Accounting for PPP Loan Proceeds

Jul 20, 2020

Many businesses have received Paycheck Protection Program (PPP) loans and are now asking the question, “How do I account for the proceeds and potential forgiveness related to the PPP loan?”

The legal form of a PPP loan is debt, and regardless of the expectation of forgiveness, following the guidance under ASC 470, Debt will always be an appropriate option. However, the PPP loan does include a forgiveness component, resulting in many businesses wondering if the funds could be recorded as a grant. Currently, U.S. GAAP does not contain specific guidance on how business entities should account for government assistance. The AICPA has suggested that businesses can reference other guidance such as International Accounting Standard (IAS) 20 as an accounting framework for forgivable loans. A not-for-profit entity that received a government grant should apply ASC 958-605.

How does accounting work under both scenarios?

Debt
Balance Sheet
In accordance with ASC 470 Debt, upon receipt of the funds, a liability should be recognized for the full amount and will generally be classified as a long-term liability. Interest should be accrued at 1% beginning on the date the loan was received and continue over the term of the loan.

Income Statement
Any amount that is forgiven and the entity is legally released from its obligation, would be recognized as a gain in the income statement as an extinguishment of debt. This includes any interest which is forgiven.

Cash Flow
Receipt of the loan proceeds and any repayment, the Company would present as financing activities. Any funds that are ultimately forgiven would be disclosed as a noncash finance activity. Interest paid should be presented as a cash outflow from operating activities.

Disclosures
The disclosures in the financial statements, at a minimum, should indicate the accounting treatment, terms of the agreement, and where the loan amounts are recorded in the financial statements, similar to other debt.

Grant
For those entities that are reasonably assured that they will comply with the eligibility and forgiveness criteria for the full loan, grant accounting could be an appropriate option. These entities should consider the guidance under IAS 20.

Balance Sheet
Upon receipt of the forgivable loan, a short-term liability for deferred income should be recognized. As the entity incurs the eligible expenses, the income should be recognized and the liability should be reduced.

Income Statement
In accordance with IAS 20, grant income can be presented as a credit in the income statement either as a reduction to the related expenses or it can be presented in other income.

Cash Flows
Grant proceeds received, that are expected to be forgiven, should be presented as operating activities in the cash flows statement.

Disclosures
The disclosures in the financial statements should indicate the accounting policies applied, such as funds received, amounts included in both deferred income and recognized in income during the period, how deferred amounts will be recognized, and any unfulfilled conditions. The disclosure should also reference where the loan amounts are recorded in the financial statements.

Conclusion
If an entity does not anticipate meeting the PPP eligibility and loan forgiveness criteria, the loan should be accounted for as debt. In certain scenarios, in which the entity is reasonably assured of meeting the loan eligibility and forgiveness criteria for the full loan, it may be appropriate to account for the proceeds as a government grant. Whatever option the entity decides to follow, the financial statement disclosures should be straight-forward and inclusive.

The SBA has indicated it intends to issue additional guidance to help address questions from borrowers and lenders. All entities that received a PPP loan should continue to monitor for any developments which could impact their accounting for the loan. 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.

Juli Seiwert, CPA

419.891.1040

juli.seiwert@wvco.com

 

Categories: Audit & Accounting, COVID-19


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


The Treasury Department and Small business Administration’s (SBA) Latest Guidance, Loan Forgiveness Application and the WVC Forgiveness Calculator

May 26, 2020

On May 15, the SBA released its Loan Forgiveness Application for the Paycheck Protection Program. The application outlines the computation for debt forgiveness.  While there are still many questions that need to be addressed, the guidance helped clarify some larger items:

  • The first day of the Covered Period for your PPP loan must be the same as the PPP Loan Disbursement Date and extends over the 56-day Covered Period. Borrowers with biweekly or more frequent payroll periods may elect to use the Alternative Payroll Covered Period that begins on the first day of their first pay period following the date when you receive the loan proceeds.
  • Payroll costs that have either been paid or incurred in the 56-day Covered Period are both eligible for forgiveness. If a cost is incurred and paid in the Covered Period, it will only be counted one time toward the forgiveness calculation.
  • Eligible Nonpayroll for forgiveness consist of:
    • covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”);
    • covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
    • covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
  • Under the SBA’s guidance, the total amount of cash compensation eligible for forgiveness for each individual employee cannot exceed an annual salary of $100,000, as prorated for the Covered Period; that is, it cannot exceed $15,385.

