How Nonprofits Can Effectively Tap PPP Opportunities And Avoid a ‘Surprise’ Audit

Not-for-Profit | Scott Davis | Apr 05, 2021

It is not often that articles about accounting contain hyperbole, but some recent reports on PPP loans have included what might be called overly zealous warnings that nonprofits taking advantage of this stimulus opportunity might find themselves the subject of a single audit.

Being a CPA myself, I understand that no one in accounting nor any part of a nonprofit’s management wants to see the word audit and the name of their organization in the same sentence. Despite the fact that audits are actually fairly routine and rarely find glaring errors, let alone evidence of malfeasance, the word itself implies some sort of guilt.

But with the recent passing of a third stimulus package with yet another PPP opportunity, let’s be clear at the outset about two things regarding nonprofits and PPP loans:

  1. Taking advantage of a PPP loan to get your nonprofit through the trials of the COVID-19 pandemic does NOT automatically put you at the top of the list for a government audit and should not make you gun shy about exploring how a PPP could work to your advantage.
  2. PPP makes fairly clear what the rules of the game are, and there are basically three scenarios your nonprofit may face. In this space we will look at those variables and offer counsel on how to handle each one.

So, the basic question a nonprofit needs to answer is this: Whatever the staff size of YOUR nonprofit, should it avail itself of a PPP loan? Or, if it already has, should it consider a second, or even, a third PPP loan?

And never forget, it is a loan. That PPP money comes to you from a private lending institution which expects to get paid back. But, the loan could be forgiven, meaning you don’t pay it back, the federal government does. However, and this is an important however:

For that to happen, the PPP loan amount must be VERY CAREFULLY CALCULATED so it actually meets and closely matches the needs of your nonprofit. In short, ask for more than you need, or, fail to spend the money according to PPP criteria, and you’re on the hook for the balance and/or any funds spent inappropriately. So, step one is having a grasp of those criteria.

Under the original provisions, PPP loans would be fully forgiven after 8 weeks if the loan proceeds were used for the following:  payroll, benefits, rents and utilities (and maintenance of certain payroll levels). Then, on June 5, 2020, the Paycheck Program Flexibility Act (PPPFA) was signed into law and its primary modifications to the original provisions were:

  • Reducing from 75% to 60% the percent of a borrower’s loan proceeds which must be used for payroll costs.
  • Increasing from 8 weeks to 24 weeks the covered period, which is the period eligible costs can qualify for forgiveness.
  • Increasing from two years to five years the maturity of loans issued on or after June 5, 2020.
  • Extending the deferral period for principal and interest on the loan.

Another benefit, while the PPP loan is considered income upon forgiveness, like a government grant, it is not subject to unrelated business income tax. Just as important, if you overborrow, or for whatever reason decide not to seek forgiveness on the PPP loan, while you do owe whatever that amount is, the interest rate is…1%. And, as just mentioned, you have five years to pay it back.

Nonprofit organizations have options for reporting the PPP loan at the statement of financial position date:

  1. Report the loan as debt. Even if you have applied for forgiveness on your PPP loan it is acceptable to leave the loan as debt on the statement of financial position.
  2. If you feel confident you have met all the criteria for loan forgiveness, just recognize the amount as income.

So, while the criteria for what a nonprofit can and cannot do with PPP funds is fairly straightforward, the key to realizing full forgiveness on the loan is very carefully calculating what the amount of the PPP loan should be.

And finally, the government has made clear that PPP loans are not subject to Single Audit. Larger loans may be selected for review and forgiveness applications are evaluated by the lending institution and the Small Business Administration. As with all things in dealing with the government, if your accounting professional has kept your house in order, an audit seems unlikely. Or, if one does occur, your nonprofit will be in good shape.

Most important, if your nonprofit could use a “bridge loan” from the PPP, one that will get you and your staff to the other side of the pandemic, our counsel would be this: Enlist the expertise of accounting professionals who will not only see that you make the most of this opportunity, but that, yes, all is forgiven.