Banks are starting to accept Paycheck Protection Program (PPP) loan forgiveness applications, and some businesses are jumping at the opportunity to have the loans officially forgiven. The timing of your application and forgiveness could affect the timing of the tax effects and when you show the income in your financial statements. Please consider the following before submitting your application:
Tax:
As a reminder, the IRS is taking the position that expenses paid by the PPP funds forgiven will not be tax deductible. It is currently unclear whether the IRS will determine if PPP loans will be income in the year the PPP loan was granted or the year it was forgiven.
Financial Reporting:
Generally accepted accounting principles (GAAP) allows for two approaches which are essentially to record the proceeds as a form of ‘other income’ either at: 1) point of legal forgiveness by the bank or 2) upon spending of the loan proceeds for eligible costs. If you report under a method that is not GAAP this same approach may or may not apply. Read Accounting for PPP Loans for more information on this topic.
Timeline Considerations:
Applicants have 10 months from the end of their covered period (8-24 weeks) to apply.
Other Things to Consider:
There are many other technical aspects that will be in question until the further guidance is provided. We strongly encourage you to work with your accounting professional, bank, and other advisors before applying for PPP loan forgiveness.