If your 501(c)(6) organization received a PPP loan, it's time to determine the appropriate accounting method. Most 501(c)(6) associations will treat PPP loans as either debt or government grants. The method you use depends on whether your organization expects to meet the eligibility and forgiveness criteria for all or substantially all of the PPP loan.
If your organization expects that it will not meet the criteria and will need to repay all or substantially all of the loan, then the loan should be accounted for as debt.
If your organization expects that it will meet the criteria and receive full forgiveness, you may account for the PPP loan under one of two options:
Option #1: Account for the PPP loan as debt.
Option #2: Account for the PPP loan as a government grant.
Either option is acceptable, but there are distinct differences in the initial accounting for the loan proceeds, the timing of the recognition of income, and the category of the income recognized that you should consider when deciding between them.
The following examples (provided in a February 2021 special report from the American Institute of Certified Public Accountants Center for Plain English Accounting titled “PPP Loans: Debits, Credits, and Financial Reporting FAQs”) show the accounting for each of the options.
| Example PPP Loan Basic Facts: | |
|---|---|
| Entity Type: | 501(c)(6) association |
| Loan Amount: | $100,000 |
| Interest Rate: | 1% (Monthly interest of $83) |
| Loan Received: | March 1, 2021 |
| Year End | June 30, 2021 |
| Forgiven Date | September 1, 2021 (SBA Notification) |
Authoritative Guidance: FASB ASC 470, Debt
Receipt of loan funds journal entry:
Under this option, your organization is considering the loan to be a debt.
| Account | Debit | Credit |
|---|---|---|
| Cash | $100,000 | |
| PPP Loan | $100,000 |
Monthly interest expense journal entry:
Under the debt accounting option, interest should be accrued each month. All PPP loans carry an interest rate of 1% (because the interest rate was set by a government agency, imputed interest is not required).
| Account | Debit | Credit |
|---|---|---|
| Interest Rate | $83 | |
| Accrued Interest | $83 |
Loan forgiven journal entry:
For PPP loans accounted for under FASB ASC 470, the loan is not derecognized until legal release of the liability has occurred (the date Loan Forgiveness Application Form 3508 has been approved).
When legal release has occurred and the liability is derecognized, the forgiven amount should be recorded as a separate line item in “other income” with an appropriately descriptive title, such as “Forgiveness of PPP Loan.
Authoritative Guidance: FASB ASC 958-605 Not-for-Profit Entities-Revenue Recognition-Contributions
Receipt of loan funds journal entry:
Under this option, your organization is considering the loan to be a conditional grant. You would initially record the loan as a “Refundable Advance” (liability).
| Account | Debit | Credit |
|---|---|---|
| Cash | $100,000 | |
| Refundable Advance (Liability) | $100,000 |
Loan forgiven journal entry:
Under FASB ASC 958-605, a transfer of assets that is a conditional grant is accounted for as a “Refundable Advance” (liability) until the conditions have been “substantially met” or explicitly waived by the donor. Therefore, you would treat the PPP loan like deferred revenue.
The key to determining when to recognize the grant revenue is when the conditions have been “substantially met.” In accordance with FASB ASC 958-605, conditions can be met in stages or over a period of time.
There are two possible positions under Option #2 that you can take when it comes to having “substantially met” the conditions:
Position A: Recognize grant revenue as the PPP funds are spent on “qualified expenses” (assuming your organization has also met the full-time equivalent employees and limitation in reduction in compensation conditions).
Under this position, having to submit Loan Forgiveness Application Form 3508 is considered to only be an administrative requirement (and not a condition).
Position B: Recognize grant revenue after the association has submitted its Loan Forgiveness Application Form 3508 and loan forgiveness has been approved.
Under this position, the bank/SBA review and approval of the Loan Forgiveness Application Form is considered to be a condition.
When PPP grant revenue is recognized, the revenue should be broken out on a separate line with an appropriately descriptive title, such as “PPP Government Grant” so that users of the financial statements can easily identify the amount recognized and better compare the other support and revenue line items in the financial statements.
| Account | Debit | Credit |
|---|---|---|
| Refundable Advance (Liability) | $100,000 | |
| PPP Government Grant | $100,000 |
Form 990 presentation will generally follow the audited financial statements. If the loan is treated as a “conditional grant” on the audited financial statements, the association should report on Form 990, Part VIII, Line 1e government grants (contribution) as the contribution is recognized and no interest expense would be incurred. If the loan is treated as a “loan” on the audit report, the organization should report on that amount on Form 990, Part X, balance sheet, until the loan is forgiven and report any interest expense accrued.
For California nonprofits, if the forgiven PPP loan exceeds $5,000, the nonprofit should report the name, amount, the date the loan was received, and the mailing address of the SBA on California Form 199. If the nonprofit is required to file the California Form RRF-1, the nonprofit should check “Yes” to Form RRF-1, Part B, Question 5, “During this reporting period, did the organization receive any governmental funding?” and report the name, mailing address, contact person name and phone number of the SBA.
Modifications to the PPP loan program have caused an issue many nonprofit organizations are facing with the derecognition of the PPP loan and any potential mismatch (matching principle) with the qualifying expenditures. These additional modifications were made on June 22, 2020, when revised interim final rules were also issued. Below is a summary of the primary modifications to the PPP loan program from the SBA website:
In addition to the changes mentioned above, once forgiveness is applied for, based on the SBA loan review procedures, the lender has 60 days to issue a decision to the SBA, which then has 90 days to review the PPP loan before remitting funds to the lender. Therefore, this increases the length of time from receipt of funds until the final forgiveness amount is approved beyond a year in some cases. Borrowers may also apply for forgiveness using the 3508EZ form, provided they meet one of the three requirements to do so as noted in the instructions to the form.
Update as of 07/02/2021
On Friday, July 2, the Small Business Administration (SBA) officially announced they would no longer request the Loan Necessity Questionnaires (SBA Form 3510 and 3511) (sic) for any PPP loan reviews.
However, any borrower who has not yet filed for forgiveness of a large loan should still prepare a file memo that outlines the business conditions necessitating the loan in the event of possible future audits of the forgivable spend.
The SBA released new draft forms for larger PPP loan recipients to provide additional information. Lenders are expected to send the new Form 3509 (for-profit) and Form 3510 (nonprofit) to borrowers that have original PPP loan amounts of $2 million or more. Although it’s not clear yet how the SBA will use the data in its review, this may be just a first step in data collection as part of the audit process, or a way for the SBA to reduce the depth of audits by filtering out organizations that clearly meet the certification of need based on the questions alone. Overall, the tone of the questionnaire was more specific and comparative to 2019 than many expected.
Below is a summary of the form and considerations for nonprofit organizations:
General
Liquidity Assessment
Organizations who already documented their rationale for PPP loan eligibility can leverage their initial eligibility documentation to support responses to this questionnaire. Be prepared to speak to your balance sheet, including endowments, investments, cash and non-cash savings. Describe restrictions on the assets, keeping in mind whether the organization can access those funds for payroll costs or what the impact to the organization of accessing these funds could be even if they are unrestricted.
For schools, the focus seems to be on the tuition impact to the 2019-2020 school year, so be prepared to articulate the impact if tuition wasn’t reduced during that period.
Other things to consider is timing of your loan forgiveness application, as forgiveness is due within 10 months from the end of the organization’s covered period, as well as how you are booking the loan for financial statement purposes. Some organizations have decided to book the loan as debt until they receive formal forgiveness out of concerns from the questionnaire.
