The Paycheck Protection Program (PPP) was established by the CARES Act to aid small businesses during the financial uncertainty of the COVID-19 pandemic. In conjunction with the Department of US Treasury, the Small Business Administration (SBA) provided PPP loans to small businesses to fund up to eight weeks of payroll and other business expenses.

Since these PPP loans will start showing up on financial statements soon, this article provides information on where and how these loans will show up. PPP loans can either be reported as debt or as a government grant, so how a business reports their loan will determine how that loan appears on their financial statements. Regardless of financial classification, PPP loans are considered debt for tax purposes by the federal government (Accounting for PPP Loans Received by Businesses).

Reporting PPP Loans as Debt

If a business treats its PPP loan as debt, which is the most common method, then it is recorded as a financial liability on the balance sheet. The loan amount should be recorded as cash inflow from financing activities (PPP Loans and Financial Statements).

Businesses might pursue this route because they have not received official word from the SBA that their loan will be forgiven, even if loan forgiveness is anticipated. The loan will also need to be reported on the debt maturity disclosure (10 Financial Reporting Reminders for PPP Borrowers). 

In summation, the following are some general guidelines for recording the PPP loans as debt:

• PPP loans should be treated as cash inflow from financing activities
• Repayment of PPP loans is cash outflow from financing activities
• Forgiven PPP loans become supplemental non cash activity

When the PPP loan or “debt” is forgiven (or otherwise extinguished), the amount forgiven is recorded on income statement as a gain. 

Reporting PPP Loans as a Government Grant

In order to treat a PPP loan as a government grant, businesses must first meet both the loan and the loan forgiveness eligibility requirements for the bulk of the PPP loan. If approved and these conditions are met, the PPP loan can then be recorded as an income-related grant, where the incoming cash is recorded as deferred income liability (PPP Loans and Financial Statements, Accounting for PPP Loans Received by Businesses).

Additionally, the following are some general guidelines for recording the PPP loans as a government grant:

• PPP loans should be treated as either cash inflow from operating or financing activities
• Repayment of PPP loans should be treated as cash outflow from operating or financing activities
• Forgiven PPP loans become supplemental non cash activity

Preparing the Appropriate Documentation

When applying for PPP loan forgiveness, the SBA may require documentation in addition to their loan forgiveness form (SBA form 3508S). This documentation includes records of all payroll periods for the time covered by the loan. They also want to see all non-payroll expenses sustained or paid during the time covered by the loan (PPP Loan Forgiveness). The SBA provides a more in-depth list of these payroll and non-payroll items on their website: PPP Loan Forgiveness.