PPP Loan & Forgiveness for Nonprofits
Article

PPP Loan & Forgiveness for Nonprofits

September 29, 2020

Determining Appropriate Accounting Method for a Nonprofit PPP Loan

If your 501(c)(6) organization received a PPP loan, it's time to determine the appropriate accounting method. Most 501(c)(6) associations will treat PPP loans as either debt or government grants. The method you use depends on whether your organization expects to meet the eligibility and forgiveness criteria for all or substantially all of the PPP loan.

If your organization expects that it will not meet the criteria and will need to repay all or substantially all of the loan, then the loan should be accounted for as debt.

If your organization expects that it will meet the criteria and receive full forgiveness, you may account for the PPP loan under one of two options:

Option #1: Account for the PPP loan as debt.

Option #2: Account for the PPP loan as a government grant.

Either option is acceptable, but there are distinct differences in the initial accounting for the loan proceeds, the timing of the recognition of income, and the category of the income recognized that you should consider when deciding between them.

The following examples (provided in a February 2021 special report from the American Institute of Certified Public Accountants Center for Plain English Accounting titled “PPP Loans: Debits, Credits, and Financial Reporting FAQs”) show the accounting for each of the options.

Example PPP Loan Basic Facts:
Entity Type: 501(c)(6) association
Loan Amount: $100,000
Interest Rate: 1% (Monthly interest of $83)
Loan Received: March 1, 2021
Year End June 30, 2021
Forgiven Date September 1, 2021 (SBA Notification)

Option #1: Accounting for the PPP Loan as Debt

Authoritative Guidance: FASB ASC 470, Debt

Receipt of loan funds journal entry:

Under this option, your organization is considering the loan to be a debt.

Account Debit Credit
Cash $100,000
PPP Loan $100,000

Monthly interest expense journal entry:

Under the debt accounting option, interest should be accrued each month. All PPP loans carry an interest rate of 1% (because the interest rate was set by a government agency, imputed interest is not required).

Account Debit Credit
Interest Rate $83
Accrued Interest $83

Loan forgiven journal entry:

For PPP loans accounted for under FASB ASC 470, the loan is not derecognized until legal release of the liability has occurred (the date Loan Forgiveness Application Form 3508 has been approved).

When legal release has occurred and the liability is derecognized, the forgiven amount should be recorded as a separate line item in “other income” with an appropriately descriptive title, such as “Forgiveness of PPP Loan.

Option #2: Account for the PPP Loan as a Government Grant

Authoritative Guidance: FASB ASC 958-605 Not-for-Profit Entities-Revenue Recognition-Contributions

Receipt of loan funds journal entry:

Under this option, your organization is considering the loan to be a conditional grant. You would initially record the loan as a “Refundable Advance” (liability).

Account Debit Credit
Cash $100,000
Refundable Advance (Liability) $100,000

Loan forgiven journal entry:

Under FASB ASC 958-605, a transfer of assets that is a conditional grant is accounted for as a “Refundable Advance” (liability) until the conditions have been “substantially met” or explicitly waived by the donor. Therefore, you would treat the PPP loan like deferred revenue.

The key to determining when to recognize the grant revenue is when the conditions have been “substantially met.” In accordance with FASB ASC 958-605, conditions can be met in stages or over a period of time.

There are two possible positions under Option #2 that you can take when it comes to having “substantially met” the conditions:

Position A: Recognize grant revenue as the PPP funds are spent on “qualified expenses” (assuming your organization has also met the full-time equivalent employees and limitation in reduction in compensation conditions).

Under this position, having to submit Loan Forgiveness Application Form 3508 is considered to only be an administrative requirement (and not a condition).

Position B: Recognize grant revenue after the association has submitted its Loan Forgiveness Application Form 3508 and loan forgiveness has been approved.

Under this position, the bank/SBA review and approval of the Loan Forgiveness Application Form is considered to be a condition.

When PPP grant revenue is recognized, the revenue should be broken out on a separate line with an appropriately descriptive title, such as “PPP Government Grant” so that users of the financial statements can easily identify the amount recognized and better compare the other support and revenue line items in the financial statements.

Account Debit Credit
Refundable Advance (Liability) $100,000
PPP Government Grant $100,000

Form 990 Reporting

Form 990 presentation will generally follow the audited financial statements. If the loan is treated as a “conditional grant” on the audited financial statements, the association should report on Form 990, Part VIII, Line 1e government grants (contribution) as the contribution is recognized and no interest expense would be incurred. If the loan is treated as a “loan” on the audit report, the organization should report on that amount on Form 990, Part X, balance sheet, until the loan is forgiven and report any interest expense accrued.

For California nonprofits, if the forgiven PPP loan exceeds $5,000, the nonprofit should report the name, amount, the date the loan was received, and the mailing address of the SBA on California Form 199. If the nonprofit is required to file the California Form RRF-1, the nonprofit should check “Yes” to Form RRF-1, Part B, Question 5, “During this reporting period, did the organization receive any governmental funding?” and report the name, mailing address, contact person name and phone number of the SBA.

