From GTPlanet Game Guides

Performance points (PP) are a feature added in Gran Turismo 5: Prologue's Spec II update, and are vital to higher level races both in the single player and online modes.

Overview

PP is counted based on the setup of the car's power, weight, aerodynamics and tire choice, other options (including, but not limited to: TCS, Gear Ratios, Camber angle, TOE in/out, Ride Height, etc.) do not effect the value of the PP.

Online

Online, PP is used to determine where the user can race, there are 4 levels (as of July 1st) of PP, 500, 600, 700, and 750.

The car can be tuned to any number in between, as long as it fits the rules for the event (In theory, the user could enter a 200PP car into a 750PP race, although they will most likely be beaten by cars with higher PP values).

Offline

Offline, PP is used in a few "S" Class events, to limit how well the player's car can perform.

Tournaments

GTPlanet has it's own tournaments that may restrict how much PP is allowed during the race.