I created a liability account and put received “PPP loan” money into it.
However, now that my “PPP loan” has been forgiven, i cant seem to figure out how to get it off my books without it showing on my P&L report.
Do i create an out of balance journal entry?
Not sure how else or where else to debit/credit this.
Is there a way to make an account that is ignored?
The guide at Build a chart of accounts | Manager mentions adding a Non-operating income group, but i dont see the option anywhere.
The PPP is something you should discuss with your accountant. Experts disagree whether the forgiveness should be reported as income, even though not taxable, as loan forgiveness normally is. That debate isn’t for this forum.
One way to clear the liability is with a balanced journal entry. Debit the loan liability account and credit Retained earnings or another suitable equity account. The theory behind this approach is that the government has converted the loan into an investment in the business. The result produces the correct result for profitability, but it is unquestionably unusual. Where the credit ultimately goes depends on your form of organization. It could become an owner’s draw or a distribution to capital accounts, as examples.
Understand, this is not tax advice, but a method for accounting for this bizarre program in Manager.
By the way, income groups are created under Chart of Accounts in Settings, the same way accounts are. That is covered in the Guide you mentioned.
Thanks for the quick reply!
Retained earnings are the cumulative net earnings or profits.
What i was looking for is a way to account for the forgiveness so that it doesnt show on balance sheet or P&L. may not be possible…who knows.
What I described will do exactly what you want. Retained earnings is somewhat more complicated than your simple explanation. In this case, it functions as a holding account for profits prior to either transfer to other equity accounts or direct draw.
It is not possible to account for PPP forgiveness without affecting the balance sheet, because the liability must be cleared. The question is whether you pass the effect through a revenue account on the way to an equity account and ultimately to owners or bypass the revenue account because the forgiveness is not taxable.
Ultimately, PPP forgiveness is an outright gift that cannot be handled using normal accounting practices. That’s why experts disagree how to record it. The method I outlined has the advantage of matching your financial accounting perfectly with your tax accounting. And I emphasize again that it accomplishes your goal of keeping the forgiveness off the P&L.
When you record PPP Forgiveness by credit to other Income & debit to PPP loan on the balance sheet, it ultimately increases the Retained Earnings on a C Corp.
When you want to close out the C corp, how to dispose of the retained earnings created as a result of PPP loan forgiveness? It is a personal service C Corp and has only one shareholder. How do you pass the retained earnings on the balance sheet resulting from non-taxable PPP Loan forgiveness to the C Corp to the shareholder of the C Corp, and what would be the tax effect of the retained earnings that the shareholder gets?
Simply create a Payment and post it to the Retained Earnings account as though it were a dividend/distribution.
For that you will have to consult your personal tax practitioner.
While this is outside the scope of Manager, I feel compelled to note this business setup may not be the best for this situation. Since you use “C Corp” I assume you are in the U.S.; check with a professional accountant; a pass-through entity may be better for your situation.
Forgiveness of a PPP loan is a non-taxable transfer of a liability to equity. Use a journal entry to transfer the liability to an equity account, as already explained. From there, distribute the same way you would ordinary profits. The fact that you are organized as a C corporation does not alter that basic flow, only potentially the mechanism for accomplishing the transfer and the target equity account. But those are not questions for this forum.
As I said in post #2 above, this is something to discuss with a qualified accountant. With that advice in hand, if you cannot figure out how to do it in Manager, come back to the forum.
That may or may not be the only thing involved, depending on the equity structure of your chart of accounts. But ultimately, a payment may be involved. It is also possible the transfer will only offset losses and there will be nothing to distribute.
I would create a bad debt expense account.
It’s position above or below net taxable income would depend on local tax laws.
Then use that to pay off non recoverable loans
If the C Corp is now dissolving but has non-taxable PPP Loan Forgiveness as part of retained earnings, how to close out the retained earnings of the C Corp and the non-taxable PPP loan Forgiveness may not be taxable to the shareholder who gets it a distribution?
@Banu, that is a question for your accountant.
PPP loan forgiveness is not a bad debt. Bad debts are expenses. Loan forgiveness is normally income. But the PPP program in the United States makes that income exempt from tax by law. The arguments that go on among accountants are over how to record it. The question is whether you record it as income or just transfer the liability to equity directly. as I said earlier, this program is very strange.
Fair enough.
I like to expose all my transactions so they are visible to me and my accountant. In this case I would use and income account below the taxable income total on the profit & loss. That way it is less likely to be missed should my classification be wrong.