Consider Your Accounting Options for Booking PPP Loan Forgiveness
It’s no surprise that accounting for forgivable loan proceeds under the Small Business Administration (SBA)’s Paycheck Protection Program (PPP) has caused much confusion for many borrowers. Ever-changing regulations and guidance on the program’s forgiveness make accounting for the PPP loans complex. To help you better understand, our PPP advisory professionals have outlined recognition options and tax implications for deliberation.
Businesses have two options under the generally accepted accounting principles (GAAP) for putting their PPP loans on the books:
- Debt Approach: Taking this approach, borrowers would book the PPP loan as a debt and accrue interest just as they would with any typical debt accounting. The PPP loan would remain as a debt until officially forgiven, at which point should be added to income as a gain.
- Grant Approach: A PPP loan can be treated like a grant if the borrower has met all the various probable thresholds to trigger forgiveness. When taking this approach, cash inflow should be recorded from the PPP loan as a deferred income liability. As expenses are incurred to trigger the forgiveness, the liability would be reduced with an offset to the income statement. Borrowers have two options to credit the income statement either as other income or expenses incurred.
The lender will not dictate which route must be taken, so the choice is yours. Depending on the accounting policy elected, your GAAP financial statements may or may not match your tax returns – giving way to more considerations.
The stimulus legislation updated the Coronavirus Aid, Relief, and Economic Security (CARES) Act as it relates to PPP loan forgiveness, regardless of how it is classified for financial statement tax purposes. The legislation confirmed Congressional intent to say that no deduction is denied, no tax attribute is reduced and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. It is still yet to be seen how this will be handled on a state level. Many states have yet to issue any guidance on whether the forgivable PPP loan proceeds are taxable, or if the federal treatment will be honored at the state level. One thing is for sure, the treatment of loan forgiveness will likely have some tax implications to contemplate. S-corporations also have additional items to consider. For example, the treatment of the loan forgiveness will increase the basis of a shareholder’s stock basis. The tax-free income increases the basis by adjusting the S corporation's other adjustment account or accumulated adjustment account depending on tax attributes of the entity. How the tax-free income will impact each specific entity and the shareholders will need to be analyzed to determine how the basis increase will benefit them taxwise, specifically for their ability to deduct losses and take distributions from the S corporation. In addition, the timing of the attribute increase was not specifically clarified by the stimulus legislation – leaving questions on if it is the year it is recorded on the financial records of the entity or the year forgiveness is granted by the SBA.
Assess Your Situation
Timing is everything when it comes to booking your PPP loan – especially as it relates to bank covenants and tax liabilities. Every situation is unique and needs to be assessed. If you have bank debt, incurred losses or lower income than normal, you may want to consider booking the income in the current year to avoid issues with your lender. It’s always advisable to have a conversation with your bank about how you’re planning to account for your PPP loan to best understand the ramifications of your financing. Determining the appropriate timing of when expenses are deductible and when the loan is forgiven, along with the correct accounting treatment, can be challenging if more than one tax year is involved from when expenses are incurred and the loan is forgiven. Before moving forward with an approach, you should work with your CPA, like those at Doeren Mayhew, for guidance on determining the appropriate tax and accounting treatment for your specific circumstance. Contact our PPP advisors to get help ensuring the proper accounting and tax treatment for PPP loan forgiveness.