My church has applied for a CARES Act Paycheck Protection loan. If we receive these funds, how should we record the money on the books? Further, do you recommend a separate bank account for these funds for ease of tracking them?
When money is received from the Paycheck Protection Program (PPP), it should be treated as a loan and therefore a liability in your accounting records.
Amounts spent from loan proceeds should be recorded as an expense. The loan balance will stay the same until the time it is forgiven. At that point, you will reduce the loan and recognize grant (contribution) income. Your expenses will not change because of the loan. The ultimate impact on the income statement will be the increase to revenue.
The loan is forgiven eight weeks after receiving it to the extent the money is spent entirely on:
- payroll costs (at least 75 percent of the loan proceeds)
- group health care expenses
- interest on any mortgage obligations that existed before February 15, 2020
- rent, including rent under a lease agreement that existed before February 15, 2020
- interest on debt that existed before February 15, 2020
- utilities that were already in use before February 15, 2020
You are not required to maintain a separate bank account for the Paycheck Protection loan. However, some CPAs advocate creating a new account that is used strictly for these funds because it creates an absolutely clean paper trail for documentation when the loan forgiveness application process begins. That way, there’s no question about the PPP loan proceeds getting combined with other funds. Further, there are no questions about the types of expenses withdrawn from the account truly “coming from” the PPP loan proceeds.
While a separate account may be an effective way to track these funds, money would still need to be transferred from this account because the payroll costs that can be applied to the loan would not directly come out of this account. Whether or not you choose to create a new and separate account, the most important thing to consider is accurate record keeping. For any expenses that will be used to request loan forgiveness, make sure you have good documentation to support the amount.