In 2020, nearly every assisted living and senior care operator has faced extraordinary challenges. The physical and emotional toll on our residents, their families, and our heroic staffs were heartbreaking. Thankfully, there were some things that brought hope and help during the year, like the Paycheck Protection Program (PPP).
As this post is written at the end of 2020, a second round of PPP has just been approved that will bring much needed help to many businesses that struggled the most this year. You may or may not be eligible for Round 2 of PPP.
But there is one thing that anyone who received PPP in Round 1 or Round 2 will have to consider, especially as we approach year-end and tax season.
How to account for PPP funds received in your books?
[Special note: every situation is different – while this general information may be appropriate for some senior care providers, it may not be for you – check with your own CPA or other financial advisors to make sure you have the information you need to operate your business and to prepare tax returns later.]
As I worked with clients this year and reviewed their financial statements, I saw a wide range of accounting treatments for PPP funds. Some reported PPP funds as loans and left those liabilities on the balance sheet after it had been forgiven. Others recorded PPP as ordinary income right away. And still others simply ignored the income and reduced their payroll expense by the amount of PPP they used. Each of these approaches created problems.
One of the key principles about financial reporting that that I share with clients is that your financial statements should provide you, the operator, with valuable information. You should be able to look at your statements every month and easily know how your business is performing over time. By recording PPP in the wrong way, you remove the clarity your financial statements should offer and make them less valuable as a tool for managing your business.
This is what I’ve recommended to clients:
- When you receive PPP funds, set up a loan account as a long-term liability. The debt, if not forgiven, is normally paid off over more than one year so it’s long-term even if some (the amount due within a year) should be reclassified as current debt later.
- Consider holding the funds received in and spending the funds from a new checking account you set up for just this purpose – it may make your job easier later.
- Expenses paid from PPP funds should be recorded in the same way you normally record the expense, whether it’s for payroll, utilities, rent, or any allowed expense.
- If (or when) the PPP loan is forgiven, it’s a matter of simply making a journal entry to reclassify the loan as income.
- But here’s a very important step – record the income as ‘Other Income’ or an income account that’s not one of your ordinary recurring income accounts. The PPP loan forgiveness is a one-time event and not a recurring source of income, such as monthly fees from your residents. By keeping the PPP income separate, you’ll be able to more easily see how your facility is actually performing on its own without PPP.
Some still ask me – what’s the difference? Remember, you want your financial statements to be useful to you as a managment tool. The ability to track recurring revenue, operating expenses, and net operating income, without regard to special items like PPP funds, is very important to tracking your assisted living facility’s financial health and performance over time.
For those of you who use Quickbooks for managing your accounting, it’s very simple to set up a new account for PPP Income and to make it an Other Income account type. If you have any questions, talk to your accountant for help making this happen.
This article may go deeper into accounting than many of you like to go but it’s very important for any small business owner of assisted living facilities to have quality financial reporting to effectively manage their business. These tips should help you do just that.
One more reminder – as the special note above says, check with your own CPA or other accounting professional to make sure any tips here are the right tips for you.