On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES ACT) was signed into law by President Trump. After the initial $350 billion in funding ran out, an additional amount of $310 billion was authorized to assist businesses and nonprofit organizations with funding during the COVID-19 pandemic. The initial time frame of use for these loans was eight weeks, and in order to obtain forgiveness 75% had to be used towards payroll expenses and 25% could be used for rent and utilities.
On July 1, 2020 Congress approved an extension of the Paycheck Protection Program (PPP) and organizations will now have until August 8, 2020 to apply. As of June 30, 2020 there is still $130 billion in available funding.
Beginning March 31, 2020 the Small Business Administration (SBA) has been issuing guidance regarding the use of these funds in order to receive full loan forgiveness and on May 15th, 2020 the SBA and the U.S. Treasury released the PPP Loan Forgiveness Application. Here’s what we know regarding allowable expenses and the forgiveness process (as of June 30, 2020.)
In order to receive full loan forgiveness, 60% or more of the PPP funds need to be used for payroll expenses and the remaining 40% can be used for business rent or mortgage interest, and utilities. Allowable utility costs include:
Current guidance says the expenses must be “paid or incurred” during this period giving a little bit of leeway for anyone who received funding in the middle of a pay period. If you do not meet the 60% percentage for payroll expenses, you will still qualify for forgiveness, but not for the entire amount of the PPP Loan.
Please note that PPP funds cannot be used to pay the employer portion of federal payroll taxes. However, payroll expenses do include the following:
- State and local employment taxes
- Employee health insurance
- Retirement plan matches
- Other employee benefits
How Do I Account for My PPP Loan?
When you receive the initial funds from the lender, you should record a refundable advance in your liabilities. Upon receiving loan forgiveness from your lender you would recognize the forgiven amount as a contribution, offsetting the refundable advance. Do not recognize the contribution until forgiveness is awarded. The AICPA and FASB developed Technical Question and Answer (TQA) 3200.18 to address the accounting for PPP Loans for nongovernmental entities (including nonprofit organizations).
What Is My Time Frame for Using the PPP Loan Proceeds?
The U.S. Senate passed the House version of PPP legislation on June 4, 2020 tripling the time allotted for the use of the funding from eight weeks to 24 weeks. All PPP funds must be used by Dec 31, 2020.
What Documentation Do I Need?
You must keep and present documentation of both payroll and non-payroll expenses. Specific documentation requirements can be found on Page 10 of the SBA forgiveness application and include bank statements, payroll reports, receipts, invoices, and cancelled checks that document the amounts paid for allowable expenses.
The forgiveness application also includes an employee calculation measure that can affect loan forgiveness as well. If you had to reduce your employees or average paid hours during 2020 you may not qualify for full forgiveness. However there are some safe harbors that your organization may meet that will keep forgiveness intact. Please see the forgiveness application for more information regarding the Full Time Employee average calculation and the two safe harbor exemptions.
If your loan was for $2,000,000 or more in addition to documenting how the PPP funds were used, your organization will also need to document economic necessity for your loan. Borrowers with access to lines of credit or with large amounts of cash reserves may not satisfy this requirement.
What If I Don’t Qualify for Loan Forgiveness?
With the passing of the PPP Flexibility Act, if your organization doesn’t qualify for loan forgiveness, the PPP loan will accrue interest at a rate of 1% for a repayment period of up to 5 years.
We hope this article helps you and your organization navigate the PPP Loan forgiveness rules. Your banker will have more information regarding acceptable documentation for the expenses paid using PPP funds.
Additional resources we recommend include:
- AICPA Issues Guidance on Accounting for Forgivable PPP Loans – Journal of Accountancy
- Your Audit Risk on PPP Loans Explained, Plus the Latest on Forgiveness – Forbes
- SBA Paycheck Protection Program (PPP) Resources for CPAs – AICPA
About the Authors:
Kari Moore, CPA, MST is a Tax Manager with over 10 years of tax and consulting experience, with a Masters in Taxation from Golden Gate University. Kari focuses on providing tax services and QuickBooks help to non-profit organizations, but has a wide breadth of experience including trust, business, and individual tax returns.
Matt Cyr, CPA has been an auditor since 2007. As a senior manager in the nonprofit audit department, Matt focuses on providing attestation services that include nonprofit audits, reviews, and compliance audits for not-for-profit organizations ranging in size and mission.