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PPP Loan Forgiveness and Reporting for Nonprofits

The last year has been filled with uncertainty and for many Nonprofits (NFP’s) the area of most concern relates to their Paycheck Protection Program (PPP) loans they received. As part of that uncertainty they are currently facing, NFP’s will have to make decisions on how to report their loans in their Financial Statements and on applying for forgiveness of their PPP loans.

Financial Statement Reporting
The American Institute of Certified Public Accountants (AICPA) has provided guidance on the available choices PPP loan recipients have for reporting the amounts received from the SBA’s Paycheck Protection Program. NFP’s should follow one of two methods to account for the funds received under from this program: the Debt Method under FASB ASC 470 or the Grant Method under FASB ASC 958-605.

Under the Debt Method (FASB ASC 470), NFP’s would account for the PPP loan as a financial liability and accrue interest. The accrued interest would not be calculated at the market rate as one would expect but at the stated interest rate. The financial liability would remain on the books until the loan has been forgiven and “legally released” or the liability has been paid in full to the creditor.

Under the Grant Method (FASB ASC 958-605), the organization would account for the PPP loan amount as a conditional contribution in which the receipt of the loan would be treated as a refundable advance. The refundable advance would be reduced and recognized as a contribution once the conditions of release have been substantially met or explicitly waived.

Both methods would require an additional disclosure in the financial statements on the accounting policies and the impact of the loan to the organization.

Application for Forgiveness
Despite new legislation and guidance, there is still uncertainty in the available guidance related to forgiveness. While guidance has been released in conjunction with changes made to forgiveness through the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (part of the Consolidated Appropriations Act, 2021), many organizations still find themselves interpreting how certain guidelines may or may not pertain to their organization. Ultimately, the primary concern of the NFP’s we work with is to consider all options that could maximize the organizations’ loan forgiveness.

NFP’s have several considerations to make as they apply for forgiveness including which form to use. Will they use 3508S, 3508EZ, or 3508? Factors having an impact on forgiveness applications related to the form to use and how to file include:

  • size of the loan and structure of your organization
  • whether employees were paid at reduced rates during the Covered Period
  • whether full-time equivalents (FTEs) were reduced during the Covered Period
  • when to end their Covered Period for forgiveness
  • when to file the forgiveness application

Following the guidance will help you to determine which form to file, but how should you determine when to file?

Filing early may not be in your best interests. For instance, the forgiveness process has generally been made easier as Borrowers continue to wait to submit their forgiveness applications. This is evidenced by the extension of the Covered Period allowed by the Paycheck Protection Program Flexibility Act (PPPFA), the release of the original S application, and the release of the modified S application on January 19, 2021. On the other hand, you will need to consider that applications for forgiveness do not have a single due date; instead, Borrowers that do not file for forgiveness within 10 months from the end of their covered period will need to start making loan principal and interest payments. Whenever Borrowers submit their application, they should expect the possibility for substantial review time; although many Borrowers have received quicker turnaround, the law does allow the lender and SBA a total of 5 months to review forgiveness applications.

One thing is certain, the calculations are confusing! NFP’s need to map out all the available options to determine what strategy will work best for their organization. This may require laying out several scenarios to achieve the best results. Where there may be ambiguity in the guidance, NFP’s should clearly document any decisions made and remain patient as the program may continue to evolve as a result of legislation or the issuance of additional frequently asked questions, interim final rules, procedural notices, or other guidance.

If you have any questions about your PPP Loan, loan forgiveness application, and financial statement reporting, please contact your HBK Advisor.

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About the Author(s)
Judy works primarily in the audit department for governmental, nonprofit and for-profit entities. During her many years in practice, she has gained extensive knowledge in local statutes, rules and regulations applicable to New Jersey Government. She has experience with auditing authorities, municipalities, school districts, public charities, among many other types of entities. Judith has extensive single audit experience and was the lead partner in the AICPA Governmental Audit Quality Center for Spire CPAs prior to their merger with HBK. Judy is also a registered municipal accountant, a registered public school accountant, and a certified municipal finance office member in the state of New Jersey.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.