We hope you all are doing well and weathering the storm caused by the COVID-19 pandemic. We want to share a few important updates with our nonprofit clients. There’s a lot going on and things seem to change continually regarding PPP updates for nonprofit organizations. We’ll touch on just a few areas for now…
PPP loan forgiveness and recording
We are still patiently waiting further guidance from SBA on the specifics of how the forgiveness will work for the PPP (Paycheck Protection Program) loans. At this point, it seems like it will be hard to receive full forgiveness based on the way the rules are currently written, due to the restrictions and how the periods fall, at least without tracking it closely and potentially taking some extra steps. Whether you use our tools/spreadsheets on our website or something else, we’re highly suggesting close tracking of the spending and running the forgiveness scenarios as you go in order to maximize forgiveness. You can record the related PPP eligible expenses like normal but either track through a spreadsheet or through your general ledger (i.e. set up a new class) and then make transfers from your PPP bank account (we’re highly suggesting a separate account) to your operating account as you spend it for PPP eligible expenses. Initially, you should record the loan proceeds as debt. Current guidance shows you would record income for the amount forgiven at the time it is approved for forgiveness. We are anticipating further guidance on this, which could affect the timing of revenue recognition.
PPP loan certifications / impact statement
As a follow up to our overall client e-blast on May 3rd and related blog “Should I Keep My PPP Loan?”, we wanted to send something specifically to our nonprofit clients on the increased scrutiny that’s been going on with the PPP loan recipients. This entire program is evolving rather quickly – and the comfort level for borrowers to apply a month ago is much different than the comfort level today. What seemed like simple eligibility requirements in the beginning is becoming more complex as time passes and as the Treasury and SBA produce additional rules and regulations.
We recommend you thoroughly document your eligibility – your reasons for applying for and keeping the loan, both qualitatively and quantitatively. We’re calling it an impact statement – a document that lays out the economic factors existing for your organization now, in light of the SBA’s most recent position that borrowers who are unable to demonstrate economic uncertainty and an absolute need for the loan should return the funds in full by May 14, 2020 (the deadline was extended by Treasury through FAQ #43 published May 5, 2020).
The following certifications are part of the PPP application process:
- “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
- “The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”
The increased scrutiny stems from the SBA’s FAQ #31 which was published April 23rd and refers to the 1st certification above, applies to both borrowers considering whether to apply for a PPP loan and borrowers who have received PPP funds, and in part reads, “Borrowers must make this certification in good faith, considering their current business activity and their ability to access other sources of liquidity enough to support their ongoing operations in a manner that is not significantly detrimental to the business.” The Government has publicized this issue after frustration with finding that several public companies have applied for and been approved for PPP loans.
On April 28, 2020, SBA’s FAQ #37 further clarified that the latest changes in the certification also apply to private businesses as well, not just large companies as was the subject of FAQ #31. This would also include nonprofits, as the government is basically saying this applies to all PPP loan applicants, and has given specific examples that have included nonprofits, such as private schools.
What Do I Do Now?
Create an impact statement. It could include a narrative as well as financial forecasts. This is for your Organization’s records and documents what you are experiencing that necessitates the loan. Be specific using forecasts, KPIs and other data. Factors to consider can include, but are not limited to:
- Quantify both monetary and percent revenue decreases due to postponed/canceled events over a recent period of time (month or quarter). Compare the decreases to the same month, or quarter, in the prior year.
- Quantify other negative impacts on program delivery due to COVID-19: furloughs, layoffs, sick leave, reductions in pay or other threats to employee retention, and changes in how your programs are performed (i.e. switching to remote or online activities)
- You might also include any trends you are seeing with delayed funding from grantors – private or governmental, delayed or decreased earned revenue, or other delays and decreases that are impacting cash flows.
- Quantify any changes in donor giving, whether through formal campaigns or general solicitations.
- Quantify changes in expenses as well.
If helpful, you could demonstrate the impacts to your organization by attaching documents, which may include an updated 2020 budget and forecasts in light of COVID-19, along with a comparison to pre-COVID budgets and 2019 financials. If your large fundraising events are yet to happen, updating your 2020 budget can help demonstrate the impact of COVID-19.
Address liquidity, explaining why you have determined that accessing other sources is not advisable for your organization at this time. Some potential reasons include:
- Limited availability on a line of credit
- Limited access to endowments or other reserves:
XX% ($x,xxx,xxx) of endowments are comprised of permanently restricted funds; based on donor agreements, the organization is not allowed to liquidate such permanently restricted assets (i.e. principal or corpus).
XX% ($x,xxx,xxx) of endowments are comprised of temporarily restricted funds which the organization is obligated to use in accordance with donor time or purpose restrictions.
How have your endowment balances been affected by the recent market?
- Limitations related to reserves or other assets:
For your reserves, investments, cash, or other liquid assets, address any limitations as far as donor restrictions, board designations, or planned use of funds. Include timing of events, for example, if you hold a large annual fundraiser that is needed to support operations through-out the rest of the year.
- Consideration of current debt and the potential to increase debt without substantial detriment to the organization’s operations.
Finally, document a general overview for the use of PPP funds. Your general strategy should document the intent to use at least 75% or more of the PPP proceeds for payroll costs and the rest in accordance with SBA rules.
The impact statement is only for your organization’s records at this point. If you feel it’s necessary – you could present to the finance committee (or Board if appropriate) to incorporate as a part of the committee’s (Board’s) official minutes.
While going through this process, you will need to decide if you’re comfortable with the certifications or if you should consider returning the funds. Documenting the need now might alleviate pressure and save time during the forgiveness process – or during the SBA’s audit process (whatever that will look like). On April 28th, Treasury Secretary Steven Mnuchin announced the government will “review all loans in excess of $2 million, in addition to other loans as appropriate”.
Single audit implications
We had been waiting for guidance on whether the SBA loan programs would be subject to Uniform Guidance single audit requirements through OMB. A single audit is a compliance audit separate and in addition to an organization’s financial statement audit and is required when total federal funds exceed $750,000 for the organization’s fiscal year. SBA has now determined that PPP loans made to nonprofits will not be subject to single audit requirements. However, they have determined that loans to nonprofits under the Economic Injury Disaster Loan program (EIDL) will be subject to the single audit requirements.
On May 5, 2020 Treasury released an interim final ruling on nondiscrimination and additional eligibility criteria which specifically addresses nonprofits, including religious nonprofits. To read more, go to:
Watch our website for updates and webinars. Feel free to reach out to us with further questions and let us know if you want any help with calculations or looking at different scenarios. Anna Lovegren, CPA, can be reached at email@example.com or Tiffany Shermak, CPA at firstname.lastname@example.org