Paycheck Protection Program considerations for NFPs
Your not-for profit organization was successful in obtaining a Paycheck Protection Program (PPP) loan. So what do you do now? To assist not-for-profits with PPP funding, we have provided answers to some of the most commonly asked questions below.
1. What can PPP loan funds be spent on?
A: Funds obtained from a PPP loan can be spent on the following: payroll costs, payments of interest on mortgage obligations incurred before Feb. 15, 2020, rent payments on leases dated before Feb. 15, 2020, and utility payments under service agreements dated before Feb. 15, 2020. (Note that for loan forgiveness, no more than 40% of the forgivable amount can be spent on non-payroll costs, up from the previous rule of no more than 25%. For more information, see our overview of the recently passed Paycheck Protection Program Flexibility Act.) Borrowers certify in the Borrower Application Form that “the funds will be used to retain workers and maintain payroll” or for one of the previously mentioned expenses.
2. If an organization receives funding from another source to support program expenses, is the organization still eligible to receive a PPP loan?
A: Yes; however, if the PPP-eligible costs are reimbursed or covered by another funding source (federal, state, local, or other), the proceeds from a PPP loan may not be utilized to cover these payments.
3. What is the time frame for using the loan funds in order to qualify for loan forgiveness?
A: Under previous legislation and a PPP Loans Frequently Asked Questions (PPP FAQ) issued by the Department of Treasury and Small Business Administration, the forgiveness amount for payroll costs depended on the borrower’s payroll costs over an eight-week “covered period” that begins on the date the lender makes the first disbursement of the borrower’s PPP loan. The new PPP Flexibility Act extends the covered period to the period beginning on the date the loan was disbursed and ending on the earlier of the date that is 24 weeks after loan origination or Dec. 31, 2020. (A borrower who has already received a loan may choose to keep the original eight-week period rather than use the new 24-week one.) “The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval,” the PPP FAQ says. (Read more from the FAQ in our running guide to PPP updates from the Treasury and SBA.)
Loan funds used to satisfy non-payroll obligations as set forth in response to Question #1 must be paid during the “covered period,” which is defined in the Loan Forgiveness Application.
4. Should we use the accrual or cash method?
A: Both with conditions. For payroll costs, the Loan Forgiveness Application defines eligible payroll costs as payroll costs either paid or incurred during the Covered Period or Alternative Payroll Covered Period. The Covered Period is defined in the most recent application as the period beginning on the date the loan was disbursed and ending on the earlier of the date that is 24 weeks after loan origination or Dec. 31, 2020; the Alternative Payroll Covered Period is the 24-week period that begins on the first day of the organization’s first pay period following their PPP Loan Disbursement Date and ends no later than Dec. 31, 2020. Again, borrowers that received their loan before June 5, 2020, may choose to instead use the original eight-week period.
Nonpayroll costs “must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
5. How should we manage the loan funds that we received?
A: A conservative approach would be to open a separate bank account, but that is not required. The entity should create a new program code in their chart of accounts to allow for accurate tracking of expenses.
6. If eligible, how do we account for the forgiveness of these funds?
A: The borrower should complete the Loan Forgiveness Application or lender equivalent and submit to its lender. The AICPA has provided guidance that allows for not-for-profit entities to treat forgiveness of a PPP loan as debt and loan forgiveness or as a conditional contribution. If the not-for-profit elects to record the PPP loan as debt, once forgiveness has been determined, the entity will recognize a contribution. This cancellation of the debt meets the definition of a contribution in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) glossary. If the not-for-profit elects to record the PPP loan initially as a conditional contribution (and therefore a refundable advance), in accordance with Accounting Standards Update 2018-08, revenue would not be recorded until all barriers have been met and there is no longer a right of return.
7. Will loan forgiveness be reduced if an employee that was previously laid off or given a reduction in hours is offered re-employment or a restoration in hours but declines?
A: No. If an employee is offered re-employment or a restoration of hours but declines, the borrower may exclude this employee from the full-time equivalent headcount when determining loan forgiveness, provided certain conditions are met, according to an Interim Final Rule on Loan Forgiveness dated May 22. (Read more from this Interim Final Rule in our running guide to PPP updates).
