The Payroll Protection Program (PPP), enacted through the CARES Act, provided $600 million in forgivable loans to bring relief to eligible businesses affected by the pandemic. The program also led to questions about accounting for and reporting the loans in the company’s financial statements. When it comes to PPP accounting and reporting, the process is similar to the process for another program, the Employee Retention Credit (ERC).
Businesses that received PPP loans must consider revenue recognition standards, document basis for the need of the loan, qualifying expenses, and accounting policies.
Below we have summarized the different accounting treatments for PPP loans by industry.
A. Accounting for Government Contractors
Double dipping is strictly prohibited by the DCAA. This means that contractors cannot be reimbursed for contract costs that are already offset by PPP funds. Contract costs must be reduced in the year the loan was forgiven. Be aware that the loan forgiveness may not have been granted in the same accounting period as the loan issuance. If PPP loan proceeds were expended for direct contract costs and the contract can no longer be credited (i.e., it is complete), then the credit will be returned to the Government in a manner agreed to by the contracting officer.
- Before Forgiveness – PPP loans are a liability of the contractor and, therefore, should be reported on the balance sheet. Costs paid for by these loans are normal contract costs.
- After Forgiveness – The amount of a PPP loan that is forgiven will apply as a credit under FAR 31.201-5. In the year forgiven the credit will be applied against contract costs in the same way the PPP loan funds were originally spent by the contractor. For example, if a portion of the forgiven PPP loan was used to pay facility rent, the cost of facility rent should be credited. To the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven. Furthermore, any reimbursements, tax credits, etc. from whatever source contractors receive for any COVID-19 Paid Leave costs should be treated in a similar manner.
- COVID-19 Paid Leave Costs – Paid leave costs are to be classified to a newly created cost category, Other Direct Costs (ODC) COVID-19. Costs from ODC-COVID-19 may be allocated to the applicable contracts based on some reasonable, agreed upon allocation. In some situations, it may be more appropriate to charge these costs through indirect cost pools (overhead, G&A, etc.).
B. Not-for-Profit Organizations
Not-for-profit organizations have two options to account for PPP loans.
- Debt Method – Under this method the loan is recorded as a liability and will remain on the statement of financial position until the year forgiven. When the forgiveness application is approved and the forgivable amount is determined, the debt would be removed, and recognized as contribution revenue.
- Conditional Contribution Method – This method is best used when the Organization’s intention is to have the full amount forgiven. Conditional contributions include a barrier that must be overcome and a right of return/release. The PPP loan includes specific spending requirements that can be considered barriers that if not met would cause the loan to be repaid. Under this method, when the funds are initially received, a refundable advance is recorded (liability). As qualifying expenditures are incurred that are eligible for forgiveness contribution revenue will be recognized and the refundable advance will be reduced.
C. Accounting for Business Entities
There is no clear guidance for for-profit entities. The TQA describes that entities will need to determine the appropriate accounting treatment by considering the guidance for similar transactions under GAAP or by applying relative guidance outside of GAAP. Three possible options are identified below:
- Debt Method (same as option 1 for not-for-profit organizations) – However, instead of recording a contribution it should be reported as a gain on extinguishment once the loan is partly or fully forgiven and legal release is received. The gain will need to be presented separately on the income statement.
- Conditional Extinguishment of Debt Method (Similar to option 2 for not-for-profit organizations) – This option permits the for-profit to change the name of the revenue line from “contributions” to something more appropriately descriptive, such as PPP loan forgiveness or extinguishment of debt. The gain will need to be presented separately as a separate item on the income statement.
- International Accounting Standards (IAS) 20 – The accounting using this method is similar to option 2 for not-for-profit organizations, where a refundable advance would be recorded, but provides for additional presentation options. Under IAS 20, income from PPP loan forgiveness can be presented as either (1) gross revenue on the income statement or (2) netted against related expenses.
Statement of Cash Flows
On the Statement of Cash Flows, PPP loan proceeds received are recorded as cash inflows from financing activities, principal payments are recorded as cash outflows from financing activities, and interest payments are recorded as cash outflows from operating activities. Gains from forgiven principal and interest should be recorded as noncash reconciling items to net income.
Details for PPP loans that are material to the financial statements should be included in footnotes. Borrowers should explain accounting methodology and where amounts were included in the financial statements, as well as other standard disclosures related to debt
For federal tax income purposes, all PPP loans are classified as debt. The debt forgiveness amount of any forgiven PPP loan is considered nontaxable income. Additionally, according to the Consolidated Appropriations Act, taxpayers can fully deduct business expenses even if they were not paid with the proceeds of a forgiven PPP loan.
Many states, however, remain on track to tax them by either treating forgiven loans as taxable income, denying the deduction for expenses paid for using forgiven loans, or both. Below is a link that show states’ tax treatment of forgiven PPP loans.
Due to the complexity of reporting, accounting, and tax treatment of PPP loans, it’s important to consult with a tax advisor. The tax professionals at BSB are following the latest guidance to help maximize your tax benefits while remaining compliant with current law.