Accounting for Nonprofit PPP Loan Modifications

Modifications to the PPP loan program have caused an issue many nonprofit organizations are facing with the derecognition of the PPP loan and any potential mismatch (matching principle) with the qualifying expenditures. These additional modifications were made on June 22, 2020, when revised interim final rules were also issued. Below is a summary of the primary modifications to the PPP loan program from the SBA website:

  • The percentage of a borrower’s loan proceeds which must be used for payroll costs was reduced from 75% to 60%.
  • Borrowers can elect to use a 24-week covered period or the original 8-week period. (Entities that received funds prior to June 5 may still use the 8-week period.)
  • Provides one safe harbor from loan forgiveness reduction based on reductions on full time equivalents (FTEs) if the entity:
    • Is not able to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020, by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OHSA), related to worker or customer safety requirements related to COVID-19.
    • Files form 3508EZ.
  • Changes from June 30, 2020, to December 31, 2020, (or the date of the forgiveness application, if earlier) the date at which FTE reductions or pay rate reductions can be cured to avoid a reduction to forgiveness.
  • Increases from two to five years the maturity of loans issued on or after June 5, 2020. (Borrowers who received funding before June 5 may also ask their lender to extend their loan period, but this will be at the lender’s discretion.)
  • Extends the deferral period for principle and interest on loans to the date the SBA remits the loan forgiveness amount to the lender or 10 months after the loan forgiveness covered period if the borrower has not applied for forgiveness.

In addition to the changes mentioned above, once forgiveness is applied for, based on the SBA loan review procedures, the lender has 60 days to issue a decision to the SBA, which then has 90 days to review the PPP loan before remitting funds to the lender. Therefore, this increases the length of time from receipt of funds until the final forgiveness amount is approved beyond a year in some cases. Borrowers may also apply for forgiveness using the 3508EZ form, provided they meet one of the three requirements to do so as noted in the instructions to the form.

Supplemental Nonprofit Questionnaire

Update as of 07/02/2021

On Friday, July 2, the Small Business Administration (SBA) officially announced they would no longer request the Loan Necessity Questionnaires (SBA Form 3510 and 3511) (sic) for any PPP loan reviews.

However, any borrower who has not yet filed for forgiveness of a large loan should still prepare a file memo that outlines the business conditions necessitating the loan in the event of possible future audits of the forgivable spend.

Prior Guidance on Supplemental Questionnaire

The SBA released new draft forms for larger PPP loan recipients to provide additional information. Lenders are expected to send the new Form 3509 (for-profit) and Form 3510 (nonprofit) to borrowers that have original PPP loan amounts of $2 million or more. Although it’s not clear yet how the SBA will use the data in its review, this may be just a first step in data collection as part of the audit process, or a way for the SBA to reduce the depth of audits by filtering out organizations that clearly meet the certification of need based on the questions alone. Overall, the tone of the questionnaire was more specific and comparative to 2019 than many expected.

Below is a summary of the form and considerations for nonprofit organizations:

General

  • Provide gross receipts, contributions, and expense for Q2 2019 and Q2 2020.
  • Has the borrower been ordered to shut down by a state/local authority due to COVID?
  • Has the borrower been ordered to significantly alter its operations by a state or local authority due to COVID, and what were the cash outlays?
  • Has the borrower voluntarily ceased or reduced operations due to COVID?
  • Has the borrower voluntarily altered its operations (other than ceasing or reducing operations)?
  • Did the borrower begin any new capital improvement projects not due to COVID, and what were the cash outlays?

Liquidity Assessment

  • Provide the value of cash, savings, and temporary cash investments as of the last day of the calendar quarter immediately before the date of the borrower’s PPP loan application.
  • Did the borrower prepay any outstanding debt between 3/13/2020 and the end of the covered period?
  • During the covered period, were any of the borrower’s employees compensated over $250K annualized? If so, how many employees and what is the total amount of compensation during the covered period of all such employees?
  • Are there any restrictions on the borrower using net income or cash, savings and temporary cash investments for payroll and other costs?
  • Does the borrower have an endowment? If so, detail the types and value of each asset in each endowment as of the last day of the calendar quarter before the date of the loan application.
  • Describe any restrictions on the use of the assets.
  • What was the value of the non-cash investments as of the last day of the calendar quarter before the loan application?
  • Is the borrower a school, college, or university?
    • If so, what is the median tuition?
    • Did the borrower offer financial assistance to students for 2019-2020 due to COVID?
    • Did the borrower’s revenues from tuition decrease for 2019-2020 due to COVID relative to 2018-2019?
  • Did the borrower provide health care services?
    • Provide program service revenue for patient care comparison between Q2 of 2020 and Q2 of 2019.
    • Did the borrower offer discounts on patient care due to COVID?
    • Did the borrower receive any other CARES Act funds?

Organizations who already documented their rationale for PPP loan eligibility can leverage their initial eligibility documentation to support responses to this questionnaire. Be prepared to speak to your balance sheet, including endowments, investments, cash and non-cash savings. Describe restrictions on the assets, keeping in mind whether the organization can access those funds for payroll costs or what the impact to the organization of accessing these funds could be even if they are unrestricted.

For schools, the focus seems to be on the tuition impact to the 2019-2020 school year, so be prepared to articulate the impact if tuition wasn’t reduced during that period.

Other things to consider is timing of your loan forgiveness application, as forgiveness is due within 10 months from the end of the organization’s covered period, as well as how you are booking the loan for financial statement purposes. Some organizations have decided to book the loan as debt until they receive formal forgiveness out of concerns from the questionnaire.

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