Accounting for PPP funding – from loan to grant income
As businesses continue to apply for and receive Paycheck Protection Program funds, there remains a lingering question of how to account for it in the books. Is it a loan or government grant? A conditional contribution?
In reality, it could be all of the above. Consider it a liability on your books until you find out how much qualifies for forgiveness.
Keep in mind the rules in place regarding forgiveness: Payroll costs must be at least 60 percent of the amount forgiven, with nonpayroll costs accounting for no more than 40 percent.
For more on ensuring you get maximum PPP forgiveness, visit https://www.cpabr.com/covid_19_news/latest-interim-final-rule-introduces-new-ppp-loan-forgiveness-provisions/
Accounting for your PPP loan when you initially get it
You can account for your PPP loan either as a loan, a grant or conditional contribution. As mentioned above, however, we advise recording it as a liability when you first receive the funds.
If you consider it a loan, you will treat it as any other liability. This is probably the most common scenario and the most conservative. Once determined, the amount of loan forgiveness you receive can then get recorded as gain on forgiveness. You will also want to record the 1 percent interest as a monthly liability until you learn the amount of your PPP loan forgiveness. Any PPP funds not forgiven are still listed as a loan.
Counting your PPP as a grant entails recognizing the income over time as you use the funds for allowable costs. For a conditional contribution, you would recognize the income as you meet the PPP conditions. You will want to discuss with your accountant on what treatment is appropriate if you require financial statements.
Whether you are running a business or nonprofit, we suggest listing your PPP loan forgiveness as a separate income line – call it PPP grant income or other income. You are using the money to offset payroll and other allowed expenses, but your books still reflect the real cost of your payroll for budgeting purposes.
Keep in mind; if you spend the PPP money for a purpose that does not fall under the forgiveness criteria, you can still use it as a 1 percent loan paid back over either two or five years, depending on the terms. If that is the case, then you would account for the money as any other loan – just as you would for any other PPP funds that do not qualify for forgiveness.
However, if you are careful to follow the PPP spending guidelines, chances are most, if not all, of your loan will qualify for forgiveness. Indeed, the point of the program at the start was to both free up capital for businesses and allow them to continue paying employees.
Tax returns and deductions
The IRS has said that no deduction is allowed for the payment of any expenses that result in forgiveness. That means your business, at this point, will still have a tax liability for the PPP money used to offset these costs. Lawmakers still might address this issue because it does not appear that they intended to cause an additional tax burden.
For example, if you made $1,000 but paid a worker $300 that you offset with PPP money, you would still owe taxes on the full $1,000.
In some cases, businesses may find themselves not knowing the amount of PPP forgiveness in time for their 2020 returns. Do they take the deduction? Do they offset expenses with the PPP funds? Do they extend their returns until Congress makes a decision? Hopefully, more guidance will be issued before you need to make that decision.
Given that businesses or nonprofits may run on different fiscal year-ends, you may not know the answer before your tax returns are due.
Our team is keeping track of the latest information and guidance. We are here to work with you and your company to help you get the full benefits provided by COVID-19 economic relief and any other changes made by federal or state governments during and after the pandemic.
Boyer & Ritter can help you navigate through compliance requirements of the loan forgiveness program, to help ensure maximum forgiveness is received, and provide a reliable and trusted source of information for your lender and the government. To learn more about engaging us for PPP Loan Forgiveness Support Services, and to help determine the level of support you may need, please contact us HERE.