Accounting for PPP Loans and PPP Loan Forgiveness

How should businesses record Paycheck Protection Program (PPP) loans on their Balance Sheets?

 

The answer to this question is not as binary as it may first appear. Some argue that PPP disbursements are true loans and should be recorded as debt, but others maintain that those funds should be considered revenue since they will be forgiven. Unfortunately, the IRS and the Small Business Administration (SBA) have not definitively stated how businesses should account for PPP loans. We must instead rely on non-binding technical advice and industry practice to guide us. The prevailing practice is for businesses to choose one of two methods:

(1) Record PPP funds as they would any other debt following ASC 470, or;

(2) If they believe their loans will be forgiven, record PPP funds as if it were other income.

PPP Loans and Subsequent Forgiveness

The PPP was created to encourage small businesses to keep their workforce employed during the government-declared emergency. The SBA began accepting PPP loan applications in early April, but the initial $349B of relief funds was claimed in less than two weeks. Not long after, Congress reinstated the program by infusing it with an additional $310B. The SBA stopped accepting new applications on August 8, 2020.

Businesses that were granted PPP assistance can use their funds in one or more of the following expenditure categories: payroll, utilities, rent, and mortgage interest. However, for their loans to be forgiven, they must comply with a few additional rules:

• Allocating at least 60% of PPP funds to payroll costs
• Maintaining a steady employee headcount
• Paying each employee at least 75% of the salary they were making before the health crisis

If businesses cannot fulfill each of these requirements, the SBA may reduce some (or all) of their forgiveness amount. If the loans are not forgiven, they must be repaid within two to five years at a nominal interest rate of 1%.

Recording PPP Loans as Debt

If a business reports their PPP loan as debt (or if they do not anticipate that their loans will be forgiven), they should consider doing the following:

(1) Record their loan as a liability on their Balance Sheet, and

(2) Record interest expense over the loan’s life. This interest expense should be recorded at the stated 1% interest rate, not at market rates. Loans backed by government entities are excluded from imputed interest rules that would traditionally require organizations to mark their interest at the going market rate.

If the SBA forgives the loan, the entity should offset its debt balance by recording a gain on its extinguishment. If the SBA does not forgive the loan, the organization should reduce its debt balance as they make loan repayments, just as they would any other debt.

Recording PPP Loans as Other Income

If a business believes their loan will be forgiven, they can treat their PPP loan as other income. Only when there is “reasonable assurance” that they will meet the loan forgiveness conditions can they record revenues.  Currently, the IRS has taken the position that the expenses paid using the PPP proceeds are not deductible.  However, the IRS has not clarified how that treatment will impact potential tax credits that are calculated using the expense paid.  On September 22, 2020, the IRS issued guidance to the lending institutions indicating that the issuance of form 1099-C will not be required for any forgiveness of PPP loan money.

Understanding when the loan forgiveness conditions have been met can be tricky, and unfortunately, there is no authoritative guidance to follow. The most conservative option is recognizing revenue only when the SBA legally releases the entity from its liability. A less conservative (but still viable) option is to recognize revenue over time as the business incurs expenses that make them eligible for forgiveness (i.e., payroll, utilities, rent, and mortgage interest).

The PPP has been a lifeline for many small businesses, but it comes with a few reporting hurdles. And sadly, businesses may also be facing additional tax burdens. In opposition to what Congress intended, PPP loan forgiveness appears to be taxable. Small businesses can undoubtedly manage PPP loans, but they may need some help to get it right.

Contact Us

If you have any questions regarding the above material or need help navigating PPP loan forgiveness, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.