Criteria for PPP Fund Forgiveness

PPP funds will be forgiven provided the business meets specific criteria. If these criteria are not met, the business must return the funds.

What criteria must be satisfied so that your PPP funds are forgiven? Here are two of the main points of reference:

Maintaining Employee Headcount

The number of full-time employees cannot have dropped from average monthly levels during 2019. This may require some businesses to re-staff. If your business launched in the second half of 2019, you can use the average headcounts from January to February of this year. Seasonal business owners can use the headcount from March to June. 

Maintain Salaries

For PPP funds to be forgiven, employers cannot cut salaries or wages. Don’t forget that PPP funds can be used for more than just payroll; they can be used to fund benefit packages, such as health insurance, vacation time, and more.

Initial Recording

If you believe your business meets these criteria, your initial recording of these funds should be as a current liability, similar to deferred revenue. It’s important that the value of your PPP funds be retained in your accounting documents until you are released from the liability.

If you do not believe your business meets these criteria, you should classify these funds as a long-term liability. Keep in mind that forgiveness is not all or nothing. If you reduce your salaries, for example, you may still be entitled to a percentage of the PPP loan.

Subsequent Recording

Because of the unique nature of these funds, accounting for PPP funds will require special attention.

Filing Paperwork

First, your business must file the proper paperwork to document that you met the appropriate criteria.

Accounting for PPP Funds on the Balance Sheet

If your business meets the criteria, how do you show this in your accounting books? Currently, the PPP funds should be listed as a liability. Because you have been forgiven a debt, you will need to record this amount as income. Specifically, this should be listed as “other income” after income from operations.

If you forget to take this step, you may skew your gross margins and make it look as though your business performed better than it actually did.

Adjust Monthly Forecasts

Again, if your funds have been forgiven, you should be sure to record them in a separate entry for “other income.” This will also help you manage your operating income and produce accurate monthly forecasts.

What If I Don’t Receive Full Forgiveness?

If you only receive partial forgiveness for your PPP funds, you can still employ the above procedures. Although, in your case you will record the adjusted forgiveness amount rather than the total amount of the loan.

PPP Funds and Tax Preparation

We’ve offered advice on accounting for PPP funds in your books. We’ve provided this advice for the purpose of record-keeping. Please consult your tax account for how PPP funds may impact your yearly taxes.

Owning a business may seem overwhelming during this season of instability. But managing your books well can help you focus on maintaining and expanding your business.

What is an Audit PBC List?

An audit PBC list is a formal documentation request that your auditor makes before starting the audit procedure. It serves as a kind of audit checklist.

There are no set standards for which kinds of documents and records your auditor will request. Every business has a unique financial structure. In general, any documentation that relates to or affects the finances of your business finances is likely to appear on the PBC list.

Even though there are no set guidelines, you can expect the list of requested items to include reports and documents related to:

• Revenue and income
• Expenses
• Cash flow
• Loans
• Debt agreements
• Schedules
• Procedures
• Contracts

The audit PBC list is dynamic. It’s subject to change as the auditor works through the auditing process. They’ll change or add to the audit checklist as they go.

The purpose of this audit checklist is to make your auditor’s job a little easier. But it can also make your life simpler. If you use the list to prepare and consolidate your documentation in advance of the audit, the process becomes more efficient and takes less time. That, in turn, can save you additional expenses for the audit. 

Manage Your Auditor

Just like the audit process in general, the PBC list can be a source of anxiety, especially when it’s extensive. But it can also be an opportunity for you to take control of the pacing and execution of the audit.

You can exert some authority by managing how your auditor submits their requests. Here are a few strategies for doing so.

Require the audit PBC List to Be Sent at the End of the Fiscal Year

You (or your accountant) will be preparing annual reports and closing out your books when your fiscal year is closing. You’ll have the required information close at hand during that time. By mandating that the PBC be issued then, you can set the required documentation aside so it will be easier to collect and submit.

Require Due Dates for Listed Items

Make sure that your auditor is unambiguous about deadlines. Ask them to set a due date for each specific item on the list. Don’t accept a blanket statement like, “Just have everything done by January 30.” That’s a sign of a disorganized auditor (and a potentially long audit process). A competent auditor will know at which points in the process they’ll need to get certain documents.

Set a Deadline for the PBC List

Your auditor should forward the audit checklist no later than four weeks before the audit is set to begin. This will give you some breathing room and time to gather the required information. Make sure that this deadline is conveyed to and acknowledged by the auditor.

Get a Schedule for Each Stage of the Audit

Auditors are very methodical. They have very systematic timelines for how they’ll handle the different parts of their audit. Ask your auditor to provide you with a complete timetable outlining when they’ll be reviewing certain areas. This will allow you to make your accountant or financial manager available to answer questions when they arise. 

Audit Yourself Before the Auditor Does

Balance sheets provide the pathways that your auditor will take when the process begins. The PBC checklist will require all of the supporting documents that relate to your balance sheets. They’ll check every sheet to verify that there is sufficient information to back up your financial claims.

A great way to ensure that they’ll have the information is to audit yourself before the auditor arrives. Confirm that every balance sheet has sufficient supporting documentation, with no exceptions. Certify that every account has a document associated with it.

Along with making your financials as air-tight as possible, this process will also give you a better understanding of the auditing process. You’ll know what to expect from the auditor, putting the focus squarely on them as they conduct their business. That can save you both a lot of time.