Nonprofits and PPP loans: what every organizational leader needs to know

The Paycheck Protection Program (PPP) has provided nearly 4.9 million loans to American businesses. It is estimated that 40 percent of eligible nonprofits received one of these lifelines.

If you run one of the nonprofits that received 3.7 percent of all loans made under this program, there are several points you need to be aware of and some of them are time-sensitive.

Determining Forgivable PPP Loan Amounts

One of the most critical aspects of the PPP loan forgiveness is understanding what loan amounts are eligible for forgiveness both in payroll and non-payroll expenses.

Forgivable payroll expenses includes:

• Compensation (not exceeding $46,154 per employee), including:
  • Gross salary, gross wages, gross commissions, and gross tips,
  • Vacation, parental, family, medical, or sick leave (unless the nonprofit was reimbursed under the Families First Coronavirus Response Act)
  • Allowance for separation or dismissal
• Employer contributions for employee group health care coverage and employee retirement plans
• State and local taxes assessed on the compensation of employees

Forgivable non-payroll expenses includes mortgage interest payments, rent or lease payments, and utility payments for the business incurred or in place prior to February 15, 2020

While the income tax treatment of forgivable expenses is not a concern for nonprofits, organizations still need to ensure they account for these funds properly.

Accounting Options for Nonprofit PPP Loan Forgiveness

Determining how to apply for a PPP loan and how to best use those funds may have been challenging. However, ensuring that you account for your loan and loan forgiveness appropriately can also be confusing and time-consuming.

Non-authoritative technical practice aids and current industry discussions show that nonprofits can use either the debt model under ASC 470 or the grant model under ASC 958-605. You can determine which option is best for your nonprofit. Neither one is recommended over another.

The Debt Model

It doesn’t matter if your nonprofit anticipates repaying its PPP loan or believes that it represents a grant that will be forgiven. You are allowed to account for the loan as a financial liability, according to FASB ASC 470.

You can also accrue interest under FASB ASC 835-30. The nonprofit wouldn’t acquire additional interest at a market rate. When governmental agencies prescribe interest rates, they are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest, for instance, government-guaranteed obligations.

Using the debt model, if some or all the PPP loan is forgiven, that income would be recognized when your nonprofit is “legally released,” meaning that the SBA forgives its debt.

The Grant Model

If your nonprofit doesn’t use the debt model, it should account for such PPP loans under FASB ASC 958-605 as a conditional contribution. However, to do so, it must:

• Expect that it will meet the PPP’s eligibility criteria
• Determine that the PPP loan represents a grant that is expected to be forgiven

The nonprofit must initially record the cash inflow from the PPP loan as a refundable advance. It’s not recognized until and unless the conditions are met or explicitly waived if it’s conditional.

Once the release conditions are substantially met or explicitly waived, the nonprofit can reduce the refundable advance and record it as a contribution.

Proper Accounting and Reporting is Crucial

There’s no doubt that PPP loan has certainly been the lifeline that many nonprofits needed to continue business in the COVID landscape. However, it has created uncertainty and confusion regarding proper accounting and reporting. Management needs to evaluate which accounting treatment is most appropriate for their nonprofit entity’s unique circumstances and what is most suitable for reporting financial statements.

It’s essential to note that you should expect an audit if your PPP loan exceeds $2 million. Incorrectly reporting or accounting for your nonprofit PPP loan or its forgiveness could come with severe consequences, such as years of IRS audits, the loss of 501(c)(3) status, and significant tax penalties and interest.

To ensure that you don’t risk your business to such fates, it’s highly recommended that you have a business attorney on your side. They can help you understand your options and reporting requirements so that you can fully receive the benefits the PPP is meant to provide for nonprofits.

John Snow and Chris Tzortzis of Hackstaff & Snow, LLC, are top Denver business attorneys with expertise spanning various industries. Specializing in renewable energy project development, commercial law, corporate law, and nonprofit tax advice, John Snow and Chris Tzortzis offer an in-depth understanding and knowledge of general nonprofit rules and regulations and are a trusted resource for business owners throughout Colorado.