Grant vs. Debt Accounting For PPP Funds
Jan 15, 2021
Over the past several weeks’ companies have started to receive notification of forgiveness of their PPP loans. As you begin to think about how you will account for your loan and forgiveness, it is important to remember proper GAAP accounting. As we noted in our prior blog, Accounting for PPP Loan Proceeds, the legal form of a PPP loan is debt. However, the PPP loan does include a forgiveness component which under certain scenarios permits treating the proceeds as a grant and following IAS 20 Accounting for Government Grants as an option. To be treated as a grant, the proceeds must be reasonably assured they will comply with the eligibility and forgiveness requirements. The biggest difference between the two options is under grant accounting, the income is recognized as the costs are incurred and for debt accounting, the gain is recognized when the entity is notified of forgiveness.
PPP loans should be derecognized when the debt is extinguished, in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. Under this guidance, debt is extinguished when either the debtor pays the creditor, or the debtor is legally released from being the primary obligator. As a result, when treating the PPP loan proceeds as debt you recognize the income in the year the company is notified of forgiveness. For any business with a 12/31 year-end who receive notification after such, even if the financial statements have not been issued, the gain should be recognized in 2021. If a company wants to recognize the gain during the fiscal year 2020 they should consider grant accounting.
Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting. Regardless of the accounting approach followed by a borrower they should disclose in the footnotes how the PPP loan was accounted for and where the related amounts are presented in the financial statements. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
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Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company
juli.seiwert@wvco.com | 419.891.1040
Categories: Audit & Accounting, COVID-19
New Guidance Released on Deductibility of Expenses Paid with PPP Funds
Nov 19, 2020
Yesterday, the U.S. Treasury Department and Internal Revenue Service (IRS) released guidance clarifying the deductibility of expenses paid with paycheck protection program (PPP) loan funds.
The two significant rulings can be found here: Revenue Ruling 2020-27 and Revenue Procedure 2020-51. Both address issues related to the deductibility of expenses paid with PPP funds.
What is the significance of the new guidance?
Previously, it was unclear what would happen if a taxpayer incurred the expenses in one year (2020), but received forgiveness in the next year (2021).
Rev. Rul. 2020-27 states if a business reasonably believes a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Meaning, if you used all of your PPP funds in 2020 and expect to receive full forgiveness, those expenses are not deductible, regardless of whether or not you have applied for or have received forgiveness notification as of the end of 2020.
What happens if loan forgiveness is partially or fully denied in 2021 after one has filed their 2020 return?
Revenue Procedure 2020-51 establishes a safe harbor for taxpayers whose loan forgiveness applications are partially or fully denied, or who decide not to apply for forgiveness after filing their 2020 tax return.
While these expenses may ultimately become deductible with a future act of Congress, we encourage you to connect with your William Vaughan Company advisor to assist you in determining the best path forward for you and your business.
Need further PPP guidance? Check out our COVID-19 Resource Center.
Categories: COVID-19, Other Resources, Tax Planning
PPP Application Deadline Extended to August 8
Jul 06, 2020
On Saturday, July 4, President Trump signed legislation extending the application deadline for the Paycheck Protection Program (PPP) enacted in the weeks following the economic shutdown as a result of COVID-19.
The original deadline to apply was Tuesday, June 30, but with more than $130 billion still available in the fund, both houses of Congress approved the extension unanimously earlier in the week. With the President’s signature Saturday, businesses will now have until August 8 to apply for the assistance.
The PPP provides loans to small businesses to be used for certain payroll and non-payroll costs they may otherwise have difficulty funding due to the coronavirus pandemic. Such loans may be forgiven in part or in whole.
You can apply for your PPP loan through any of the 1,800 participating SBA approved 7(a) lenders or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. For more information on the federally funded program, visit the SBA website or connect with your William Vaughan Company advisor for additional guidance and recommendations based on your specific situation.
Categories: COVID-19, Other Resources