by Xinxin Ru, on June 30, 2022
Introduction of PPP Loans
On March 27, 2020, former President Trump signed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has as one of its core provisions the Paycheck Protection Program (PPP). Under the PPP, Congress authorized the U.S. Treasury to use the Small Business Administration (SBA) 7(a) loan program to issue $349 billions of forgivable loans to small businesses to assist them during the COVID-19 pandemic. In April 2020, the CARES Act was further amended to expand the amount of funds available for PPP loans by an additional $320 billion. To date, since April 2020, the PPP has resulted in more than $500 billion of loans made to more than 4.6 million businesses. As of August 8, 2020, the PPP loan closing date, the SBA had an additional $134 billions of unadvanced PPP funds out of a total of $669 billion authorized under the PPP. PPP loans are limited to $10 million per qualified borrower and are forgivable to the extent that loan proceeds are used to fund eligible expenses consisting of qualifying payroll, mortgage interest, rent, and utilities. On June 5, 2020, former President Trump signed the Paycheck Protection Program Flexibility Act (the Flexibility Act) to amend some provisions of the PPP.
How Should PPP Loans be Accounted for Under GAAP?
In general, a company may account for its PPP loan using the following accounting standards:
Account for the PPP loan as traditional debt in accordance with ASC 470, Debt.
Account for the PPP loan as a government grant following the guidance found in ASC 958, Not-for-Profit Entities or IAS 20, Accounting for Government Grants and Disclosures, or
Account for the PPP loan under the gain contingency rules, found in ASC 450-30, Gain Contingencies.
Forgiveness of PPP Loan
To qualify for PPP loan forgiveness, an entity must satisfy certain requirements:
The entity must verify the number of employees including full-time equivalents (FTEs).
The entity must document (or certify) that during the covered period (8 or 24 weeks), it uses PPP loan proceeds on eligible expenses consisting of:
At least 60% of the loan proceeds are used for payroll and payroll-related costs, and
The remaining 40% is used on other qualifying expenses consisting of interest, rent, and utilities.
An entity is required to use at least 60% of PPP loan proceeds on payroll costs. If an entity elects to use the 24-week covered period (in lieu of the 8-week period), it is possible that an entity may be able to qualify for full forgiveness of the PPP loan based on using 100% of loan proceeds to fund payroll costs without having to justify using funds on other eligible expenses (such as interest, rent, and utilities). The PPP loan rules do not require that any portion of loan proceeds be used on non-payroll expenses (interest, rent, and utilities) as long as at least 60% is used to pay payroll costs. Therefore, using the entire amount of loan proceeds on payroll costs with none used to pay non-payroll costs is acceptable.
A representative of the entity must certify that the documentation is true and accurate, and that the forgiveness amount was used in accordance with the PPP guidelines for use.
3. A representative of the entity must certify that the documentation is true and accurate, and that the forgiveness amount was used in accordance with the PPP guidelines for use.
4. An entity must retain all records related to the forgiveness for six years from the loan forgiveness date (or the repayment date) and must permit the SBA to access such files upon request.
Tax Effects of PPP Loans
Section 1106(j) of the CARES Act specifically provides that any PPP loan forgiveness is excluded from taxable income and therefore is nontaxable. On its face, this non-taxability provision is a tremendous windfall for companies who not only receive an unsecured PPP loan but more importantly receive forgiveness of the loan with no tax consequences.
On December 27, 2020, former President Trump signed the $2.3 trillion Consolidated Appropriations Act, 2021. A key provision of the new Act is to clarify that eligible expenses paid with PPP loan proceeds and used to obtain forgiveness of PPP loans are deductible for federal tax purposes. Division N, Section 276 of the Consolidated Appropriations Act, 2021 states: … no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income [by Section 1106 of the CARES Act].” This provision applies to PPP loans under the CARES Act and new PPP loans under the Consolidated Appropriations Act, 2021. This new provision supersedes previous IRS guidance in Revenue Ruling 2020-27 and other documents stating that such expenses were nondeductible in 2020 when paid or incurred.
Yen-Yi Anderson, Managing Partner of Anderson & Associates, founded the law firm in January 2014. Yen-Yi Anderson focuses her practice on excellence in business immigration, commercial law, and civil litigation.