Three cheers for PPP loans! The Paycheck Protection Program (PPP), a federal initiative, has provided a lifeline to millions of small businesses as they’ve struggled through the COVID-19 pandemic. Though its rollout was not perfect, the program has helped keep doors open and workers employed. Its importance in keeping the economy trudging along can’t be overstated.
Over the course of its two funding periods, the PPP provided loans to businesses that could be forgiven if they met these criteria:
- Workers must largely remain employed, and their compensation levels must be maintained.
- Loan proceeds must be spent on payroll or other eligible expenses.
- Money spent on payroll costs must be at least 60% of the amount received.
As of January, 2021, the Small Business Administration reported that it had forgiven over $100 billion in loans and that over 80% of businesses that received PPP loans had had them forgiven. That means, if you were awarded a PPP loan, it’s likely that it was forgiven or will be in the future. Hooray!
So, what does this mean for your financial reporting?
The pandemic is an unprecedented event, and the PPP is an unprecedented program to address it, which means reporting the loan proceeds received and forgiven can get tricky because there are no established standards for them. The Financial Accounting Standards Board (FASB), an authority on accounting methods, does not yet have a specific codification for PPP loans, but the American Institute of Certified Public Accountants (AICPA) has released some guidance for businesses and tax preparers.
AICPA has advised businesses to recognize their PPP loans as either debt or government grants. If the loan is recognized as debt:
- The money from the loan would be recorded as a financial liability and begin accruing interest.
- The debt would remain on the books until it is either forgiven or paid off.
- If the loan is forgiven wholly or partially, the debt is reduced by that amount and a gain on extinguishment is recorded.
The AICPA suggests that if you’re unsure whether your business’s PPP loan will be forgiven, it might be safest to record it as debt and handled as mentioned above. On the other hand, if you’re reasonably certain that your business will be able to meet the conditions to have your loan forgiven, it might be best to record it as a government grant. Treating the loan as a grant has the advantage over treating it as debt in this case because it keeps interest out of the equation. If your loan is forgiven, you don’t have to worry about interest, so keeping interest off your books makes things cleaner and less complicated.
However, all businesses are different.
Your decision on how to record your PPP loan and its forgiveness should be based on the nature of your individual business and its history with grants and debt. For example, if your company regularly receives government grants, and the PPP loan is too different from those grants to be treated in the same way, it might be best to use the debt model to account for the loan, even if you are fairly sure that it will be forgiven.
At CRI, we are committed to understanding your company and its unique needs. If your business received a PPP loan, our professionals can help you determine the best way to record it and its forgiveness. Reach out to an advisor today!