PPP Loan Fees: Accounting and Tax Considerations Loom as Year-end Approaches

By John Kinsella

One very positive development in the banking industry in 2020 has been banks’ participation in the Small Business Administration’s Paycheck Protection Program. While PPP has allowed banks to be economic first responders during the pandemic, all has not been seamless, however. There has been considerable analysis and discussion regarding the accounting and tax treatment of PPP fees that are payable to banks.

For accounting purposes, there is guidance and consensus that the fees received should be deferred and then amortized into income over the life of the loan using an effective interest methodology. For practical purposes, this means the vast majority of the fees will likely be recorded into income when the loan amounts are forgiven.

There is less consensus on the tax side of things.

For banks, on the cash basis, it seems clear that the fee income will be recognized into taxable income in the year the fee is actually received.

For accrual basis banks, however, there are multiple positions that banks and their advisers are considering. The first position is that the fee is for a service performed and should be recognized in 2020. The PPP information sheet provided by the SBA states that “processing fees will be based on the balance of the financing outstanding at the time of final disbursement”. Based on the plain reading of the SBA description, one may conclude the fee is service income and subject to recognition based on the statutes.

Alternatively, some banks and advisers believe the appropriate analysis for income recognition for tax is similar to book. That is, the “fee” really represents additional interest income on the loan and should be amortized over the life of the loan using an effective yield methodology. There are provisions under the tax regulations that discuss somewhat similar circumstances. Tax regulation 1.1273-2 in part states:

Payments between lender and third party. If, as part of a lending transaction, a party other than the borrower (the third party) makes a payment to the lender, that payment is treated in appropriate circumstances as made from the third party to the borrower followed by a payment in the same amount from the borrower to the lender and governed by the provisions of paragraph (g)(2) of this section…. The character of the deemed payment between the borrower and the third party depends on the substance of the transaction.”

Assuming that lenders get comfortable that this provision applies (original issue discount rules) and that the fee is really an adjustment to yield (considering the interest rate on these loans is 1%) there appears to be a basis for amortizing the fee over the life of the loan.

Bankers may also be considering the potential impact of tax rate increases and other changes that might be applicable in considering income recognition between 2020 and 2021.  As year-end approaches, bankers should consult with their advisers as they make decisions that affect deferred tax accounting and tax return reporting and payments.

John Kinsella is VP for tax policy at ABA.