Technical Bulletin: No. 2021-04-1: Treatment of PPP Loans

Arlington, Va., April 13, 2021 – Beginning with the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 through the American Rescue Plan Act of 2021, the US Congress has appropriated more than $960 billion in funding for the Paycheck Protection Program (PPP) loans through four separate bills.[1] This unprecedented program, administered by the US Small Business Administration (SBA) and designed to aid American small businesses, is scheduled to end on May 31, 2021. Borrowers, however, have had to contend with significant level of uncertainty as Congress, the Executive Branch, and the SBA has had to continually refine, clarify, amend, and adjust the terms of PPP loan qualification and forgiveness as the program was implemented.

The most recently available information from the SBA[2] indicate that 9.1 million loans totaling $745.8 billion has been approved as of April 4, 2021. The SBA also reported that of the $521.2 billion of PPP loans originated in 2020, $209.1 billion were forgiven and just $0.7 billion were denied forgiveness ($83.8 billion of loans were under review) through April 1, 2021.

Data suggest the majority of borrowers have either yet to apply for forgiveness or are awaiting a decision on its application for forgiveness. PPP loan forgiveness terms vary based on whether the loan is a first or second draw. Per the SBA: “[a] borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.”

This bulletin sets forth our thoughts on how companies in this status should treat their PPP loans from a valuation perspective.

FON Valuation Services Viewpoint

A full year has passed since the establishment of the PPP and as many small businesses begin to finalize their annual reporting cycle this spring, a number of these companies has or will need to complete business valuations for a myriad of reasons.  Whether it is to meet the impairment testing requirements for financial reporting purposes, determine the fair market value of a legal entity in connection with a tax reorganization, or execute on estate and gift tax planning strategies, companies must not overlook the treatment of the PPP loans in their valuations.

Two key considerations for business owners and managers to keep in mind with respect to their PPP loans and business valuations: 
– Status of PPP loan forgiveness
– Treatment of PPP loans and the uses of the proceeds on the financial statements

We discuss each topic below.

Status of PPP Loan Forgiveness

PPP loans may be forgiven in whole or in part and until the SBA makes its final determination, uncertainty remains. With the passage of the Consolidated Appropriations Act, 2021 on December 27, 2020, the amount of any forgiven PPP loan do not count as income for tax purposes. Furthermore, the terms of forgiveness differ between first or second draw PPP loans. 

Despite specific criteria being set forth as to how and how much of the proceeds are used for PPP loans to qualify for forgiveness, the tendency is to simplistically presume the entirety of the loan will either be forgiven or not forgiven in the valuation. While this may be a reasonable treatment of the PPP loans for many companies, we caution this approach should only be taken with consideration to the forgiveness terms.

In instances where the PPP loan is a material balance, we believe it is critical that a thorough and thoughtful accounting and assessment of the how proceeds have been used (and how any remaining proceeds will be used) is prepared while an application for forgiveness remains pending. This may require consultation with auditors and tax advisors, with the likely result being a multitude of expected loan forgiveness/repayment outcomes. Similar documentation would often be prepared in support of a loan forgiveness application.

Treatment of PPP loans and Uses of Proceeds

That same analysis becomes an equally critical data point for ensuring appropriate and consistent treatment of the loan balances and uses of the proceeds on the projected financial information that is the basis for the valuation.  For instance, the cash flows underlying an Income Approach analysis may require the differentiation of normal operating cash flows from the cash flows associated with the origination and uses of the loan proceeds given differences in tax treatment of those expenditures and expectations regarding repayments/forgiveness.

A valuation that incorporates these refinements will yield results that are not only technically consistent, but also informative to users as it facilitates the preparation of sensitivity analyses on the impact of PPP loans on the value of the organization.  The ability to assess a potential range of outcomes in a valuation is particularly important when multiple outcomes regarding loan repayment and forgiveness are reasonably expected.

About FON

FON is a financial advisory firm dedicated to investment banking, valuation advisory, management consulting, and principal investing across the aerospace, defense, and government services industries. As current and former members of regulatory and standard-setting organizations, FON’s valuation practice provides services informed by decades of experience. In advising high-net-worth individuals, public and private companies, equity and debt investors, transaction advisors, compliance and regulatory agencies, and state and federal courts, our professionals approach each mandate with an appreciation of its unique requirements and challenges. We have performed valuations of assets and business interests throughout the Americas, Europe, Middle East and Africa, and Asia/Pacific.

Get in Touch

Have questions about this FTB or want to learn more about how FON Valuation Services can help your business? Contact our team:

Raymond Moran, ASA, MRICS
Managing Director |

Jouky Chang
Managing Director and Practice Leader |
Technical Bulletin: No. 2021-04-1: Treatment of PPP Loans