Accounting for PPP Loans

When the first COVID stimulus package was passed, it was done extremely quickly. Not everything was ironed out. It took some individuals weeks or even months to even secure a PPP (Payroll Protection Program) loan. Those who did were frequently left adrift, without any information about what the PPP loan would mean for them. In fact, some things are still a little unclear. Here’s what you need to know about the PPP loan and what its tax consequences could be for you.

How does the PPP Loan Work?

Note: The PPP loan could be taken two ways: as a loan or as income. As a loan, the PPP loan needs to be paid back. This is its default status. When the loan is forgiven; it never needs to be paid back. This is dealt with through a lender, but it’s still a government program. The lender operates as an interface, but they have certain restrictions and regulations that they have to follow. Not every lender was clear on these restrictions and regulations, so there was some confusion initially.

If the PPP loan is paid back like a regular loan, there are no income-related tax consequences. It’s money that was borrowed, not money that was acquired. But if the PPP loan is forgiven, then it becomes income to the organization. The same rules apply to any other type of income tax. The PPP loan also reacts to the EIDL loan grants, as the EIDL grants could also be considered to be income to the business.

When the PPP loan was initially released, borrowers only had a matter of weeks to request forgiveness. This was extended so that borrowers then had months. Finally, it was extended so that borrowers had until the date of maturity. But it was unclear how forgiveness would be processed. While PPP loan providers did have forms and paperwork associated with PPP loans, most didn’t know how this paperwork would be processed.

Many of those who acquired a PPP loan have already filed these documents (if they haven’t, they need to do so immediately). But without word regarding whether the PPP loan has been forgiven, it becomes a problem.

How to Account for PPP Loans?

Accounting for PPP loan taxes, if it truly was a loan, is simple: the amount you received from the PPP loan is debt rather than income. The Payroll Protection Program was part of an economic stimulus package that was designed to compensate for the fact that many companies weren’t making the income that they needed to make. If you took the loan and will pay it back, then you essentially borrowed income from the future. You don’t need to pay income taxes on the PPP loan itself. The loan (and interest) will be paid back.

Thus, your PPP loan should be booked as a loan against your company rather than income to the company. At the end of the year, you should be able to show how much interest you’ve paid toward the loan, as well. 

Taking the PPP loan as a loan isn’t optimal for most businesses, as it costs nothing to get the loan forgiven. But there are situations in which the loan would not have been forgiven, and would therefore have needed to be paid back. This would happen if the PPP loan had to be used for things that were not supported by the loan, such as the majority of it going toward rent rather than toward employee payroll expenses. 

If you’re confused by your PPP loan, it’s better to consult with a professional as quickly as possible — before your taxes are due. A professional will be able to go over your situation and tell you what you need to do before the fiscal year ends, so you can make the adjustments that you need, and prepare for potentially owing additional taxes.

How to account for PPP Loan Forgiveness?

When a PPP loan is forgiven, it does become income to the business. It will need to be booked as income and the organization will need to pay income taxes on it. If the PPP loan was originally booked as a loan, the debt entry needs to be reversed.  

But to account for PPP loan forgiveness, you also need to make sure that your loan has been forgiven. Not everyone has received word that their application has been approved and not every loan servicer knew how to process forgiveness. 

For those who were self-employed or who were independent contractors, PPP loans also functioned differently. These Payroll Protection Program loans required different documentation and therefore also had to be processed in a different way. Either way, once the loan is forgiven, the PPP loan is treated just like any other type of income.

So, what do you do if you’re trying to forgive your loan, but you don’t know whether it will be forgiven? First, you need to learn more.

What do you do if you don’t know whether your PPP Loan will be forgiven?

If you don’t know yet whether your PPP loan has been properly processed and forgiven, then you will need to file your taxes with your PPP loan as a loan — rather than as income. That would be the current status of your loan.

But that doesn’t mean that you would leave your tax return that way.

If your loan is forgiven, it will show up as income to you later — upon forgiveness. Effectively, you will have received income in the amount that you borrowed, because you will no longer be expected to pay it back. And if you find out that your loan had been forgiven earlier, but you weren’t aware of it, you can modify your tax return with an amendment.

For some business owners, it is possible that they missed the window for PPP loan forgiveness, which was about six months after the loan was finally disbursed. Some individuals and businesses had loan forgiveness dates that went beyond the expiration date for their PPP loan forgiveness forms, which led to some confusion. Regardless, rather than making any assumptions, business owners should connect with their lenders and find out more.

The bottom line when accounting for your PPP Loan

Your PPP loan was designed to be a bridge loan to help your organization. If you used it as recommended, it should be forgiven, and essentially “free” money — except for the taxes on it that you’re going to need to pay. You will need to pay taxes on your PPP loan just like ordinary income. But if you just want a loan and you want to pay it back, then the PPP loan isn’t going to be income to you; it’s going to be treated like any other debt.

It’s important to communicate closely with your account servicer to find out more about the status of your PPP loan and what you need to know. Because communication has generally been sparse to business owners during this time, many aren’t quite aware of how their PPP loan has been processed and how their PPP loan has to be dealt with now.

Unfortunately, there were a lot of complications with the PPP loan process, and there aren’t always easy answers. If your loan hasn’t been forgiven yet, it can be booked as income to you. Your tax returns can be modified later if you find out that you received forgiveness. Connecting with your PPP loan servicer can help you find out more about the status of your PPP loan while connecting with your tax accountant can give you the best information about how you should adjust your taxes to compensate.

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