Government Grant Recipients Face an Uncertain Road to PPP Loan Forgiveness
By Bruce L. Blasnik, CPA, CGMA, Partner
Nonprofit organizations (“nonprofits”) that receive significant amounts of federal and state grant funding (“government grants” or simply “grants”) are likely to face challenges in maximizing the benefits of their Paycheck Protection Program (PPP) loans. Most government grants are structured as cost reimbursement contracts, and they prohibit “double-dipping” – you can’t be reimbursed for the same cost twice.
The guidance on how this will impact the forgiveness of PPP loans is scant, to say the least. And while the federal government may theoretically be neutral with respect to which federal dollars an organization keeps and which they lose, that is clearly not the case with state grantor agencies. State agencies, all of which are under significant financial stress, stand to benefit if they disallow grant costs covered by forgivable PPP loans.
Forgive or Repay
Here are four possible scenarios which could occur with respect to forgiveness of PPP funds for nonprofits:
- Federal and state governments will recognize the extreme duress faced by nonprofits and neither the federal agencies nor state agencies will claw back or disallow any funding. While this is certainly a possibility, it is probably not the likely outcome.
- Nonprofits will be allowed to keep all their PPP funds and the full amount of the loan will be forgiven providing they meet the applicable requirements for forgiveness, but federal and state agencies will claw back or disallow grant funding for the forgiven costs. Given the financial dire straits many states are in, this is, no doubt, what the states are counting on. This, in essence, allows the states to be the pass-through beneficiaries of the PPP funds, which they were not eligible for directly.
- Nonprofits will be allowed to keep all their PPP funds, but a portion of those funds will not qualify for forgiveness because the costs were not really borne by the nonprofit agency. The unforgiven PPP funds will have to be repaid over time, but the PPP funds would not supplant federal and state funding. Short of no claw back at all, this is the best outcome for nonprofits. Being able to retain all the PPP loan funds, even as a long-term loan, could be the difference between survival and demise for many nonprofits, particularly in the face of future funding delays, freezes, or cuts.
- It turns into a free-for-all where every federal and state agency makes their own rules, leaving nonprofits in a quandary, not knowing what to do or how to proceed. This is a very real and unfortunate possibility, and we are already seeing signs that this is beginning to happen. The PPP has generated a multitude of questions and issues for borrowers (and lenders). So far, the Small Business Administration (SBA) has been slow to respond, and often the responses themselves have generated more questions than answers. When you consider the fact that the SBA does not typically deal with the nonprofit sector, it seems likely that guidance on this very important issue will be late in coming, ambiguous and insufficient. Let’s hope this is not the case.
Action Plan
Managing through the COVID-19 crisis has stretched many nonprofits to their limits. Unfortunately, there is more to do, and the time to start is now.
- If an entity expects to meet the forgiveness criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, the entity may record the loan as a refundable advance. The advance would be recognized as income once there is reasonable assurance that it is probable the conditions for recognition have been met. (This is the accounting model promulgated by International Accounting Standards No. 20 and Accounting Standards Codification section [ASC] 958-605.)
- Alternatively, regardless of whether an entity expects to repay the PPP loan, in whole or in part, it may account for the loan as a financial liability (debt). The debt remains a liability until the earlier of (a) when the borrower has been legally released, in whole or in part, or (b) the loan is repaid. (This is the accounting guidance under ASC 405.)
- If an entity expects to meet the forgiveness criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, the entity may record the loan as a refundable advance. The advance would be recognized as income once there is reasonable assurance that it is probable the conditions for recognition have been met. (This is the accounting model promulgated by International Accounting Standards No. 20 and Accounting Standards Codification section [ASC] 958-605.)
A Word About For-Profit Government Contractors
While the focus of this article is the nonprofit sector, the same principles and concerns apply to any business that does work for the government under any type of cost-plus arrangement. Many of the above action steps apply to these businesses as well.
In Conclusion
Uncertainty, and the stress that goes along with it, continues to plague both nonprofit and for-profit businesses that rely on the federal, state or local governments for a portion of their funding / revenue. While the path forward remains clouded with ambiguity, we urge you to be thoughtful about how you move forward and to be proactive in helping to shape your future.
Contact Us
As always, for further guidance and assistance, please reach out to your PKFOD engagement team members, or Bruce L. Blasnik, CPA, CGMA, Partner at LoanForgiveness@pkfod.com. We are here to help.