On April 24, 2020, the President signed the Health Care Enhancement Act, which added $484 billion to the already established Paycheck Protection Program (PPP). The PPP extends the opportunity for non-profits and small businesses to apply for loans up to 2.5 months or payroll up to $10 million. The second round of PPP loan applications opened on April 27, 2020, and six days later, more than 2.2 million non-profits and small business had applied for loans, leaving about $135 billion available1. The immense attraction of the PPP loans is that they do not require collateral or a guarantee, and the loan may be forgiven as long as certain criteria are met. DHG presented a webinar on April 30 titled PPP Loan Forgiveness and Other CARES Act Implications for Non-profits; you can visit the link to watch the recorded session or download the presentation slides for further information about PPP loan forgiveness for non-profits.
The following are two important updates for non-profits to consider regarding the PPP.
1. Safe Harbor Extension and Clarification
The U.S. Department of the Treasury (the Treasury) and the Small Business Administration (SBA) issued guidance via FAQ #31 on April 23, 2020, which seems to indicate that organizations should perform a lookback, reevaluation and reassessment of the true economic need for the PPP loan weeks after the loan application was certified by the applicant. Organizations must show that the loan is necessary to continue the ongoing operations of the organization.
Organizations that received a PPP loan and are concerned that their current business activity could be challenged or have some question about their ability to access other sources of liquidity based on this guidance are provided with an option. The SBA and Treasury guidance is closed out by stating, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. This deadline to return the loan in full was subsequently extended to May 14, 2020, in FAQ #43, and then extended again to May 18, 2020 in FAQ #47.
On May 13, 2020, smaller organizations received much needed clarification and relief with FAQ #46:
“Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”2 (Emphasis added by DHG.)
The SBA has stated that any loan over $2 million will be reviewed for compliance with program requirements. This new FAQ states, “If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”
This FAQ provides needed clarification that allows non-profits to resume their focus on the organization’s mission to retain employees and maximize the loan forgiveness.
2. Does the PPP Loan or Economic Injury Disaster Loan (EIDL) constitute a federal grant?
Many non-profits have expressed concerns that CARES Act loans could be considered a federal grant. Grant classification could trigger the audit requirements under the Uniform Guidance ( .e., Single Audit) if the loan amount exceeds $750,000.
On May 5, 2020, the American Institute of Certified Public Accountants (AICPA) Government Audit Quality Center issued Alert No. 404 stating that the SBA staff informed them that PPP loans made to non-profits will not be subject to Single Audit. However, loans “under the EIDL program are considered a direct loan program disbursed from SBA to loan recipients. Therefore, these loans are considered federal financial assistance and are subject to the Uniform Guidance single audit requirements.”
DHG recommends non-profits review and update their internal controls to be certain that these new loan programs are administered in accordance with federal regulations. Control procedures should include, but not be limited to: adequate documentation for cash disbursements; segregation of cash duties; monitoring procedures on loan balances; and cost allocation procedures to prevent personnel costs from being reimbursed from more than one funding source. Non- profits should also consider contacting cognizant oversight agencies to determine how these loans could affect their reimbursement rates.
For questions or more information, contact us at firstname.lastname@example.org.
- Bohn, Kevin and Cole, Devan. “$175 billion in small business loans given out in second round of the Paycheck Protection Program.” CNN.com. May 3, 2020.
- Paycheck Protection Program Loans Frequently Asked Questions (FAQs), #46.