Many businesses have begun applying for forgiveness of their Paycheck Protection Program (PPP) loans, and Q4 of this year is when they will also need to decide how they will report the funds on their financial statements.
It’s up to recipients of a PPP loan, whether forgiven or not, to account for it properly. While there isn’t specific guidance under U.S. GAAP on how to account for this type of loan, there is some flexibility. Now is the time to be working closely with your advisors to understand your options. Below are a few of the questions our clients have been asking.
Q. What is the Expected Timing of Receiving Notification of Forgiveness Once PPP Forgiveness Applications Are Submitted?
A. You have 10 months to file for forgiveness from the end of your covered period. Twenty four weeks is the covered period, unless you received your loan before June 5 and elected the eight week covered period. Many taxpayers are electing to use the 24 week covered period and are applying for forgiveness in Q4 of this year. Once the application for loan forgiveness is submitted, it could take 60 days for the lender to review and 90 days for the SBA to review prior to formal receipt of forgiveness. Therefore, entities with a 2020 year end that expect their PPP loan will be forgiven in part or in its entirety will likely have to wait until 2021 to receive notification of forgiveness.
Q. What Options Do We Have for Accounting for the PPP Loan?
A. Specifically, there are four primary ways an entity can record the funds on their financial statements. Which one you choose will depend on the type of company, whether you intend to repay the loan and other specific goals.
If you're unsure if you are going to apply for forgiveness, you can use the debt model under U.S. generally accepted accounting principles (GAAP), recognizing the money as a loan. If you determine that the PPP loan is more like a grant, your business can refer to the rules in International Accounting Standards for accounting for government grants or the revenue recognition rules for nonprofit organizations in U.S. GAAP. You can also choose to follow GAAP’s gain contingency rules.
Read “4 Options to Account for Your Company’s PPP Loan” for more detail on these methods.
Q. Which Accounting Method Will Allow My Business to Recognize the Forgiven Income Sooner?
A. Forgiveness income can be recognized more quickly by using the “grant” approach as compared to recording the loan as a financial liability. However, exactly when the taxpayer must recognize the forgiven income will vary between these three methods. Taxpayers will need to use their best judgment as to which method most accurately represents the loan to shareholders, stakeholders, and all other third parties when preparing their 2020 financial statements.
Everything is going to depend on the unique situation of each loan recipient, but there are some emerging distinctions. For example, if you elect to account for the PPP loan under the debt model, that model appears to be the easiest way to account for the loan, as you would not recognize income until legal release is received by the bank and SBA. However, the concern with the debt model is there is uncertainty as to when legal release will be granted to taxpayers. The earliest a taxpayer may receive legal release is currently expected to be 2021.
If you are looking to recognize the forgiveness in your 2020 financial statements, the revenue recognition rules for nonprofit organizations in U.S. GAAP appears to be gaining popularity. Under this model, forgiveness income can be recognized if conditions of meeting forgiveness criteria have been substantially met. It still provides an overall conservative approach as payroll data and calculations would need to support that the conditions have been substantially met prior to recognizing the forgiveness. Therefore, if taxpayers believe their loan will be forgiven and it would be appropriate to show the forgiveness income in the 2020 financial statements, then taxpayers need to gather payroll data and perform calculations now to determine whether conditions for forgiveness have been substantially met.
There are many questions surrounding the PPP and its accounting and tax consequences. Meet with your advisors now, if you haven’t started already, to discuss your options and strategy.
Contact Tina Dzik at email@example.com, Adam Hill at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.