CWG Publication: You should put your Paycheck Protection loan into a separate bank account if you want it to be forgiven, experts say

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Business Insider Publication 

Written by Julie Peck, published 5/8/2020

Original Article:

Even if you're eager to issue paychecks and cover rent as soon as possible, business owners who received federal relief loans through the Paycheck Protection Program (PPP) shouldn't just deposit those funds into their general spending accounts, according to experts.

While it may not seem as though it would make much difference which account a business uses to fund its activities, there are practical, legal, and financial reasons to establish new accounts solely for PPP loans.

Doing so can make it easier to keep track of how you use the funds when it comes time to have them forgiven, while also establishing accountability and transparency to help protect against trouble during an audit, Johnny Wang, a St. Louis partner at the law firm Stinson LLP, told Business Insider.

A separate account holds you accountable

"Although I generally agree with the principle that a dollar is a dollar is a dollar, we recommend placing the funds in a separate account because it encourages fiscal discipline and compliance with only using PPP funds for allowed purposes under the CARES Act," Wang said. "Segregating the funds will force businesses to manually make transfers from the PPP account and encourage an analysis as funds are spent as to whether the transfer or payment is an allowed use under the act."

Wang said that being able to maintain accountability in this manner was also important to help protect companies from committing unintentional misdeeds that might attract the attention of federal oversight entities, who will be monitoring loan recipients for compliance in a fraud-rich environment.

"If the funds are kept in a general operating account, PPP funds could be inadvertently used for disallowed purposes, such as on inventory or for paying other vendors. The certification on the PPP application requires a borrower to certify that these funds will only be used for narrowly defined allowed purposes, and we anticipate that the loan-forgiveness application will require similar certifications," Wang said. "Having a clear list of transfers from a PPP funds account will streamline the loan-forgiveness application process and minimize the risk of violating the certifications that are made."

Wang said federal code allows for criminal penalties on borrowers who falsely certify their loans, including up to 30 years of imprisonment and fines of up to $1 million. There is also liability under the False Claims Act.

"Because of the potential risks involved, businesses should act with intention and caution when using PPP funds," he said.

Payroll is tricky and should be navigated with care

Drawing down loan funds from a separate bank account can pose issues, including when it comes to funding a payroll that includes one or more employees earning more than $100,000, Robbin Caruso, a partner in the tax-controversy practice at the top-50 US accounting firm Prager Metis, told Business Insider. 

The Small Business Administration allows businesses to use PPP loans only on salaries under $100,000. If you have one or more employees who earn greater than $100,000, you can pay them their entire salary, but you have to reimburse your payroll account only the $100,000 amount from the PPP loan proceeds. It would be an inappropriate use of funds to reimburse your payroll account the whole amount you paid such employees.

Employers must avoid the error of reimbursing their payroll accounts with the total amount paid to employees who earn more than $100,000, Caruso said. "Businesses should work with their payroll providers and tax advisers to determine how to best track these allocations," she said.

With these stipulations in mind, Caruso said that in most cases, the benefits of managing PPP funds in this manner outweigh the extra work.

"While not specifically required in current guidance, keeping a separate bank account allows you to easily show that your business utilized the funds from the loan for allowable expenses," she told Business Insider. "Additionally, businesses should set up separate accounts in their books and records to track loan proceeds and expenses paid with PPP funds." 

Forgiveness matters

Eight weeks after they receive a PPP loan, businesses are eligible to apply to have those funds converted into a grant. To do so, companies will have to demonstrate that loan proceeds have all been spent on covered expenses — according to the Small Business Administration, 75% of the funds must have been used for payroll, with the rest used toward other covered expenses.

"The quote 'follow the money' comes to mind here, where being able to track and prove what was spent is extremely important for getting your loan forgiven," Nick Kolbenschlag, the cofounder and managing partner of the financial-services firm Crown Wealth Group in Charlotte, North Carolina, told Business Insider. "Being that most companies have linked pay accounts or autodrafts set up from their normal operating account, what I'm seeing some clients do is move the exact amount from the PPP bank account to the operating account each time an expense is about to be paid. This transfer along with the expense's invoice and cleared payment should serve as the proper documentation needed to get that expense forgiven."

Keeping scrupulous track of expenses makes things easier in the long run

Heather Valentine, a Richmond, Virginia, business owner and real-estate agent, told Business Insider that she has left her normal procedures for paying her bills in place and is simply reimbursing her company for covered expenses from the PPP loan that Valentine Properties received on April 16. 

"I put [the PPP loan funds] in a separate bank account so that I'm the only one who can sign for it, and it's only in my name," Valentine said. "Then, I created a spreadsheet of all the possible things I can use it for — utilities, payroll, my office rent, etc. — and that enables me to track it very closely as I make each expenditure out of the account."

For example, when she uses her business credit card to pay the utilities, she goes into the PPP account and makes a payment to the business for the amount of that utility payment and documents that as a reimbursement. 

"So I'm paying everything as normal, but as I'm paying covered things, I'm transferring that same amount out of the PPP account into the operating account and clearly documenting it. All of the money will stay in the PPP account until it's actually spent," she said.

Valentine said this system is the combination of Kolbenschlag's advice and the simple necessity of being organized in the environment of a real-estate brokerage, which she compared to "herding cats." Regardless, she feels that separating and classifying the funds in this manner will help her be better prepared to request forgiveness.

"I own a real-estate brokerage and I actively sell — I have lots of systems and practices in place, and this is an easy way to keep track of everything," she said. "I couldn't even imagine applying for forgiveness otherwise."