A key point regarding a PPP Loan is that it is a loan. When the Borrower receives the loan, the proceeds should be recorded on the Balance Sheet as a Note Payable which is a liability. The loan proceeds should not be posted on the Income Statement as income.  

If the loan ends up being forgiven, it should be handled for income reporting as follows: 

  1. Financial Statements (specifically the Income Statement) – The forgiven loan amount is an elimination of an obligation to pay a debt. An appropriate reporting of this elimination is for it to be presented as “Gain on Extinguishment of Debt.” This is a Financial Statement only presentation. This will be removed when the income statement activity is placed in an income tax return.
  2. Income Tax Return – The forgiven loan amount will result in “Loan Forgiveness Income” but this income WILL NOT be subject to income recognition which means it will not be subject to tax. As a result, the forgiven loan amount will not be included as income in the income tax return.

Regarding expenses, the Income Statement will reflect the expenses paid with the PPP Loan proceeds. With respect to tax reporting, per IRS Notice 2020-23 as amplified by IRS Notice 2020-35 and as modified by IRS Notice 2020-39, the position of the IRS is any expense paid with PPP Loan proceeds is not eligible as a tax deduction if the PPP Loan is forgiven. What this means is the expenses paid with the PPP Loan cannot be tax deducted on the tax return if the PPP Loan is forgiven. On the other hand, if the PPP Loan is not forgiven, the expenses paid with the PPP Loan can be tax deducted. 

Recasting certainly becomes a challenge when dealing with these issues. Recasting should be handled as follows:

  1. Financial Statements (specifically the income Statement) – When recasting from Financial Statements, assuming the loan has been forgiven and also properly recorded, the forgiven PPP Loan should be reflected in the Income Statement as Gain on Extinguishment of Debt.” The expenses paid with the PPP Loan proceeds will also be reflected in the Income Statement. In this case, recasting is simplified because there is no adjustment to reflect.
  2. Income Tax Return – When recasting from an income tax return, the PPP Loan, whether forgiven or not forgiven, will not be reflected as income in the tax return. If the loan is not forgiven, the expenses paid with the PPP Loan proceeds are tax-deductible and will be reflected as expenses in the tax return. If the loan is forgiven, the expenses paid with the PPP Loan proceeds are not tax-deductible and will not be reflected as expenses in the tax return. In the case of the loan not being forgiven, the expenses paid with the PPP Loan proceeds can be added back as a One Time Event. In the case of the loan being forgiven, the expenses paid with the PPP Loan proceeds are not tax-deductible and as a result, will not be in the tax return. In this case, there is no income or expense in the tax return associated with the PPP Loan, so recasting is simplified because there is no adjustment to reflect. 

 The information provided herein is based on the PPP Loan being correctly and properly recorded for both Financial Statement and Income Tax Return reporting. 

By Monty W. Walker, CPA, CGMA, CBI