The terms COVID-19, CARES Act, Paycheck Protection Program (PPP), and PPP Flexibility Act of 2020 (PPP Flexibility Act), are likely now a part of your daily vocabulary. The introduction of these new programs means that there are now some important considerations that your nonprofit organization should be aware of as you continue to navigate through the next several weeks and months.
Since its launch in April 2020, many nonprofit organizations could apply for and receive funding under the PPP program. Since these organizations have received and are spending the funds, it’s imperative to understand how to ensure maximum forgiveness of these PPP funds. It is equally important to determine if there are any other implications on financial reporting or other funding streams that may need further attention.
Determining if Your PPP Loan is Debt or a Conditional Promise to Give
Although entities sign a promissory note with a financial institution—and in legal form, the PPP loan is debt—the underlying loan is, in substance, a grant from the federal government. Fortunately, unlike for-profit businesses, nonprofit organizations have specific guidelines to follow when it comes to accounting for grants—FASB ASC 958-605 Not-for-Profit Entities: Revenue Recognition. Whether or not you expect forgiveness for all or a portion of your PPP loan will determine which accounting guidance you should follow. There are essentially two options, either report the financial liability as debt in accordance with FASB ASC 470 or use FASB ASC 958-605 as a conditional contribution with the initial cash inflow from the PPP loan as a refundable advance. The refundable advance is reduced, and revenue recognized, once the conditions of release have been substantially met or explicitly waived. Any amounts that will not qualify for forgiveness or that an organization intends to repay will accrue interest.
Potential Complications with Government Grant-Funded Organizations
Nonprofit organizations that are substantially funded by federal and state grant funding (governmental grants) may have an additional layer of challenges. Most governmental grants that are cost reimbursement grants prohibit an organization from being reimbursed for the same cost twice (double-dipping). You cannot charge the same payroll or utility costs to the federal or state grant and receive reimbursement while also considering those as ‘eligible’ costs to plug into your PPP forgiveness application. Overhead cost applications also need to be considered to ensure no duplication of cost. The Office of Management and Budget recently released memo M-20-26, emphasizing the importance of not double-dipping with PPP Funds.
Talking with grantors and keeping open communication lines is critical as nonprofits navigate through the next weeks and months. Since many funders allow budget revisions or extensions, it’s crucial to take advantage of these opportunities if it makes sense for your business. It’s helpful to shift your grant budget to cover other allowable costs while saving the categories of costs allowable under the PPP for forgiveness. Another viable avenue to avoid potential double-dipping is to seek extensions for programs that had to cease or reduce capacity due to government-mandated shutdowns. Unfortunately, the details will likely lie with the individual awarding agencies—this means that decisions may not be the same across all agencies.
Consideration of the Forgiveness Period: Electing Eight vs. 24 Weeks
When the PPP Flexibility Act was signed into law on June 5, 2020, the period for forgiveness was extended up to 24 weeks. This extension will likely benefit most nonprofit organizations by maximizing forgiveness, allow for the digestion of potential impact with government funding, and provide answers to many outstanding questions. While ultimately this may delay recognition of revenue, if the PPP loan is forgiven and no government grant funding was impacted, then both your organization and your clients can rest easy.
When assessing the impact of using the eight or 24-week period, do not forget the rules surrounding reductions in full-time equivalents (FTE) that could reduce the amount of forgiveness. It is important to note that forgiveness is not only tied to the actual dollars spent.
While it would be nice to say the SBA, federal and state grantors, and lending institutions have it all figured out and have provided all the answers, we are not quite there yet. As you continue to move forward, always keep asking the questions, be diligent with your documentation, and adapt to change as more information comes forth. Always communicate regularly to your board on the status of forgiveness, challenges, or uncertainties with government funding that your organization could face. Don’t forget to plan for a scenario that may arise should a portion of the PPP loan not qualify for forgiveness. Most importantly, don’t lose sight of the original reason the PPP program was created—to support eligible organizations facing economic hardships created by the COVID-19 pandemic by providing them with forgivable loans to cover certain operating costs.
For specific questions regarding your situation, contact your local CRI business advisor for questions. Be sure to check out our COVID-19 Resources page for more articles, podcasts, and quick-hit webinars that offer additional resources and guidance.