- Legal and financial experts agree: Deposit your small business loans in a separate account.
- This will help keep track of how funds were used to make them forgive and will protect your business during an audit.
- A separate account prevents you from using funds for prohibited purposes and prevents payroll errors.
Even if you’re anxious to issue paychecks and cover the rent as soon as possible, business owners who have received federal relief loans through the Paycheque Protection Program (PPP) shouldn’t just deposit those funds into their general expense accounts, experts say.
While it may seem like which account a business uses to fund its operations makes a big difference, there are practical, legal, and financial reasons to open new accounts just for PPP loans.
This can make it easier to keep track of how you use the funds when the time comes to forgive them, while establishing accountability and transparency to protect you from problems during an audit, Johnny Wang, an associate at St. Louis to the law solidify Stinson LLP, Insider said.
A separate account holds you accountable
“While I generally agree with the principle that a dollar is a dollar is a dollar, we recommend placing the funds in a separate account as this encourages budgetary discipline and adherence to the use of PPP funds only. for purposes permitted by the CARES Act, ”Wang said. . “The segregation of funds will require businesses to manually make transfers from the PPP account and will encourage analysis as funds are spent on whether the transfer or payment is a permitted use under the law. “
Wang said being able to maintain accountability in this way was also important in helping to protect businesses from unintentional mischief that might attract the attention of federal watchdogs, who will monitor loan recipients for the. compliance in a environment rich in fraud.
“If funds are kept in a general operating account, PPP funds could be inadvertently used for unauthorized purposes, such as inventory or to pay other vendors. On-demand PPP certification requires a borrower to certify that these funds will only be used for narrowly defined authorized purposes, and we anticipate that the loan forgiveness application will require similar certifications, ”Wang said. “Having a clear list of transfers from a PPP fund account will streamline the loan forgiveness application process and reduce the risk of violating the certifications that are made. “
Wang said the federal code allows criminal penalties against borrowers who falsely certify their loans, including up to 30 years in jail and fines of up to $ 1 million. There is also liability under the False Claims Act.
“Because of the potential risks involved, companies should act with intention and caution when using PPP funds,” he said.
Payroll is tricky and must be walked through with care
Withdrawing loan funds from a separate bank account can pose problems, including when it comes to funding a payroll that includes one or more employees earning more than $ 100,000, Robbin Caruso, partner of the practice of tax controversy in the top 50 of American accounting solidify Prager Métis, Insider said.
Small business administration allows businesses to use PPP loans only on salaries below $ 100,000. If you have one or more employees who earn more than $ 100,000, you can pay them their entire salary, but you only need to repay the $ 100,000 of the P3 loan proceeds to your payroll account. It would be an improper use of funds to reimburse your payroll account for the full amount you paid to these employees.
Employers must avoid the mistake of reimbursing their payroll accounts with the full amount paid to employees who earn more than $ 100,000, Caruso said. “Companies should work with their payroll service providers and tax advisors to determine the best way to track these allowances,” she said.
With these stipulations in mind, Caruso said that in most cases, the benefits of managing PPP funds in this way outweigh the extra work.
“While not specifically required in the current guidelines, maintaining a separate bank account makes it easy for you to show that your business has used the loan funds for qualifying expenses,” she told Insider. . “In addition, businesses should create separate accounts in their books and records to track loan proceeds and expenses paid with PPP funds.”
Eight weeks after receiving a PPP loan, companies can request that these funds be converted into a grant. To do this, businesses will need to demonstrate that the loan proceeds have been fully spent on covered expenses – according to the Small Business Administration, 75% of the funds must have been used for payroll, the remainder being used for other expenses covered.
“The quote ‘follow the money‘ comes to mind here, where it is extremely important to be able to track and prove what was spent to get your loan canceled,” Nick Kolbenschlag, co-founder and managing partner of the financial services company. Crown Heritage Group in Charlotte, North Carolina, Insider said. “Since most companies have linked payment accounts or direct debits set up from their normal operating account, what I see is that some customers are transferring the exact amount from the PPP bank account to the operating account whenever an expense is about to be paid. This transfer together with the expense invoice and authorized payment shall serve as the appropriate documentation necessary to obtain that expense canceled. “
Keeping careful track of spending makes it easier in the long run
Heather Valentine, business owner and real estate agent in Richmond, Va., Told Insider that she left her normal bill payment procedures in place and was simply reimbursing her business for expenses covered by the loan. PPP which Valentine’s Properties received last April.
“I put [the PPP loan funds] in a separate bank account so that only I can sign it, and that’s only for my name, “said Valentine.” Then I created a spreadsheet of all the possible things for which I can use it – utilities, payroll, my office rent, etc. – and it allows me to follow it very closely as I make every expense on the account. “
For example, when she uses her business credit card to pay for utilities, she accesses the PPP account and makes a payment to the business for the amount of that utilities payment and documents it as a refund.
“So I pay everything as usual, but since I pay covered things, I transfer that same amount from the PPP account to the operating account and document it clearly. All the money will stay in the PPP account until it is actually spent, ”she said.
Valentine said this system is the combination of Kolbenschlag’s advice and the simple need to be organized in the environment of a real estate brokerage, which she likened to “breeding cats.” Either way, she thinks that segregating and categorizing funds this way will help her be better prepared to ask for forgiveness.
“I own a real estate brokerage firm and actively sell – I have a lot of systems and practices in place, and it’s an easy way to keep it all up,” she said. “I couldn’t even imagine asking for forgiveness any other way.”
This article originally appeared on Insider on May 8, 2020.