by Joy Mcadoo, CPA
Relief for your Business
It’s hard to keep track of the many pandemic-relief programs. There’s the Paycheck Protection Program, the Employee Retention Credit, and the Families First Coronavirus Response Act credits, to name a few. Knowing what’s taxable and not taxable, as well as how to report it on your financial statements, can be even more challenging.
With year-end tax planning and financial reporting coming up, it’s important to get up to speed. Here’s what you should know about 2021 reporting for Generally Accepted Accounting Principles (GAAP) and tax—both federal and Minnesota.
Paycheck Protection Program (PPP) Loan Forgiveness
- Federal tax rules: Any forgiven amount is not taxable. Expenses paid with loan proceeds are deductible.
- Minnesota tax rules: Same as federal.
- GAAP reporting rules:
- Any amount forgiven is recorded as gain from extinguishment/forgiveness of debt.
- Gain from forgiveness is presented on its own line in the income statement as other income.
- Cash flow treatment: Receipt of the PPP loan proceeds would be recorded as cash from financing activities. Any amounts forgiven would be disclosed as a noncash financing activity.
- If you received funding under the second round of PPP, make sure your accounting treatment is consistent with the accounting policy election you made to record the first PPP loan.
Employee Retention Credit (ERC)
- Federal tax rules: Taxable (wages on the claimed credit must be reduced by the amount of the credit, which results in the credit being taxable income). The credit will reduce your wage expense.
- Minnesota tax rules: NOT taxable for MN purposes.
- GAAP reporting rules:
- ERC funds can be recorded as other income or as an offset to related qualifying expenses. However, netting ERC income with expenses is not encouraged as GAAP generally does not permit net presentation in financial statements.
- Record the income when the qualifying expenses are incurred. No need to wait until you receive the cash.
- If you previously reported PPP funds using a method other than the debt model, the model you elected for PPP should also be the model applied to ERC funds. If PPP funds were accounted for using the debt model, you can select either option above (other income or netting) for ERC funds.
Families First Coronavirus Response Act (FFCRA) credits (sick pay for employees who are unable to work due to COVID-related impacts)
- Federal tax rules: FFCRA credits are taxable income. The wages used to claim the credit are deductible. Include FFCRA credits in your gross income as “other income.”
- Minnesota tax rules: NOT taxable for MN purposes.
- GAAP reporting rules: Same as Employee Retention Credit.
Other Grant Income (e.g., EIDL advances, municipal grants such as Minnesota Main Street COVID Relief Grants)
- Federal tax rules: Grant income is taxable unless specifically excluded. Excluded programs include PPP, EIDL, and SBA 7(a) and 504 six-month loan payments.
- Minnesota tax rules: PPP loan forgiveness is not taxable. All other grant income is taxable in 2021.
- GAAP reporting rules: Typically presented in your income statement as other income when funds are received. Reporting can differ based on specific grant considerations.
Cross Your T’s and Dot Your I’s
It’s important to understand how these tax and reporting requirements will impact your business before the year-end crunch. And don’t forget to evaluate tax reporting rules in other states if needed. If you’d like assistance sorting out these details and more, JAK is here to help. We’ll work with you to make sure your tax and GAAP reporting are done right and on time. Don’t wait until the last minute. Contact us today!