All guidance on the Loan Forgiveness Application can be found here. While we are expecting more guidance from the SBA, we advise our clients to keep careful and detailed records and documentation throughout this process to maximize forgiveness.

WVC Calculator

William Vaughan Company is working diligently to update our Forgiveness Calculator to meet the latest SBA guidance. We will be sending you the latest version as soon as possible. Keep an eye out for our email. If you do not already receive our timely communications, please subscribe to WVC Insights here.

Categories: Other Resources


IRS Denies Tax Deductions for Expenses Related to Payroll Protection Program Loan Forgiveness

May 11, 2020

What happened?
On April 30, 2020, the IRS released Notice 2020-32 (the Notice) answering a major tax question involving the Paycheck Protection Program (PPP). It ruled that any deductible expenses that result in forgiveness of a PPP loan will not be deductible in computing the taxpayer’s income. This conclusion contradicts the language in the CARES Act (the Act) under Section 1106(i) which states the cancellation of indebtedness of a PPP loan, under the provisions of Section 1106(b), “shall be excluded from gross income” in computing the taxpayer’s taxable income.

The IRS points out in the Notice that while the Act provides that PPP loan forgiveness is not taxable income, no provisions of the Act address the ability to deduct eligible expenses paid from such loan proceeds.

What’s Next?
Stay tuned! It is unlikely the end of this controversy. First, it is possible a taxpayer may decide to challenge this position in court. Whether they would or would not prevail is open to question, and the other big problem is being able to afford the litigation. The more likely scenario is that Congress would reverse the notice by simply enacting an amendment in the next Coronavirus bill (if there is one) to make clear expenses used to justify PPP loan forgiveness are deductible, regardless of any provision by the IRS.

Visit the WVC COVID-19 Resource Center for more insights by clicking here.

Categories: Other Resources, Tax Compliance, Tax Planning


Making the Most of Your PPP Loan

Apr 10, 2020

You have applied for your Paycheck Protection Program (PPP) loan through one of the 1,800 participating SBA approved 7(a) lenders and you are awaiting the exciting news of your approval. In the meantime, have you considered how you will make the most of the funds? Here are a few recommendations as you consider how to best utilize the cash for your business.

Track Your Business Impact
For purposes of not only following the PPP loan certification guidelines but also to help you prioritize your immediate needs, we recommend keeping track of the pandemic’s impact on your business. A hard or electronic log noting the daily/weekly effects on your employees, vendors, and business cash flow will ultimately help you plan ahead and maximize your benefit. Furthermore, at the end of the eight weeks following your loan approval date, this will also help maximize your loan forgiveness.

Develop A Plan
If your operations are currently on hold or reduced, begin to outline varying scenarios of how operations may resume. To obtain full loan forgiveness, at least 75% of the proceeds will need to be used for payroll and you must have at least the same number of employees as of June 30, 2020, as you did as of February 15, 2020. Think about those employees currently on furlough, and when you will bring them back. Calculate various scenarios of operational levels, payroll amounts, and resulting loan forgiveness to guide your decision-making.

Maintain Detailed Records
The covered period of the PPP loan is eight weeks from the date you receive your proceeds. When you receive the proceeds, make note of the receipt date and determine your covered period. We also recommend that you deposit them into a separate account to allow for easier tracking of their use on eligible expenses. Additionally, if your bank activity is requested as part of the loan forgiveness considerations, you will only need to provide activity from this account rather than all operating activity.

Start a tally of your eligible expenses. As a reminder, these include payroll, benefits, retirement, rent, utilities, and mortgage interest payments. Your bank may ask you for a preliminary loan forgiveness calculation around the seven weeks into your eight-week covered period.

  • For payroll, keep records of wages, healthcare costs, and retirement plan employer contributions.
  • Keep separate records for rent, utilities and any mortgage interest paid
  • Keep documentation of the number of employees you have as of June 30, 2020
  • Pay particular attention to any payments made to employees under the Families First Coronavirus Response Act for Emergency Sick Pay or Emergency FMLA. Maintain records for any such payments, as they will reduce the PPP loan forgiveness amount to avoid “double-dipping”.

Note that PPP loan recipients cannot participate in the following CARES act benefits: Employee Retention Credit (provides for a tax credit equal to 50% of payroll taxes) or Delay of Employer Tax Payments (allows for the deferral of payment of employer payroll taxes until 50% due December 31, 2021, and 50% due December 31, 2022).

Categories: Other Resources, Tax Compliance, Tax Planning