Since the first round of the Paycheck Protection Program was rolled out as part of the CARES Act last spring, more than 5 million businesses, including some auto dealerships, have benefited from PPP loans.
If PPP funds are used to cover payroll, mortgage interest, rent and utility expenses and meet other criteria, the loans may be forgiven and converted to grants (i.e. non-taxable income). However, if you have received a PPP loan, and been granted forgiveness, the question we hear most often is “how do I account for this PPP loan on my books?”
The American Institute of Certified Public Accountants (AICPA) recently published guidance to help borrowers understand how to account for forgivable PPP loans. According to the guidance, businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) should follow these steps when reporting these loans:
According to the AICPA guidance, if you expect to meet the PPP’s eligibility criteria for loan forgiveness and conclude that the loan represents a grant that’s expected to be forgiven, you may follow analogous international guidance. International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, covers how to account for the loan if certain conditions are met.
Under this guidance, your business can’t recognize government assistance until it’s probable that any conditions attached to the assistance will be met and the assistance received. The term “probable” under IAS is analogous to “reasonable assurance” under U.S. accounting standards.
Recipients of PPP loans of $2 million or more should expect an audit if they apply for loan forgiveness, according to the Small Business Administration. Properly accounting for a forgivable PPP loan could be critical if your dealership is audited by the federal government. While this article provides general information, your specific PPP forgiveness calculation – and the related accounting treatment – can be unique. Contact your CPA for specific guidance in your situation.
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