you finally receive the long-awaited PPP loan and now have an array of questions on how to track utilization to ensure loan forgiveness? Many business owners went through days of agony: first by trying to figure out how to apply for the PPP loan during the initial round of funding, then by learning their application didn’t meet qualifications, and finally by scrambling to apply during the second round of funding. Ultimately, when some of them “made” it, business owners then had to figure out how to track the use of the funds to increase the chances of getting the loan forgiven.  

There are several options available to help you during this dreaded PPP utilization tracking phase. Remember the funds will probably be used up in a few months so I suggest adopting the tracking system that’s easiest to implement and maintain and has the least impact on your long-term financial reporting process. 

I’m listing the options in order of least to most favorite (mine at least). At the end of the article, I will provide a summary in the form of a table for quick reference.  

1. Opening a new bank account to hold and track usage of the PPP loan funds

What to consider when using this approach:

  • For compensation payments to be directly debited from this account, you will have to change the banking details in your payroll system and change them back to the regular operating checking account once the PPP funds are fully used.
  • 100% of payroll (and payroll tax) debits will be deducted from this new account, but remember that federal payroll taxes and wages above $100,000 are not eligible for the PPP loan forgiveness. You will need to perform additional steps and accounting entries to “reimburse” the PPP loan account for any portion of the debited funds not eligible for forgiveness. 

If you choose to use this approach:

I recommend that if you open a separate bank account, you do not change the banking details within your payroll provider. Instead, as payroll costs are debited from your regular operating checking account, you “fund” your operating account from the PPP bank account for the portion of the payroll costs that qualifies for loan forgiveness. This can be accomplished by doing a cash transfer and then keeping a log or adding a memo to the general ledger transactions of what was covered by that transfer (wages, state payroll taxes, benefits). You can follow the same approach for rent payments or other costs covered by the PPP.

2. Keeping the PPP funds in the regular checking account and tracking PPP spend in an Excel worksheet

What to consider when using this approach:

  • You might hate spreadsheets, and this approach will require that you keep a log in Excel format (or Google sheet) of transactions “funded” by the PPP loan. The log should include the transaction date, transaction description (payroll, benefits, rent) and amounts.
  • If the original bank transaction was not covered 100% by the PPP (e.g. payroll deductions which included the portion of the federal payroll taxes and individual wages above $100,000 not covered by the PPP loan), I recommend that you also include the original transaction amount in the log for ease of tracing back to bank statement later on. 

If you choose to use this approach:

You can have your bookkeeper or tax accountant set up a template for you which you can reuse over and over, or you can download our sample PPP log here.

3. Keeping the PPP funds in the regular checking and tracking PPP spend in a separate general ledger expense account or expense category in your accounting system called “PPP Expenses”

What to consider when using this approach:

  • If your chart of accounts – the accounts or categories that define the structure of your income statement and balance sheet – has been thoughtfully designed, this approach will mess that up a little. You will no longer have visibility to your total payroll costs, for example, because a portion of the costs will be in your traditional Payroll or Wages account and the portion paid with PPP will be in the PPP “expenses” account. 
  • As you record PPP expense transactions to this account, remember to “split” the payroll debits between what’s eligible for loan forgiveness and what’s not (e.g. federal payroll taxes, wages above $100,000).
  • Don’t confuse this PPP expense account with your PPP loan account which should have been created on the balance sheet to record the loan liability when the funds were received.

If you choose to use this approach:

Remember, the transparency of the PPP spend will be buried in this one PPP expense account. I’d recommend downloading the details from the PPP expense account and keeping it in the form of a log with clear notes. 

4. Keeping the PPP funds in the regular checking, recording PPP spend to your existing income statement categories based on expense type and tracking PPP spend using classes or other classification field in your accounting system.

What to consider when using this approach:

  • You might need to activate classes in your accounting system by going to settings, create class named PPP and then tag each transaction covered by the PPP loan with that class. 
  • You will need to split transactions which have a portion of the expense covered by PPP and a portion that’s not. For example, a payroll debit that includes federal payroll taxes and wages above $100,000 will need to be split into two lines, one to go against the PPP funds tagged with the PPP class and one for the payroll taxes or individual wages above $100,000 without class categorization. 
  • You will be able to run reports by class which will give you visibility into the spend covered by the PPP loan, as long as you are diligent when categorizing transactions and ensure the PPP class is always used for PPP spend. 

If you choose to use this approach:

This is my favorite approach. It’s easy, clean, systemized. What can go wrong! Just the possibility of you forgetting the used classes. 

Accounting for the PPP from A – Z:

Remember that meanwhile, your PPP loan liability is sitting in the balance sheet. This balance was created when you received the funds and an entry was generated to debit your cash account and credit your loan account on the balance sheet. You may have created a PPP loan liability account.

Since payments are deferred for six months and you are working towards getting forgiveness for the loan, your loan liability balance won’t change for a while.

You will continue to incur expenses which will reduce your cash balance, not your loan balance, and increase your expenses in your income statement.

Once your loan is forgiven, I’d suggest reducing the loan liability account on the balance sheet by the forgiven amount and booking the other side of that entry to an “Other Income” account in your income statement called “PPP Loan Forgiveness.” Consult with your bookkeeper or accounting professional as needed. 

Here is a summary of the entries I recommend to trace the life of the PPP loan:

a. Funds are received

Debit: Cash PPP Loan account

Credit: PPP Loan Loan

b. Funds used

Debit: Expense accounts (wages, rent, etc.)

Credit: Cash

c. Loans forgiven

Debit: PPP Loan

Credit: PPP Loan Forgiveness in Other Income

d. Loan payment for amount not forgiven

Debit: PPP Loan

Credit: Cash

Note: You might need to accrue interest or split the loan payments between loan principal and interest expense.

A few reminders regarding forgiveness of the PPP loan:

– At least 75% of PPP funds must be spent on payroll costs

– Eligible payroll costs include wages (up to $100,000 per employee, benefits, state payroll taxes)

– Must maintain the same level of full-time equivalent (FTE) employees. If you attempt to re-hire employees previously let go and they do not want to return to your firm, these employees won’t impact your eligibility as long as you make a good-faith attempt to re-hire them and keep documentation of your efforts of them denying the offer of re-employment.

– Expenses eligible for the other 25% of the loan can be used for interest on a mortgage, rent, and utilities.

– Payments for portion of the loan not forgiven will be deferred for six months and loan needs to be paid off 24 months from receiving the funds. 

– Interest rate on loan amounts not forgiven is 1%.

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