How to Account for PPP Loan Forgiveness
If you received a PPP (Paycheck Protection Program) loan, you may be wondering how to account for it in your financials. The two most important things to know are:
PPP loans are not accounted for in the same way as income
Record the PPP loan deposit as a Loan Payable within the liabilities section on your balance sheet. This can also be considered a long-term liability, but since most or all of it can be forgiven within the year, we recommend putting it under current liabilities.
List the expenses paid for by the loan in your Income Statement. Remember that you can only use this for payroll expenses, rent, mortgage interest, and utilities if you want it forgiven. You also may want to use a class-tracking feature in your accounting software and label them as “PPP Expense” for easier tracking.
Talk to your lender about the documents you’ll need to provide to request forgiveness. The necessary documents usually include payroll summaries and/or paystubs and P&L’s showing other expenses authorized and used during the period the loan covers. You’ll have to do it within 8-24 weeks of receiving the funds to qualify for full forgiveness.
When the lender tells you how much of the loan can be forgiven you’ll face a central question: how do we account for that?
Recent IRS guidance states that the expenses used to obtain forgiveness on these loans will not be considered valid deductions on your 2020 return, making the forgiven amount taxable income.
The best way to handle it is to determine how much of your loan is forgiven and move that amount out of the loan on the balance sheet and over to “Other Income” as “PPP Forgiveness.” The rest of the unforgiven amount will stay on the balance sheet for future payments to be applied.
There may be more guidance from federal and/or local agencies. But for now, this is accepted practice to handle the forgiveness of these unique loans.