How to Report PPP Loan Forgiveness on Form 990

The Paycheck Protection Program (PPP) provided a financial bridge for many organizations, and its loan forgiveness component introduced unique reporting considerations. For tax-exempt entities, the forgiven loan amount, while not taxable, must be properly disclosed on their annual Form 990 information return. Proper reporting is necessary to maintain compliance and accurately present the organization’s financial activities for the year the loan is forgiven.

Classifying PPP Forgiveness for Reporting

For the purposes of Form 990, the Internal Revenue Service (IRS) provides specific instructions for classifying a forgiven PPP loan. The amount forgiven is to be treated as a government grant. This classification holds regardless of how an organization may have treated the funds for its own internal accounting under Generally Accepted Accounting Principles (GAAP), where it might have been recorded as extinguishment of debt. The IRS’s position simplifies the reporting by creating a uniform approach for all tax-exempt entities.

This treatment ensures that the funds are clearly identified as support from a government source, which has direct implications for an organization’s public support status and other disclosure requirements on the return. The entire forgiven principal and any accrued interest are combined into a single amount reported as grant revenue. This must be done in the tax year that the lender formally forgives the loan, not necessarily when the funds were received or spent.

Reporting on the Form 990 Core Form

The mechanical process of reporting the forgiven loan on the main Form 990 is straightforward once the amount is classified as a government grant. The total forgiven loan amount must be reported on Part VIII, the Statement of Revenue. Specifically, filers will use Line 1e, which is designated for “Government grants (contributions).”

While the forgiven loan is reported as revenue, the corresponding expenses funded by the PPP loan are reported in their usual categories on Part IX, the Statement of Functional Expenses. For example, salary and wage expenses paid with PPP funds are included in the total compensation reported on Line 5, and rent or utility payments are included on Line 16, Occupancy.

The forgiveness of the loan also impacts the organization’s balance sheet, reported on Part X. Prior to forgiveness, the outstanding PPP loan would have been listed as a liability, typically on Line 17, “Secured mortgages and notes payable to unrelated third parties.” Once the Small Business Administration (SBA) approves the forgiveness application and the lender removes the debt, this liability is eliminated from the balance sheet for the year-end in which forgiveness was granted.

Impact on Schedule A Public Support Test

The classification of PPP loan forgiveness as a government grant has a significant effect on the public support test, which is calculated on Schedule A. This schedule is used by most 501(c)(3) organizations to demonstrate they receive substantial support from the general public, a requirement to maintain their status as a public charity rather than a private foundation. The test compares public support to total support over a five-year period, and a certain percentage must be met.

The forgiven PPP loan amount flows to Schedule A and is included in the denominator of the public support calculation, representing total support. This inclusion increases the total support figure significantly. However, the same amount is generally excluded from the numerator, which represents the public support portion of the calculation.

This dynamic can drastically reduce an organization’s public support percentage. For instance, if an organization normally has $500,000 in total support and $400,000 in public support, its public support percentage is 80%.

If it receives a $200,000 forgiven PPP loan, its total support (the denominator) increases to $700,000, while its public support (the numerator) remains at $400,000. This drops the public support percentage to approximately 57%, potentially pushing it below the required threshold and jeopardizing its public charity status.

Schedule B Contributor Reporting Requirements

Another specific reporting question involves Schedule B, the Schedule of Contributors. This schedule generally requires organizations to list contributors who gave more than $5,000 during the tax year. A common question was whether the SBA or the lending institution that facilitated the PPP loan should be listed as a contributor for the forgiven amount.

According to IRS guidance, organizations are not required to report the SBA or the lending bank on Schedule B for the forgiven PPP loan. The reasoning aligns with the classification of the funds as a grant from a governmental unit. Schedule B is primarily designed to provide transparency on significant contributions from private individuals, foundations, and corporations, not direct support from the U.S. government.