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Beyond public health risks, the COVID-19 crisis poses a significant threat to non-profit organizations. As of August 8th, the Small Business Administration (SBA) has closed the application for loans through the Paycheck Protection Program (PPP).  As a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, this loan incentivizes organizations to maintain their current workforce without significantly reducing salaries.

The PPP loan is available to most small businesses and non-profit organizations that meet certain size requirements.  However, given the recency of the CARES Act, there is no traditional way of accounting for PPP Loans within nonprofit guidance.  This level of novelty naturally causes some confusion. As a non-profit seeking to benefit from this offer, make sure you understand the nature of this loan as well as how to recognize it in your accounting. 

A Conditional Contribution

As a non-profit organization, you may elect to treat the PPP loan under the debt forgiveness model or as a conditional contribution.  In the essence of most nonprofits, the conditional contribution model is most practical and aligns with other sources of agency funding including most government awards.  While technically a form of debt, the PPP loan essentially functions as a grant for nonprofits.  This is due to the high potential for forgiveness. Those seeking forgiveness need to meet a few conditional requirements. Mainly, loan recipients must spend funds in accordance with SBA guidance and maintain a certain level of employment or meet safe harbor requirements.  In meeting these requirements, loan forgiveness is highly likely.

Conditions for Forgiveness

The SBA is clear in stating how your non-profit should use the PPP loan proceeds.  The funds from this loan are to be used for payroll, mortgage interest payments, rent, and utilities. The mortgage, rent, and utility agreements must all have been in place prior to February 15th, 2020. Additionally, no more than 25% of the loan may be used for non-payroll expenses or 40% for loans originated on or after June 5, 2020.  Only by spending these funds on the approved expenses can you expect your loan to be forgiven.

Recommended Accounting Method

Remember that you must be able to meet the conditions noted above before you can recognize the PPP loan as a contribution. If you are confident that you can meet the conditions for forgiveness, you are ready to consider how you will account for the PPP loan.  At this stage, it is critical that you understand what accounting method you should use.

Fortunately, The American Institute of Certified Public Accountants (AICPA) provides detailed instruction to aid you in accounting for the PPP loan. The AICPA suggests that loan recipients should follow guidelines outlined in The Accounting Standards Codification (ASC) put forth by the Financial Accounting Standards Board (FASB). The section of this document that is most relevant to PPP loans is FASB ASC 958-605.  This section covers all details regarding conditional contributions specifically as they relate to non-profits.   

Conclusion

As COVID-19 causes more challenges for organizations of all varieties, it is important to recognize opportunities for assistance.  By using a PPP loan in accordance with SBA and AICPA guidelines, your non-profit has a greater ability to continue functioning while maintaining a level of stability for your workers.  Should your organization need additional support recognizing the PPP loan, please contact us today.

References

“Business Loan Program Temporary Changes; Paycheck Protection Program –

Requirements – Loan Forgiveness”. Sba.Gov, 2020, https://www.sba.gov/sites/default/files/2020-05/IFR%20Forgivenss%20FINAL.pdf  Accessed 7 July 2020.

“Paycheck Protection Program”. Sba.Gov, 2020,

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#section-header-7   Accessed 7 July 2020.

“Q&A Section 3200”. Aicpa.Org, 2020,

https://www.aicpa.org/content/dam/aicpa/interestareas/frc/downloadabledocuments/tqa-sections/tqa-section-3200-18.pdf  Accessed 7 July 2020.

Freedman, Robert. “How Companies Can Account For PPP Loans Under FASB

ASC 470″. CFO Dive, 2020, https://www.cfodive.com/news/payroll-protection-program-accounting-fasb/579830/  Accessed 7 July 2020.

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