Timing of PPP loan being converted to income

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#1
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When preparing financial statements for a corporate taxpayer [in this case an "S" corp ,but, that shouldn't matter], if a bank approves a PPP loan for total forgiveness by January 31, 2021 but the SBA doesn't give it's approval until Feb. 5, 2021, must the loan remain on the financial statements prepared for a period ending January 31, 2021 or can it be converted to retained earnings as of January 31, 2021 even though the SBA approval came after that date.

The financial statements are just "prepared" financial statements, not a compilation, review or audit.

Thank you.
 

#2
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Some options depending onnBasis of accounting?
 

#3
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The taxpayer is on the accrual basis of accounting, Terry.
 

#4
sjrcpa  
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When did they apply for forgiveness? At 12/31/20 what was the likelihood it would be forgiven?
 

#5
eze  
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It's a toss up. There is an argument that that the forgiveness is a grant. Accounting for a government grant does not have guidance issued for a for-profit company. I would be totally comfortable moving it to equity if I am certain of the final approval.

Some people are calling it forgiveness of debt...I prefer calling it a grant because the forgiveness was baked into the original advance agreement.
 

#6
Joan TB  
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can it be converted to retained earnings


What does this mean as far as the actual accounting entry? Exactly how would this entry look? Do you mean to make a journal entry directly to equity without recording an entry through the P&L?

In my mind, when the loan is forgiven, there should be a journal entry to debit the loan and credit Other Income - (Govt Grant). Then it closes to R/E when the period closes. For the federal tax return, it becomes non-taxable income. Then the discussion becomes exactly WHEN to record that entry, so the question becomes who actually has the final authority for the approval... the bank or the SBA? I know the approval application is submitted to the bank, but then the bank has to submit it to the SBA, so I would think the SBA approval is the actual decision.

Note that "Other Income" is not in the regular revenue section of the P&L.

It sounds like you are preparing in-house F/S. Have you explored what is the impact to your client on the various timing choices? Recording the forgiveness early could conceivably have more backlash than recording it after it is a final done deal. What is the FYE for your client? If Dec, then choosing Jan or Feb may not really have much of an impact, unless there are loan covenants or something else to contend with. In that case the F/S are not just being used in-house but are being used by a third party, which greatly changes your exposure.
 

#7
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The client has a Sept. 30 year end. When I mentioned converting the loan to retained earnings, I really meant to say "cancellation of indebtedness income" under other income/expense. Then, it would be closed out at year-end to the retained earnings with any other net income or loss. The statements might be given to a third party.
I think they applied for forgiveness in either December or January.
I don't look at it as a grant since grants are considered taxable income.
 

#8
frank22  
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Hi, for a report I did on a C Corp we handled it like a grant, but didn't call it a grant. At year end they had spent all the funds, and had all the conditions had been substantially met. Handling it like a grant for book purposes doesn't change the tax status. Because all the funds had been spent in the year, it was just putting it in other income and disclosing in the notes. On the cash flow statement it goes to financing activities.

https://www.journalofaccountancy.com/ne ... dance.html
 

#9
Joan TB  
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It won't matter too much how you label the account as long as you and the F/S users know what it means.
But your argument against the term "grant" is weak, since cancellation of indebtedness income" is also typically taxable.

With a 9/30 year-end, I can see where Dec v Jan might have some impact since that is an end of a quarter. I would think Jan v Feb wouldn't have much impact.
 

#10
eze  
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JofA to the rescue....sort of. https://www.journalofaccountancy.com/ne ... =20Apr2021

Sounds like a grant to me. But as long as you are communicating what the program is and why it was moved out of debt, I think you will be OK, no matter what you call it.
 


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