As you plan to spend funds received through the Paycheck Protection Program (PPP) loan, there are many considerations not-for-profit organizations need to take into account. Not only must you plan to spend funds for allowable purposes (including payroll and benefits, rent, and utilities) to obtain forgiveness of all or a portion of the amounts borrowed, you also must consider how the utilization of the PPP loan forgiveness may interact with other funding your organization has received.
While we have yet to see authoritative guidance on the following topics, we suggest that you begin considering how the PPP loan forgiveness may interact with and affect the following:
For NFPs that have received cost reimbursement grants, track costs to be utilized for PPP forgiveness similar to a separate grant in order to ensure that the same costs are not applied both to a grant and utilized to create forgiveness of the PPP loan. Although SBA guidance does not specifically address it, we believe this would likely be considered double-dipping, either by the SBA, the grantors, or both.
NFPs with cost-reimbursement grant funding that will be impacted by this may consider requesting a two-month extension on the affected grants. This would allow for further achievement of grant objectives without additional funding from the grantors. The PPP funds would supplement the grants and the organization as intended.
Contributions Received With Donor Restrictions
Similar to the grant funding issue, we caution against applying the same costs to both donor-restricted contributions received for specific purposes and to the PPP loan forgiveness calculation. Logically, the same dollar of cost cannot consume two different dollars of funding sources.
Since the PPP funding is not restricted as to purpose, the organization will be able to allocate its resources in a manner that is most useful (i.e. PPP funds can be applied to general operations and restricted funds can be applied to designated programs). If general operations cannot utilize the full amount of PPP funding, NFPs may apply the remainder of PPP funds to designated programs in lieu of restricted funds. Since the PPP funding is time-restricted rather than purpose-restricted, it would normally be used first in order to avoid losing its eligibility. The purpose-restricted funds would still be available for designated programs after the PPP timeframe ends.
Unrelated Business Taxable Income
The current position of the Internal Revenue Service, as articulated on April 30, is that while the PPP loan forgiveness itself does not create taxable income, the expenses that are incurred in creating the PPP loan forgiveness are not deductible expenses for income tax purposes. Unless and until that position is changed, for NFPs that have unrelated business taxable income, we caution that expenses utilized in obtaining the PPP loan forgiveness should not also be deductible against an organization’s unrelated business taxable income in determining the calculation of tax due.
If the full amount PPP funds cannot be utilized by non-UBI activities, NFPs would still apply the remainder against UBI activities in order to use the PPP funds, but these amounts would not be deducted as expenses on the 990-T. The NFP would still receive a benefit equivalent to the PPP amount minus the tax reduction (i.e. approximately 75% of the PPP amount).
As guidance continues to be provided related to the PPP loan program, we will continue to alert you to key issues of importance.
How to Report Loan Forgiveness
NFPs with June 30 year-ends will likely not have received approval for loan forgiveness from the SBA at fiscal year-end, but will be in a position to assert compliance with criteria for loan forgiveness and that the loan, or a portion thereof, will not have to be repaid. At this time, there is not authoritative guidance for how to report the loan at year-end when the NFP is awaiting approval from the SBA. Nor is there a consensus on how to report amounts on the financial statements and related notes. We will advise as soon as guidance is published, including exposure drafts.
If you have questions about how the PPP loan program and forgiveness calculation impact your organization, please let us know. We’re here to help.