USA PPP loan forgiveness

[LeahYue]

Dear All,
I posted similar question months ago, now we have spent all PPP loan. My question is that how should we account for the forgiven amount? My original amount hit both cash and liability account though.

 

[kirby]

Debit the Liability Account that holds the loan. Credit Income. Your cite for this is ASC 405-20-40-1.

 

[LeahYue]

Debit the Liability Account that holds the loan. Credit Income. Your cite for this is ASC 405-20-40-1.

Thanks Kirby

 

[bcolorado]

Normally, if a loan is forgiven, it does become income per Kirby's cite. But the PPP Loans given through the CARES act specifically state that they will not be included in income if they are forgiven. To answer your question, note that on November 18, 2020, the IRS released guidance clarifying that if you reasonably believe your PPP loan will be forgiven—regardless of whether it’s 2020 or later—any expenses you used your PPP loan to cover are not deductible. Because PPP Loans are mostly used for payroll this presents an accounting issue in your software. If one was to simply Debit the Liability account and Credit the payroll expense accounts (reducing expense), you lose valuable information for comparisons and could compromise the precision of the yearend reports such as the W-2s. Therefore, I suggest a contra-expense account that will reduce your net expense, track your PPP Loan usage and keep the integrity of your original expense accounts. Additional note: some states may tax PPP Loan proceeds. Its a moving target!

 

[kirby]

But the PPP Loans given through the CARES act specifically state that they will not be included in income if they are forgiven.

True. For tax filing purposes but not for financial accounting purposes. Here is a segment from PWC in accounting for PPP:

“If all or a portion of a (PPP) loan is ultimately forgiven, the borrower should record income from the extinguishment of its obligation when it is legally released from being the primary obligor in accordance with ASC 405-20-40-1.”

Also note that a credit to contra expense has the same effect on income as a direct credit to income. Both increase income.

 

[ArtKer]

Dear All,
I posted a similar question months ago, now we have spent all PPP loan. My question is that how should we account for the forgiven amount? My original amount hit both cash and liability account though.

You would create a journal entry debiting 'Other Income' and crediting the liability account. This will move the funds over to your P & L.

 

[bcolorado]

You would create a journal entry debiting 'Other Income' and crediting the liability account. This will move the funds over to your P & L.

Is there a face palm emoji on this forum? This just doubles the liability.

 

[ArtKer]

Is there a face palm emoji on this forum? This just doubles the liability.

No need for a facepalm emoji. I mistyped, as it should have read 'other non-operating income'. This is not a liability account.

 

[bcolorado]

No need for a facepalm emoji. I mistyped, as it should have read 'other non-operating income'. This is not a liability account.

Now I'm really confused. Is it possible to edit your reply?

 

[ArtKer]

Our CPA instructed us to do this when the loan is forgiven. Not sure where the confusion lays, but it sounds like you have a stronger grasp of how this should be handled.

 

[bcolorado]

Our CPA instructed us to do this when the loan is forgiven. Not sure where the confusion lays, but it sounds like you have a stronger grasp of how this should be handled.

I'm a CPA who specializes in tax accounting. I had a complicated issue concerning a reduced price in an installment sale. Years ago there was a great accounting forum that I believe was associated with Intuit. I thought it had morphed into this forum but no. That forum only allowed CPAs. Still searching!