Paycheck Protection Program Reviewed by Momizat on . Valuation Considerations When PPP Has Been Used The Payroll Protection Program (PPP) is a program established in 2020 by the U.S. Congress entitled the Coronavi Valuation Considerations When PPP Has Been Used The Payroll Protection Program (PPP) is a program established in 2020 by the U.S. Congress entitled the Coronavi Rating: 0
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Paycheck Protection Program

Valuation Considerations When PPP Has Been Used

The Payroll Protection Program (PPP) is a program established in 2020 by the U.S. Congress entitled the Coronavirus Aid, Relief, and Economic Security Act known as the CARES ACT. This Act, which was in response to the President’s closing of the economy on March 13, 2020, was enacted to assist certain businesses, self-employed, sole proprietors, certain nonprofit organizations, and American Tribal businesses in continuing to pay their employees. In this article, the author addresses how a PPP loan should be treated when the entity is the subject of a valuation.

A Little History

The Payroll Protection Program (PPP) is a program established in 2020 by the U.S. Congress entitled the Coronavirus Aid, Relief, and Economic Security Act known as the CARES ACT. This Act, which was in response to the President’s closing of the economy on March 13, 2020, was enacted to assist certain businesses, self-employed, sole proprietors, certain nonprofit organizations, and American Tribal businesses in continuing to pay their employees.

A business could apply (and is still able to; not all the funds have been used with the approval of the Small Business Administration [SBA]) for a low-interest rate* (1%) private loan to pay for payroll, payroll taxes, unemployment costs, commissions, cash tips, paid leave, severance pay, any other compensation to an employee, rent, interest, and utilities as long as they were in operation as of February 15, 2020. Employee pay is specifically limited to those with a primary residence in the U.S. and exclude non-employees of the applicant. Payments may not be made to outside independent contractors that provide services to the business.

The company and its subsidiaries/affiliates must have 500 or fewer employees worldwide. It must also meet the SBA defined small business description for its industry based on the average number of employees and have a tangible net worth that did not exceed $15 million on March 27, 2020, and an average net income that did not exceed $5 million for the two full fiscal years before the date of the PPP application.

Some specific businesses are ineligible to receive these loans if they are: (1) engaged in any illegal activity; (2) a household employer; (3) a passive business; (4) in bankruptcy proceedings; (5) a public hospital; (6) an owner of at least 20% of a business who is incarcerated; (7) an owner of at least 20% of a business who is under indictment or arraigned, etc.; (8) an owner of at least 20% of a business who is on either probation or parole; (9) the business is owned in any percentage by an undocumented alien; and (10) the business applicant, owners, or business controlled owners who have guaranteed loans received from any federal agency that is currently behind in their payments or has defaulted on said loan within the last seven years and caused a loss to the federal government.

The Loan Amount

The PPP loan will be calculated based on 2.5 times the average monthly payroll costs. If the applicant is a sole proprietor, independent contractor, or self-employed individual, the net operating income from the business (from the 2019 Form 1040 Schedule C) would have been divided by 12 and then multiplied by 2.5 to determine the PPP gross loan amount; i.e.: operating income of $120,000 / 12 = $10,000 x 2.5 = PPP loan of $25,000.


It would be best to consult with your client to keep a separate folder for all of the PPP expenses paid. and, if they have not done so, set up a separate checking account for the PPP loan as well. Each company will have to sign documents verifying with the loaner bank (or lender such as PayPal, Kabbage, etc.) that they have complied with the regulations and on the Paycheck Protection Program PPP Loan Forgiveness Application Form 3508 (the long form) or Form 3508EZ for the SBA.

The “trick” with the Form 3508EZ starts with lines 1 through 4 whereon the costs for payroll, interest, rent, and utility payments are recorded. Line 5 reports the total of the previous 4 lines. Line 6 records the PPP loan amount and line 7 (the trick) records the payroll cost divided by 60%. Yes, this will provide a larger amount. For clients that borrowed $50,000 and had $30,000 in payroll expenses, interest of $5,000, rent expense of $12,000, and utility bills of $3,500 totaling $50,500 would have the borrowed amount of $50,000 forgiven. Payroll of $30,000 divided by 60% equals $50,000. Since the loan amount is lower than the amount expended, your client has complied well. On the other hand, if the PPP loan was $60,000 and the expenses were the same as presented (the expenses equal again $50,500 and the payroll cost divided by 60% is $50,000), then the lowest amount in this case is the $50,000 and the difference to the amount borrowed is the amount that will become ($10,000) a taxable event. You will need to assist your client with this calculation to properly record the liability and the income to the income statement.

If they have not started keeping separate records and copies of payroll, payroll taxes, and invoices and expenses allowed to be paid, now is the time to start getting their books in order. For those self-employed individuals that received “early” PPP funds in April, they have to complete Form 3508 or 3508EZ by October 31, 2020. If funds were received by the June 30, 2020 deadline, then the reporting date is December 31, 2020.

By law, all documentation relative to the PPP loan must be kept for a minimum of six years after the date the loan is forgiven or the date the PPP loan is paid-off, whichever date is later.

Economic Injury Disaster Loan (EIDL)

Here is a “little” about this loan. The EIDL is in excess of the PPP (if the business qualifies) with its own limitations. It usually is a 30-year loan with the first year of loan repayments forgiven. Therefore, it is essentially a 29-year loan at a low interest rate approximating 3.79%.

Recording the PPP Loan on the Books

Basically, the cash received will not be considered “income” and the PPP expenses shall not be recorded on the income statement as an expense.

