Wednesday, April 22, 2020

Treacherous Government Loans and Account Segregation

My small business received both the EIDL and PPP loans. Yes, thank you, it was a bunch of work, but no harder than creating a Pathfinder 2nd Edition character for the first time. I have some unique experience in creative financing my business, so I saw the opportunities and jumped on them. This is my area. However, these loans are treacherous. I'm going to briefly go over why they're treacherous and how you can navigate these waters.

The EIDL loan has approved uses and disapproved uses. A lot of disapproved uses are things you might do all the time, like issuing profit or paying off old debt. This is theoretically a thirty year loan. Are you not going to have profit for 30 years to prove the SBA Gods that you've used the loan for legitimate funds? No, but you need to be able to prove profit taking and debt retirement did not come from this money.

Likewise, the PPP loan, to act like a grant and be forgiven, can only be used for (some) payroll costs, some insurance, rent, utilities (whatever that means) and mortgages from the Before Times. Payroll has to be kept at 75% with the same number of full time employees (30+ hours?) to be forgiven. I am not an authority on this. Nobody is an authority on this. It''s complicated and likely to change, so you need to handle this money in a special way, although it doesn't quite need the same level of segregation as the EIDL money.

Here's what I've done. The first thing I did was create money market accounts at my local bank. This earns something like zero point zero nothing percent interest, but the account segregates the money from my general funds. Now I can transfer money from loan accounts to the general fund for specific uses with specific notations. I can use my own money without bumping into loan money restrictions. I created these entries in my Chart of Accounts:

I am not an accountant, but my accountant approves of what I'm doing. Step two is to create Long Term Liability accounts for these debts, which is nothing special, just how you would track a loan. 

Finally, how do you actually track expenses? I was discussing this with friends and the issue of Class came up. I've never used this before now. Setting up Class, an option in Quickbooks, allows you to note each expense line with a Class notation. So most of my Payroll taxes are allowed to be paid with PPP money, except federal taxes. I can line item each tax type as PPP approved using Class, except federal taxes. This allows me to track my usual expenses without too much interruption in work flow. When it comes time to prove how I spent the money,  I can run a report using the Class and it takes me minutes instead of it being nearly impossible.

Yes, you do need to be this detailed, and no, you probably don't need an accountant. You do need to be very clear on what is allowed and what is not for each loan. Getting your PPP money deployed in approved usages in the short period required is going to be a chore and will take creativity. My 15 year old is suddenly back on payroll. My old manager is back. Employees are being tapped to work from home on projects that don't exist yet that I'm scrambling to create (online store). Once the PPP money hits my account, the race is on to spend it properly and quickly.

The EIDL money is a little easier. I'l be paying my vendors with a big chunk and mostly leaving that money in its account for the duration. Its segregation is the most important thing, so as not to run afoul of the government.

Good luck! I know getting this stuff is hard. If you haven't gotten the PPP yet, keep trying. It's to your advantage to get it as late as possible in this crisis, when your people are going to be able to work doing something useful. Stop lamenting about large corporations getting unfair shares and start working on this. You will be far ahead of me if you get it later.

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