Regulatory and Industry News Alerts from Armanino

PPP Loan Accounting for 501(c)(6) Associations

by Dan Moors, Tom Schulte, Matt Petroski
September 10, 2021

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.

If you have questions about PPP accounting for your association, reach out to our dedicated nonprofit audit experts.

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Dan Moors - Partner, Audit - San Jose CA | Armanino
Matt Petroski, Director, Tax - Armanino
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