Using the illustration above, we would have:

      Debit: Cash                              $25,000

      Credit: PPP Loan Payable         $25,000

To record the receipt of the proceeds of the PPP loan:

      Debit: Payroll expense (A)        $5,000

      Credit: Cash                             $5,000

      To record payroll expense for the month of June 2020:

(A) If each “expense” is a legitimate forgiven expense, it may be offset to the PPP loan payable liability. Once the PPP loan payable becomes zero, then the expenses may be properly recorded as expenses on the income statement.

However, I think it would be much better when dealing with larger companies or complex accounts to set-up a PPP Other Asset account to keep track of all of the expenses. In this way, once the 8–week or twenty-four–week period has been exhausted, a reconciliation may begin. This will provide the exact data to be able to discern whether all the loan amounts will be forgiven or taxable income has to be recognized.

The Business Valuation Aspect

     Asset Approach

If the liability (as in the above illustration) yields net sum “forgiveness”, then the liability becomes null and void. This means that there is no liability at all to the entity and, therefore, if the liability is not owed, how should it be considered now and in the future; what entry should be made.

You have a couple of choices, which of course involve debiting the PPP liability: (1) credit capital paid in excess; or (2) by crediting the retained earnings. If the second choice is elected, whoever prepares the 2020 income tax return will have to explain how the retained earnings changed because of the PPP forgiveness, but that should be an easy problem to clarify.

But, if the entity (let us assume) paid a less percentage than the required 60% for payroll expenses, then it would have an amount (liability) that would have to be repaid with interest to the Federal government. You would have to normalize this account properly to state the liability owed. This is not a contingent liability, rather, it is a real and required liability that would/could be audited by the IRS.

     Income Approach

Again, if the liability has been extinguished, then the entity does not have to include the cash it received as income. However, any of the “approved” expenses may not be deducted within the income statement (remember, if the entries are made correctly, they were debited to the liability on the balance sheet). So, the sum difference is zero within the income statement and neither will affect the net income and/or the cash flow.

But, if the liability exists on the books at year-end, then there will be expenses that will become deductible and additional interest expense will have to be considered. However, another “problem” must be considered. The liability represents an “amount” received that was not forgiven, therefore, that amount must be included in income. It is not an operating income, so how should you account for the entry? It would make sense to include it as some type of miscellaneous income. By presenting it this way it could be normalized to zero as an extraordinary (one time) item and thus not affect the outcome of the net income. Yes, it will affect the outcome of the net income but in the same way capital gains would when normalized.

This raises another question, if the income must be normalized and the liability remains on the books, what is the corresponding debit? It would be the reverse as stated hereinabove, that being a debit to retained earnings. Go back to “T” accounts first learned in Accounting 101 and see for yourself how to balance the debits and credits.

If you are capitalizing the cash flow and properly accounted for the PPP loan as described hereinabove, then the indicated value would not be any different than if the PPP loan had not been taken.

However, if you are utilizing the weighted average cost of capital (WACC) (should be used when a company has significant debt on the books), the interest rate related to the PPP loan liability will have to be blended and weighted with the other loans and interest rates to properly state an interest rate in the WACC calculation.

If you are preparing a discounted cash flow, the future periods will now include the interest expense component related to the PPP loan repayment as an ongoing business deduction. I do not think that that deduction should be ignored as an extraordinary expense because the company did actually receive the financing.

     Market Approach

If you are valuing a small business and utilize either Bizcomps or ValuSource IBA databases, remember that the result will provide an Asset Sale, Control, Marketable indicated value. You will have to convert the asset sale indicated value to an equity value. Therefore, it will be very important that the PPP liability on the balance sheet be correctly normalized. Why? Because, to change the asset sale indicated value to the equity value, the specific current assets and possibly other assets (like security deposits) would be added and (usually) all of the liabilities would be subtracted in order to attain the ultimate equity value. Just remember that the only liabilities that would not be included is those directly related to any fixed asset (truck) and its collateralized loan that would be transferred to the buyer.

When utilizing the same databases, you may also obtain an indicated value from sellers’ discretionary earnings (SDE). As always, it is important to know how each database calculates its metrics. One includes depreciation while the other does not. For the most part, start the SDE with operating income before taxes, add depreciation and amortization (if appropriate), payroll taxes and other perquisites, profit sharing, health benefits, personal expenses, etc., interest expense and deduct interest income. In my opinion, SDE will be correctly stated even if the interest expense is incorrectly calculated.

If you are utilizing a selected metric to the revenue, gross profit, operating income, or cash flow and have correctly normalized the PPP unforgiven portion of proceeds received not as revenue, the indicated value would not be any different than what would have been calculated otherwise.


(*) The low interest rate only comes into play if the company has received more PPP funds than what was properly used for expenses. Therefore, the loan amount less the “forgiveness” amount will result in an amount that must be repaid to the Federal government with interest.

Mr. Rudich, CPA, ABV, CFF, MS, MCBA, CVA, ABAR, MAFF, CMEA, CM&AA, BCA, is the founder of the business valuation and litigation support services company, Business Valuation Group, LLC. His responsibilities include valuations of closely held and publicly traded companies, machinery and equipment appraisals, strategic business planning, budget and forecasting services, business consulting, business loss computations, depositions, and court testimony.

Mr. Rudich was named a “Business Valuation and Financial Forensic Master”, as part of the National Association of Certified Valuators and Analyst’s Industry Titans awards at their June 2016 Conference. He was selected into the Founders Circle of the of the Alliance of Merger & Acquisition Advisors in January 2013, elected to the Advisory Board in 2004, and received the 2008 Chair of the Year award in January 2009. He was admitted to the Westlaw Round Table Group, Washington, DC expert network as a Round Table Scholar in January 2009 and recognized by SmartCEO as one of the Top CPAs in the Baltimore/Washington, DC area in their September 2008 issue.

Mr. Rudich can be contacted at (410) 581-1888 or by e-mail to

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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