Startups & Business Owners, Is your PPP Loan Accounted for Properly? | Frank Mastronuzzi, CFO, CPA, MBA
We have gotten a lot of questions about the proper GAAP accounting treatment of the PPP loans and wanted to highlight some rules and offer guidance. These steps walk you through each step of the journal entry.
PPP Loan Accounting Entries
Journal Entry #1 — Receipt of the Loan
Book-entry upon receiving the disbursement (date is key for loan forgiveness application). Create a separate cash account on the G/L so you can track the usage for forgiveness.
DR New Cash — Existing Bank Account $100,000
CR PPP Loan Payable $100,000
Since the loan is not due for approximately 2 years with a 6-month deferment, classify this loan as long-term and not short-term.
Journal Entry #2 — Transactions using the PPP Loan Proceeds
1st create a separate G/L account for the PPP related expenses. A separate G/L account will allow you to track the spending of the PPP Loan.
We recommend reclassifying expenditures to be covered by the PPP loan (payroll, utilities, rent, etc) to this account. Currently, these expenditures are not deductible on your tax return — that may change. If the IRS changes the rules, it’s very simple to reclassify the entries back to their original accounts.
DR PP Loan Related Expenses $10,000
CR Payroll Expense $10,000
DR Loan Related Expense $250
CR PPP Utility Expense $250
DR PPP Loan Related Expenses $5000
CR PPP Rent Expense $5000
Journal Entry #3 — Loan Interest Expense Accrual
You must record interest on your loan payments each month as interest is accumulating. Even though it may be forgiven, you still need to record it.
Calculation of the amount of interest due each month. Use a straight-line calculation based upon days. Even though payments are deferred for 6 months, interest is not.
DR PP Loan Interest Expense $250
CR PP Loan Interest Payable $250
Journal Entry #4 — Loan Forgiveness
Only record the forgiveness AFTER you have received confirmation from your lender.
DR PP Loan Payable $100,000
DR PP Interest Payable $2,500
CR Other Income $102,5000
Common Questions about PPP Loan Accounting Treatment
Should my company set up a separate bank account to track funds?
We have been asked this question a bunch of times. The answer is it depends on how you like to operate. The SBA does not require it as terms of the loan. At the end of the day, the SBA will not care if you used a separate bank account to track the proceeds from your PPP loan. The main focus will be providing accurate supporting documentation of the use of your proceeds. Think of it as your tax returns. As long as you have proper back-up documentation on your tax return deductions, you can support your deductions should the IRS audit your return.
We have opened another bank account for our clients who need more discipline and controls in place and then transferred all qualifying uses of the PPP loan to this account. We have even “reimbursed” the chief operating account from which the payments were made. Instead of switching the payroll to come out of this new bank account, we would merely transfer the funds from the PPP loan account to the chief operating account. Your goal is to keep precise records with proper back-up materials to support your loan forgiveness application.
Does my company need to disclose the PPP Loan per GAAP?
In short, the answer is yes. Per AICPA guidance, the PPP Loan must be recorded on your balance sheet as a long-term loan payable. It would be the same as if you obtained a loan from your bank. Our guidance is to record it in a separate general ledger account to quickly identify the use of the loan for when you apply for loan forgiveness.
Besides, we highly recommend that you record the accrued interest payable in a separate G/L account and the expenses that you used the PPP loan. You will need a clear record of all the moving parts for your tax returns, your loan forgiveness, your audit support, and many other reasons. The more comfortable your accounting and tracking are now, the easier the rest of the process will be for you.
Should I record my PPP Loan and use of proceeds on a cash or accrual basis?
In short, the answer is you should record the loan and use of proceeds using the same methodology you have selected for your business and your tax returns. Although the PPP loan forgiveness guidance allows you to utilize the proceeds for accrual-based expenses (that are paid after the loan forgiveness deadline, etc.), we recommend you utilize the same methodology as your regular accounting basis during the business. You could easily convert from one methodology to the other should it be required, but we recommend not overcomplicating the process and staying consistent with your current approach.
Do I need to accrue the interest payable on my PPP Loan if I expect to have my loan forgiven?
Absolutely! The SBA guidance is to accrue your interest payable on your PPP loan regardless of whether the loan will be forgiven or not. Per AICPA guidance and GAAP accounting, the interest on the PPP loan accrues whether the loan is forgiven.
When you are informed that your PPP loan has been forgiven or not, then during the forgiveness, the interest is forgiven too. So when your loan is forgiven, you “write-off” the loan payable AND the interest payable that pertains to the PPP loan.
We recommend that your accounting treatment act as the loan will not be forgiven. Then, once a determination has been made, then you can record the forgiveness accordingly.
How do I record the PPP Loan for my tax 2020 returns?
Currently, the IRS has guided the tax deductibility of the loan forgiveness and the expenses paid using the PPP loan. As of now, the IRS has indicated that if your loan is forgiven, your loan proceeds are not taxable (record them as non-taxable income), and the expenses paid with your PPP loan are non-deductible on your tax returns. Note that this may change as time passes, and the IRS makes a decision. So please note that this information may change at a later date. Also, please note that each state may treat the PPP loan and the expenses that were paid with the loan differently.
We recommend that you track your expenses paid with the PPP loan separately on your G/L so that your tax professionals can properly treat those transactions on your state and federal returns. Please tax extra care on this topic as there are many opinions on the internet, but the ultimate authority is the IRS and your state’s taxing authority.
What are payroll-related expenses acceptable for the PPP loan forgiveness?
PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). The simple guidance is any normal payroll expense that you would typically pay for as an employer are the same the SBA has allowed. Any extra items or non-typical (i.e., bonuses, etc.) are not included as allowable payroll expenses.
We wanted to list a handful of resources we utilize for this PPP Loan accounting topic so that you can also refer to these sources for any updates on this topic.
Please feel free to reach out to me directly on our website at www.punchfinancial.com and contact us and ask any questions related to the PPP loan forgiveness you want.