How Tax Software for Accounting Firms Can Help Your Clients Through the PPP Loan Process

9 minute read

Just after the Christmas holiday, President Trump signed into law the final COVID-19 relief package of 2020. The Consolidated Appropriations Act, 2021 designated $285 billion of its $900 billion stimulus to fund the Paycheck Protection Program (PPP), a forgivable Federal loan program intended to help small and medium-sized businesses stay afloat during the coronavirus pandemic. Before tax season gets under way, talk to your clients about their intentions with the program. Successful accountants are familiar with PPP basics and understand how it will alter their clients’ books. Whether your clients are seeking second loans or considering PPP funding for the very first time, you can help guide them through the process, as well as use tax software for accounting firms to automatically calculate their potential tax savings.

Using PPP Funds – the Right Way

PPP loans are just that: loans. First- and second-round PPP loans have 1% interest rates, mature in 5 years, and are most often serviced by local banks. What makes them unique is that they are forgivable – but only if applicants maintain certain employment levels and use their funds in a qualifying manner. To have their second-round PPP loans forgiven, your clients should do the following:

Apply as soon as possible.

The program has been extended through March 31, 2021, but your clients should apply well before that date to ensure funding doesn’t run out. The Small Business Administration (SBA) is not currently accepting PPP loan applications, but the roll out is expected to commence later this month.

Prove they had a significant drop in revenue.

They must be able to show that their gross receipts dropped at least 25% in any quarter of 2020 compared to the same quarter in 2019. Your clients can choose which quarters to compare.

Employ 300 or fewer employees.

In the first round of PPP loans, the employee limitation was 500 or fewer. Just because your client qualified for a first-round loan does not mean they will qualify for a second-round loan.

Calculate their loan amount.

Though the SBA will perform this calculation for your client, it’s best if you can estimate the amount they will award so you can help your client plan for that influx of cash. The loan amount is equal to 2.5 times the business’s average monthly payroll cost that occurred during the 12-month period immediately prior to the disbursement date, or 2.5 times the average monthly payroll costs in 2019. The second-round loans are capped at $2 million, and total PPP loans – both first and second rounds combined – are capped at $10 million.

Use their loan proceeds within the covered period.

To qualify for forgiveness, your client must use their PPP funds within their chosen “covered period.” This period can be anywhere between eight and 24 weeks in duration, and the chosen period must end no later than 24 weeks following the disbursement date.

Use their loan proceeds in a qualified manner.

Under first-round PPP guidelines, businesses were required to spend 60% of their funds on payroll, with the remainder spent on rent, mortgage interest, and utilities. Second-round PPP loans follow this same general rule except that the remaining 40% can also be spent on operations costs, property damage costs, supplier costs, and worker protection expenses.

Maintain employee headcount.

The Federal government wants to see that the business retained its employees – or at least the headcount for full-time equivalent employees – during the covered period.

Maintain 75% of salaries.

Like employee headcount, your clients must prove they maintained at least 75% of salaries during the covered period for each employee earning less than $100,000. 

If your clients meet each of these requirements, 100% of their PPP loans will be forgiven. But even if they fail on one or more of these actions, they may still qualify for partial forgiveness. 

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Getting PPP Loans Forgiven

Your client’s bank and representatives from the SBA will be able to help them through the loan forgiveness process, but you can support their efforts by reminding your clients about PPP forgiveness rules and deadlines.

  • Businesses must apply for forgiveness within 10 months of the end of their covered period.
  • Businesses should submit their forgiveness application directly to their loan servicer, not to the SBA.
  • Their lender has up to 60 days to respond to the request for forgiveness.
  • Businesses with PPP loans of less than $150,000 can apply for forgiveness using a simplified, one-page application where they self-certify that they met all PPP requirements.

Amounts not forgiven must be repaid within the five-year maturity date of the loan, at the stated interest rate. But interest payments don’t begin immediately; interest and principal payments are deferred to the earlier of (1) the date the SBA remits your client’s loan forgiveness amount to the lender, or (2) 10 months after the end of the covered period. This prevents borrowers from paying interest on loans that will eventually be forgiven.

Recording PPP Funds

Together with your clients’ lenders, you can help your clients understand the mechanics of the loan program itself. But if your clients have questions about how to account for their loan proceeds and subsequent loan forgiveness, they will look to you. Fortunately, the American Institute of Certified Public Accountants (AICPA) released a Technical Question & Answer (TQA) on this topic.

According to TQA 3200.18, there are two acceptable methodologies for successful accountants to record PPP funding: (1) as debt under Accounting Standards Codification (ASC) 470, Debt, or (2) as a government grant under International Accounting Standards (IAS) 20.

The prudent path forward would be for your clients to record their PPP proceeds as debt on the balance sheet. Because PPP loans are government-issued debts, your clients need not be concerned about imputing interest at market rates, but they should record interest at the stated rate over the loan’s five-year maturity date. When that loan is subsequently forgiven, your client should record a gain for the extinguished debt. 

In some circumstances, your clients may choose to record their PPP loans as government grants under International Accounting Standards (IAS 20). TQA 3200.18 is nonauthoritative guidance, therefore applying IAS 20 to PPP loans is not an official, approved methodology, but your clients may be able to argue for its application if they anticipate that their loan will be forgiven and if they have an accounting policy that permits them to treat similar forgivable loans in this manner. When recording PPP loans under IAS 20, your clients should record the funds as a deferred income liability and offset that liability with a credit to an income account as they recognize the associated costs of the loan (such as compensation).

Tax Software for Accounting Firms as a Tax Savings Tool

Your clients will also have questions about how PPP loans will affect their taxes. In a news release dated January 6, 2021, the IRS explained that PPP expenses are now tax deductible, reversing previous guidance it published only a few months ago. The new guidance, outlined in Revenue Ruling 2021-2, is something successful accountants should review and be familiar with. To learn a bit more about this release and to understand how your clients’ taxes will be affected by PPP loans, we invite you to read our article here. And in the meantime, we also recommend that you check out our Corvee suite of products. Our tax software for accounting firms has a client collaboration component that helps you manage all aspects of your client’s tax needs in one area, something that can come in handy this tax season. 

In addition, our tax software for accounting firms already calculates thousands of tax planning strategy combinations for your clients in minutes. Request your demo today. 

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