Horizons Fall/Winter 2020

ready to move forward, the waiting game started over as applicants awaited the time when lenders and the SBA would start taking applications. On August 10, 2020, the SBA officially opened up their portal to begin accepting applications; however, many lenders were not ready to start processing and submitting the SBA applications and continued to work through their internal platforms while waiting for further guidance from the SBA. Entities Welcome Guidance on How to Account For PPP Loans Once forgiveness is applied, another accounting aspect of how to record the loan and its forgiveness on financial records moves front and center. The expedited way in which the PPP was developed led businesses to have questions related to many aspects of the program. Among those areas was how to actually account for the loan proceeds once they were received. Not surprisingly, U.S. GAAP contains no specific guidance on the accounting related to forgivable debt provided by a government entity. Fortunately, the AICPA collaborated with FASB staff to develop non-authoritative guidance in the form of TQA 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program . This TQA provides non-governmental entities with several approaches that are acceptable to use when accounting for PPP loan proceeds along with the related forgiveness. There are two outcomes for accounting for the PPP. One holds the balance of the loan as debt until the outcome is known (forgiveness or paying back the debt). The other writes down the loan as qualified expenses are incurred. The first option is to account for the proceeds as debt. In this scenario, the loan is reflected as a liability of the entity and interest is accrued in accordance with the loan terms until such time as the debt has been legally forgiven by the SBA or repaid by the borrower.

Another available option under the TQA, which results in a similar outcome for recognition of loan forgiveness, is to utilize the available guidance on gain contingencies. Other approaches provided by the TQA utilize guidance from international standards as well as the rules related to conditional contributions that were originally intended for use by not-for-profit entities. The use of either of these approaches may allow an entity to recognize a reduction in the PPP loan liability prior to formal forgiveness if certain criteria are met. The full text of the TQA provides additional details regarding the timing of this income recognition. These latter two approaches are generally considered more complex, so borrowers should consult with their CPA prior to year end so that any unique issues can be discussed. While the multiple options that exist can add complexity to accounting for the PPP loan proceeds, they also provide entities with more flexibility than is typically seen in U.S. GAAP. The Potential Tax Impact of PPP Loan Forgiveness Now we have forgiveness, and multiple ways to account for it, but what about the tax impact? Section 1106(i) of the CARES Act provides that any amount that would be includible in gross income of the recipient by reason of forgiveness of a PPP loan “shall be excluded from gross income.” Thus, the CARES Act excludes from the gross income of a borrower any income that may arise from PPP loan forgiveness, regardless of whether such income would otherwise be properly characterized as income from the discharge of indebtedness. In Notice 2020-32, the IRS addressed the effect of PPP loan forgiveness on the deductibility of payments of eligible expenses made with forgiven funds. In the Notice, the Service applied Section 265 to expenses paid with PPP proceeds. This provision provides that no deduction is allowed to a taxpayer for any amount that

Fall/Winter 2020

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