The first thing you want to consider is what basis of accounting is being used for your financials; cash or accrual basis or GAAP. A lot more nuance, interpretation, application of standards applies if the financials are on the GAAP basis.

Cash or Accrual Basis

– Practical Application – the legal form of the PPP loan transaction is debt and should be treated as such until forgiven.

– Recording the Loan – the PPP loan should be recorded as a current liability.

– Recording the Interest – interest is only due on any amount of the loan that is not forgiven based on the stated rate in the loan agreement. Some accountants have recommended that clients accrue the interest even if they think the loan will be 100% forgiven. The accrued interest should be recorded as a current liability.

– At the time that forgiveness is granted, if some or all of the loan is forgiven, the PPP loan and any accrued interest would be adjusted to “Other Income” on the income statement.

GAAP Basis (This is where it gets a bit more technical)

– Similar to the cash or accrual basis, the legal form of the PPP loan transaction is debt and should be treated as such as per ASC 470.

  • Under ASC 470, the loan will be accounted for as a liability (loan payable) until it is repaid OR legal notice of forgiveness is received.
  • Per the AICPA:

For purposes of derecognition of the liability, FASB ASC 470-50-15-4
refers to guidance in FASB ASC 405-20. Based on the guidance in FASB
ASC 405-20-40-1, the proceeds from the loan would remain recorded as
a liability until either (1) the loan is, in part or wholly, forgiven and the
debtor has been “legally released” or (2) the debtor pays off the loan to
the creditor. Once the loan is, in part or wholly, forgiven and legal release
is received, a nongovernmental entity would reduce the liability by the
amount forgiven and record a gain on extinguishment.

– Liabilities will be classified based on the loan agreement and amortization schedule. PPP loans mature between 2-5 years, with initial payments deferred for a period of time depending on the timing of the loan forgiveness application

– If you are a non-profit organization, there is some argument that the PPP loan transaction is a government grant, which should follow ASC 958-605.

  • Under ASC 958-605, you would derecognize the liability and record a
    contribution once conditions of release have been substantially met or explicitly waived.

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