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Financial Statement Impact of PPP Loan

Financial Statement Impact of PPP Loan

The Paycheck Protection Program (“PPP”) was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and it provides loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The loans and accrued interest may be partially or fully forgivable, if the borrower uses the proceeds for qualifying expenses such as payroll, employee benefits, mortgages interest, rent, and utilities. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the covered period. The unforgiven portion of the PPP loan is payable over two years with an option of extension to five years at an interest rate of 1%, with a deferral period of up to ten months.

AICPA issued Technical Question and Answer (TQA) 3200.18 (the “TQC”) in accordance with US GAAP which addresses non-governmental accounting for forgivable loans received under the PPP. According to the TQA, non-governmental entities may account for PPP loans under FASB ASC Topic, 470, Debt, or as a government grant under FASB ASC Topic 958-605, Not-for-Profit Entities, when certain circumstances are met.

The entities, that are not governmental nor nonprofit, can treat the PPP loan as either 1) debt or 2) government grants.

  • Loan (ASC Topic 470-50) – if an enterprise elects to treat the PPP loan as a debt, it can be derecognized only upon formal forgiveness of the debt by the lender (SBA) or repayment of the debt. The amount of loan forgiveness received can then be recorded as gain on extinguishment of debt.
  • Grant (ASC Topic 958-605) – if an enterprise expects to meet the forgiveness eligibility requirements and concludes that it can be forgiven, in substance, then PPP loan can be treated as grant.

 

Additionally, subsequent to the passage of the CARES Act, the IRS clarified in Notice 2020-32 that (i) no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the PPP loan, and that (ii) the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act. This precludes to deduct business expenses funded with PPP loan proceeds that are ultimately forgiven, thereby preventing taxpayer from claiming a double tax benefit on the qualifying expenses for PPP loans.

Therefore, while forgiveness loan amount is excluded from gross income, the PPP loan amounts used for qualifying expenses are nondeductible for federal tax purposes. Nontaxable forgiveness loan amount and the nondeductible qualifying expenses are permanent differences which are not subject to the tax provision. If borrower have nontaxable forgiveness loan amount and nondeductible expenses in the same period for tax purposes, there is no impact on the tax provision. However, if borrower uses the proceeds for qualifying expenses which are not deductible in 2020 and receive forgiveness which are excludable from income in 2021, then unfavorable tax treatment will have occurred in 2020.

The following examples illustrate the varying financial reporting and tax consequences of the Notice 2020-32:

Example 1: 100% Certain about Full Forgiveness of PPP Loan

Assume that Company X received PPP loan $700,000 on June 1, 2020. As of December 31, 2020, the Company X expects to meet all the forgiveness eligibility requirements and concludes that the full forgiveness of $700,000 is probable.  In this case, Company X can elect to treat the PPP loan as grant, recognizing the gain on the income statement.

1

Following is the presentation on the financial statements and tax provision:

2

The non-deductible compensation expense and non-taxable grant income occurs in the same tax year. Thus, no tax impact.

 

Example 2: Uncertain about Full or Partial Forgiveness of PPP Loan

Assume that Company X received PPP loan $700,000 on June 1, 2020. As of December 31, 2020, the Company X is uncertain whether it will meet the forgiveness eligibility requirements. In this case, Company X must treat the PPP loan as a loan. Since the loan can only be written off from its balance sheet (i) when the loan is paid or (ii) when the entity is legally released from the liability, the Company X’s 2020 balance sheet would include a loan of $700,000.

3

Following is the presentation on the financial statements and tax provision:

4

The non-deductible compensation expense and PPP loan – dischargeable income occurs in the different tax year. Therefore, timing difference of tax effect occurs.

Example 3: Expect Partial Forgiveness of PPP Loan

Assume that Company X received PPP loan $700,000 on June 1, 2020. As of December 31, 2020, the Company X meets the partial forgiveness eligibility requirements and expect to receive partial forgiveness of $500,000. In this case, Company X may record as gain on the portion of a PPP loan that expect to be forgiven and the remainder as a loan.

5

Following is the presentation on the financial statements and tax provision:

6

The non-deductible compensation expense and grant income occurs in the same tax year. Thus, no tax impact on forgivable portion of loan $500,000. Unforgivable portion of loan will be remaining as a loan on Company X’s balance sheet.

As shown in above, depending on how the PPP loans is treated as either debt or grants, taxpayer may have some different impact on income tax provision. Thus, each entity is required to carefully review the circumstances and related regulations when determining proper accounting and tax treatment. Please consult with your service provider.

ASU 2018-15 Internal-Use Software and Cloud Computing Arrangement (Korean version)

ASU 2018-15는 ASC 350-40 (내부사용목적 소프트웨어) 에 서비스 계약인 클라우드 컴퓨팅 약정에 대한 내용을 다루고 있다.