8. How is loan forgiveness impacted if I reduce an employees’ salaries or wages, or if an employee is no longer with the organization as a result of termination or voluntary resignation?
A: Per the May 22 Interim Final Rule, a reduction of an employee’s salary or wages in excess of 25% will result in a reduction in the amount of loan forgiveness unless the wages are restored prior to June 30, 2020. In the PPP Flexibility Act, the date to restore wages was extended to Dec. 31, 2020. The reduction in excess of 25% must be reduced from the total forgiveness amount.
The termination or voluntary resignation of an employee will not have an impact on loan forgiveness. The guidance provided allows the borrower to count such an employee toward the full-time equivalent calculation at the same level as before the reduction.
9. How should we record the loan if we have submitted our Loan Forgiveness Application and the lender has not approved it before we are ready to issue our financial statements?
A: Treatment will depend on how management intends to record the PPP loan as described in Question #6. If the not-for-profit records the PPP loan as debt, then the forgiveness of this debt would be recorded as a gain contingency under ASC 450-30. Gain contingencies are not recorded in the financial statements until the gain has occurred, which in this case would be when the lender or the SBA has rendered their decision on forgiveness of the PPP loan. If the lender or the SBA renders their decision after the balance sheet date but before the issuance of the financial statements, management would be required to disclose that decision but would not adjust the loan balance.
If the not-for-profit intends to record the PPP loan as a conditional contribution, a refundable advance would be included in the statement of financial position with an accompanying footnote disclosure.
10. Are we required to report the loan on our Schedule of Expenditures of Federal Awards (SEFA)?
A: The AICPA Governmental Audit Quality Center released Alert No. 404, notifying borrowers that the SBA has stated that PPP loans made to not-for-profit entities are not subject to the Uniform Guidance single audit, and therefore they are not required to be reported on an organization’s SEFA.
11. What compliance issues should I be concerned with?
A: Borrowers of a PPP loan are required to make certain “good-faith” representations to the lender and SBA regarding the need for and underlying calculations of PPP loan amounts. Upon completing the Loan Forgiveness Application or lender equivalent, the borrower must make certain representations that the loan proceeds were utilized for qualified payroll and other covered costs of the loan program.
While all organizations should maintain accurate and adequate records to support the payments made from loan proceeds, the SBA and Treasury established a safe harbor as noted in the PPP FAQ. Under this safe harbor, any borrower, along with its affiliates, with a loan of less than $2 million “will be deemed to have made the required certification concerned the necessity of the loan request in good faith.”
12. What financial reporting requirements should we be considering with these funds?
A: More guidance is needed, but as previously mentioned, we do know that for any portion of the loan to be forgiven, the borrower will be required to submit the Loan Forgiveness Application (or lender equivalent) and documentation to verify costs as outlined in the Loan Forgiveness Application.
13. What impact will forgiveness of the PPP loan have on our Form 990 and related state return?
A: The IRS issued Notice 2020-32 to indicate that “no deduction is allowed … for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan” under the PPP. However, at this time, we are still waiting on additional guidance and clarification as to the treatment for exempt organizations reporting on Form 990 and their related state returns.
14. When our organization applied for the PPP loan, certain information was not available or clear. Since then, the Department of Treasury has issued guidance, and our loan application may not comply with the new guidance. What impact does the new guidance have on our loan?
A: Per the PPP FAQ, if a borrower relied on interim guidance that was relevant at the time that the loan application was submitted, then no further action is necessary.
15. The interest rate on PPP loans is assumed to be below market rate. Do we need to impute interest?
A: No, in accordance with ASC 835-30-15-3(e), a transaction between the borrower and a government agency does not require the borrower to impute interest.
For more information about the Paycheck Protection Program, please visit CohnReznick’s Coronavirus Resource Center for articles, on-demand webinars, and more. For advice regarding your specific situation, contact your accounting professional or our team.
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Coronavirus Resource Center
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