How to Account for the Forgiveness of a PPP Loan?
Upon receipt of your PPP (Paycheck Protection Program) loan you will be wondering how you are to account for this in your financials. It’s not income, nor will it need to be repaid back in the near term like most loans.
First you will record the deposit from your lender as a Loan Payable under your liabilities section on the balance sheet. This can be considered a long-term liability but honestly since most or all of it can be forgiven within the year you are fine putting it under current liabilities. Here is where it will stay for now.
Record the expenses you use the funds as normal on your Income Statement; remember that you can only use this for payroll expenses, rent, mortgage interest, and utilities if you want it forgiven. You may want to use a class-tracking feature in your accounting software and label them somehow as “PPP Expenses” for easier tracking.
Confer with your lender on the necessary documents you will need to provide to them to authorize the forgiveness; likely this will fall into the categories of providing payroll summaries and/or paystubs, P&L’s showing the total spent for the other expenses authorized used during the period the loan covers. You have to do this within 8 weeks of receiving the funds to get the best chance of forgiveness.
Now when the lender tells you how much of the loan can be forgiven we come to the central question: how do we account for that? Recent guidance from the IRS 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 will be considered as taxable income.
The best practices here considering the new guidance is once it is determined how much of your loan is forgiven you need to move that amount out of the loan on the balance sheet and over to “Other Income” as “PPP Forgiveness” on the Chart of Accounts. The rest of the unforgiven amount will stay on the balance sheet for future payments to be applied.
Again there may be more guidance coming down from the federal government and/or local agencies like the WSCPA on how this should be handled but for now this is accepted practice to handle the forgiveness of these unique loans. Contact Formations to learn more.