일반적으로, ASC 350-40-30에 따라 내부사용목적의 소프트웨어를 개발하는데 발생한 비용은 자산인식될 수 있다. 이 비용에는 소프트웨어 개발에 직접적인 관련이 있는 직원의 급여 및 출장 비용이 포함된다. ASU 2018-15에 따르면, 클라우드 컴퓨팅 약정에 내부사용목적 소프트웨어에 대한 라이센스가 포함된 경우 소프트웨어 라이센스는 ASC 350-40에 따라 처리되어야 하며, 이에 따라 회사는 자산화 할 비용과 비용 처리할 경비를 결정해야한다.

ASC 350-40에 따라 특정 개발 비용 (예를 들어, 교육 비용 및 특정 데이터 변환 비용) 은 자산화 할 수 없다. 따라서, 기업은 구현 활동과 관련된 프로젝트 단계 (예비 프로젝트 단계, 애플리케이션 개발 단계, 또는 사후 구현 단계) 를 결정해야한다. 애플리케이션 개발 단계에 발생한 비용은 비용의 성격에 따라 자산화되고, 약정 기간동안 감가 상각된다. 약정 기간에는 해약이 불가능한 기간과 기업이 약정을 유지할 것으로 합리적으로 확신하는 기간이 포함된다.

예비 프로젝트 및 사후 구현 단계에 발생한 비용은 구현 활동이 수행됨에 따라 비용 처리된다.

이는 기업이 클라우드 컴퓨팅 약정을 시행하기 위해 상당한 비용을 지출할 경우 영향이 있을 것으로 보인다.

US Partnership Interest Disposition- Foreign Partners (Korean)

외국인 파트너들의 미국 파트너십 지분 매각  관련

IRS에서 Sections 864 (c)(8) 와 1446 (f)에 따른 최종 법안을 발표했다. 이 최종 법안은 2019 년 5 월 각각 제안되었던 법안을 기본으로 하였으며, 미국에 파트너십을 가지고 있는 외국인 파트너들이 알고있어야 할 주요 내용은 다음과 같다.

Section 864 (c)(8) 최종 법안에 따르면 파트너십 지분의 매각 또는 양도로 인해 외국인 파트너가 얻은 손익의 전부 또는 일부는 미국의 영업활동과 관련된 손익으로 취급된다 (Effectively Connected Income 혹은 “ECI”). 이때 미국의 영업활동과 관련된 손익의 금액은 파트너십 지분의 매각 또는 양도일을 기준으로 파트너십이 모든 자산을 공정 시장 가치 (fair market value)로 매각했을 경우 파트너가 분배 받았어야 할 손익금액을 말한다. 이 조항은 미국 파트너십에 직접적인 이해 관계가 있는 외국인 파트너뿐만 아니라 계층화된 파트너십 (tiered partnerships)을 통하여 간접적으로 미국 파트너십에 이해 관계가 있는 외국인 파트너까지도 포함된다.

또한, IRS는 Section 864 (c)(8)에 따라 파트너십 지분 양도대한 원천 징수를 요구하는 Section 1446 (f) 최종 법안을 발효하였다. 이 법안에 따르면, 파트너십 지분의 매각 또는 양도로 발생된 이익의 일부가 Section 864 (c)(8)에 따른 미국 영업활동과 관련된 거래라고 간주될 경우 양수인은 지분의 매각으로 실현 된 금액의 10%에 해당하는 세금을 원천 징수하여야한다.

위의 최종 법안에 포함 된 내용들은 2017 년 12 월 31 일 이후 시작된 파트너십 과세 연도부터 적용된다.

Section 1446 세금을 납부하지 않았거나 납부하여야 될 금액보다 적은 금액을 납부한 파트너십은 원천 징수에 필요한 세금 납부에 대해 Section 1461에 따라 책임을 져야 하며 관련된 범칙금을 납부해야 할 수도 있다.

ASU 2018-15 Internal-Use Software and Cloud Computing Arrangement

The ASU 2018-15 extends ASC 350-40 (Internal-Use Software) to Cloud Computing Arrangement that is a service contract.

 In general, under ASC 350-40-30, internal and external costs incurred to develop internal-use computer software shall be capitalized. This includes payroll and travel costs of employees directly involved with the software development. Under ASU 2018-15, if a cloud computing arrangement includes a license to internal-use software, then the software license is accounted for in accordance with ASC 350-40. Therefore, an entity in a hosting arrangement needs to determine (i) which implementation costs to capitalize as an asset and (ii) which costs to expense.

 Costs to develop or obtain internal-use software that cannot be capitalized under ASC 350-40 (such as training costs and certain data conversion costs) cannot be capitalized. Therefore, an entity determines which project stage (i.e. preliminary project stage, application development stage, or postimplementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, and the entity depreciates the capitalized expense over the term of the arrangement. The term of the arrangement includes the noncancellable period of the arrangement plus periods an entity is reasonably certain to maintain the arrangement.

 Costs incurred during the preliminary project and postimplementation stages are expensed as the activities are performed.

 This may have some impact when an entity spends significant amount of money to implement a cloud computing arrangement. Please consult with your service provider for further details.