Hello, everyone. My name is Frank Mastonuzzi with Punch Financial and welcome to another session of Just A Minute Accounting. In today’s session, we’re going to cover a very hot topic right now that we’re getting a lot of questions on and that maybe many of you have questions on. And that is, how do I record our PPP loan in our accounting records? Very straightforward. There’s four entries that you have to address and cover and so we’re going to walk through all four of them with you high level and enough to give you the basis of each entry. The first entry we’re going to talk about is the actual receipt of proceeds of the loans, the disbursement, and the date that the disbursement happens is very key because that’s the date that the SBA will use to calculate your eight week or 24 week period, starting from the date of disbursement.
And so we highly recommend that you create another GL account for cash, and specifically related to the PVP disbursement. Now, you don’t necessarily need to open another bank account, and we are hearing that a lot from people. A lot of banks are saying that you should. At the end of the day, it doesn’t matter. At the end of the day, the SBA is just going to want to know exactly what you spent the money on and having it booked to a separate GL account will help you do that. And so it’ll facilitate the forgiveness application. So we save just the simple entry of recording debit to new cash and a credit to PPP loan payable. And that loan payable should be a longterm loan payable because the terms are 24 months plus another six months of deferment. So 30 months. So that would qualify as a longterm and not short term payable.
The second entry is the most used entry in this transaction, and that’s going to be recording the expenses that you’re using the PPP loan proceeds for. So we highly recommend that you create a new GL account that’s specific for the PPP loan expenses and you track so that we can track exactly how much is being spent of the loan and therefore what needs to be supporting the loan forgiveness application. And so we say don’t change your processes and try to book things and change what bank account it goes to. Book your payroll, your utilities, your rent in a normal fashion, and then make sure that at month end you’re reclassifying those as PPP loan transactions and providing all the backup at that right point in time. So we do that at month end, anything that’s related to PPP, we move it over into a separate expense account and we then drop in the support that’s needed for that item.
So whether it’s an invoice, the utility, it’s your rent, your invoice from your landlord, or your payroll journal ledger, those are the things we’re doing. And the other reason is for tax purposes, as of today, the IRS is not allowing the expenses to be deductible on your tax return if the loan is forgiven. So you need to track what expenses were used on the PPP loan proceeds so that they’re not deducted on your tax return. So the journal entries that we’re seeing most on month end for each of the transactions is just reclassifying your payroll expense, so crediting burial expense for 10K in this scenario, debiting your PPP loan related expenses. We then upload the payroll ledger that supports that payroll amount up into a file, a folder, drop box, whatever it is, so you can support that. And same thing with utilities and rent expense. So you want to keep moving all your transactions into the right GL account and that way you’re tracking how much you’ve spent to date as well as providing support for your loan forgiveness.
Now, here’s one entry that we see 99.9% of people are forgetting, and that’s calculating your loan interest payable. Now, don’t forget that this is a loan which may or may not be forgiven later on. And for that reason, since it is a loan from the SBA, we need to record loan interest expense. Now, that may be forgiven too as part of the loan forgiveness program, but for now you need to record your loan interest on a monthly basis as if you own it and it becomes due. So we say use a straight line calculation each month, what the outstanding principle balance is and how many days of interest that month takes and book that entry. So we’re recording it as PPP loan interest expense, and we’re crediting a PPP loan interest expense payable so that we can track what the loan interest expense is over time and then when the loan is forgiven, we’re able to extinguish both of these line items.
And then lastly, on the date of forgiveness, so when you’re notified of the loan forgiveness from the bank, you’ve applied, everything comes through, they’re going to forgive it, then you extinguish the amounts that are forgiven. So, in this instance, we’re going to get the full $100,000 forgiven, and we’re going to get the $2,500 interest payable forgiven also. So we’re going to debit those two payables, because they’re no longer payable to the SBA, and then we’re going to credit other income non-taxable, and we’re going to it as PPP. The reason why we’re doing this in all these transactions is for one main point. Right now, if the loan is forgiven, the income is non-taxable to the entity as well as the expenses are not deductible on your tax return. So you want to track both of these so that when you go to do your tax return with your tax firm, you’re clearly identifying which items are taxable and which are not based on what happens.
So, by recording it and then extinguishing it, when you go to do your year end tax return, which will be in 2021, your tax firm will love you because it’s clear and they won’t have to ask a million questions and you’re going to avoid a lot of headaches down the road trying to figure out what was used, what was not used, and what’s trackable. So we hope you enjoyed this episode of Just A Minute Accounting. Covering PPP loans is not easy because it’s all new to all of us and we’re happy to help with any questions you may have. Please feel free to reach out to me at email@example.com or go to our website at www.punchfinancial.com and contact us and ask any questions related to the PPP loan forgiveness you want. Thanks and have a wonderful day.
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
CR PPP Loan Payable
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 spend 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
CR Payroll Expense
DR Loan Related Expense
CR PPP Utilities Expense
DR PPP Loan Related Expenses
CR PPP Rent Expense
Journal Entry #3 – Loan Interest Expense Accrual
You must record interest on your loan payable each month as interest is accumulating. Even though it may be forgiven, you still need to record it.
Calculation 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
CR PP Loan Interest Payable
Journal Entry #4 – Loan Forgiveness
Only record the forgiveness AFTER you have received confirmation from your lender.
DR PP Loan Payable
DR PP Interest Payable
CR Other Income
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.