Our Introduction to Paycheck Protection Program (PPP) Loans
Regardless of what industry your business operates in, the past few years have been a crazy ride. From government-mandated shutdowns to supply chain problems to changing consumer tastes, every business has been affected in some way by the pandemic.
Fortunately, the government stepped in with various loan programs and grants to assist small business owners to weather the storm. Motivated by a desire to keep small businesses in operation and preserve jobs, the government loan programs were available to most small businesses. The Paycheck Protection loan program was by far the most popular pandemic program for small businesses because if the loans were used for approved expenses, the loan were eligible for full, tax-free forgiveness.
What are PPP Loans?
In the early days of the covid pandemic, the U.S. government responded to cries for assistance from small business owners by creating PPP loans. The loans were created to quickly disperse funds to small businesses to prevent excessive business closures. To obtain a loan, a business simply had to prove they were in existence prior to the pandemic and certify that the ongoing uncertainty made the funds necessary to the ongoing operation of the business.
Based on the minimal requirements for the loan, most small businesses qualified for the program. The initial allocation of funds for the program was quickly exhausted but congress allocated additional funds.
What’s the difference between PPP Loans and EIDL Loans?
The government created two concurrent programs to assist small business owners. The first was the PPP loans. The second program was the EIDL loan and grant program.
Under the original rules, a small business was only eligible for either the PPP loan program or the EIDL loan program, however, that rule was later changed to allow businesses to participate in both programs. The only restriction was that the same expenses could not be counted towards both programs. So, if a payroll expense was used to obtain PPP forgiveness, that payroll expense could not be counted as paid for with the EIDL loan funds.
Who was eligible?
All types of businesses were eligible for PPP loans including corporations, partnerships, and sole proprietorships. Sole proprietors were able to use their net income from their Schedule Cs to calculate their own income and quality for a loan even if they had no other employees. Non-profit organizations were also eligible to participate in the loan program.
To be eligible for PPP loans, small businesses had to certify that the loans were necessary to keep the business in operation. Beyond that basic requirement, businesses had to have less than 500 employees or be a part of certain industries that were eligible to count the number of employees by locations (such as restaurant chains).
What do I need to know about accounting for PPP Loans?
When the loan was initially received, it should have been booked as a long-term liability based on the repayment terms and the fact that forgiveness was not guaranteed. A separate loan account should have been created to track the PPP loan.
If you were eligible for loan forgiveness and successfully had your loan written off, you should make a journal entry to debit the PPP loan account you created and credit a new account under other income titled “PPP Loan Forgiveness.” It’s important that the PPP loan forgiveness income be separated from the company’s normal business income.
Are Paycheck Protection Program Loans taxable?
When Congress initially approved the PPP loan program, the PPP loans and the forgiveness was intended to be tax-free for the businesses. However, the IRS initially disagreed with the way the law was written and said that the loan forgiveness income was tax-free but then the expenses paid for with the loan funds could not be deducted. This created a lot of headaches for small businesses that had counted on the tax-free income.
A later vote by Congress adjusted the rules to allow the PPP loan forgiveness income to be tax-free and the expenses paid for with PPP loan proceeds were deductible for federal tax purposes.
However, the vote for the favorable tax treatment of the loan and related expenses was limited to federal income taxes. Each state then had to decide whether to follow the federal rules for the taxation of the loans.
In California, the loans and related expenses were only allowed if the business could show that they had at least one quarter in 2020 where its revenue was 25% lower than the same quarter in 2019. There were additional rules for determining the eligibility of new businesses. Adding to the confusion was the fact that the California rules for the PPP taxation were not decided until March 2021 well after the end of the year.
Will PPP loans be offered again?
Though the future is always uncertain, it seems very unlikely that the government will approve any future PPP loans. The initial PPP loans were created quickly in response to an immediate need to provide financing for small businesses as the economy ground to a halt. Though the pandemic is still going strong, businesses, schools, and government offices are operating near capacity.
If any loans are offered in the future, it’s likely that the loans would have different approval criteria, and forgiveness, if available at all, would be harder to come by. The PPP loans, while well-intentioned, mostly provided benefits to business owners which was not the intent.
Overall, the PPP loans filled a very real need for small business to have quick access to capital at the beginning of the covid pandemic. Despite the complications related to the use of the funds, accounting, and taxation of the funds the PPP loan funds were a huge benefit for many small business owners.
Want to learn even more? Take a look at the resources below:
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