Many companies and organizations have received their PPP loans, which means that they are in the 8- week forgiveness period. During this 8-week period, any qualified costs are potentially forgivable. There are certain criteria that will dictate the forgivable portion, such as the amount of expenses (forgiveness is limited to the actual qualified expenses for the period – though it is still uncertain if this is calculated on the cash, accrual, or some combination of the two), type of expenses (qualified non-salary expenses cannot exceed 25% of the forgiveness amount), level of staff retained (any drop in staff FTE’s will reduce forgiveness), salary levels paid to staff (a reduction in the salary paid to any employee in excess of 25% will reduce forgiveness); and whether any governmental source is directly funding you for any qualified expenditures.
Many of you have read about the first four of these reductions in forgivable costs, as they are discussed within the regulations. However, there is no discussion of the regulations regarding government funding. While it is true that qualified costs funded by other government sources is not expressly disallowed in statute, it is the common theory of many professionals that work with government-funded organizations that accepting government funding for costs and then having the same costs forgiven can pose a problem for organizations that could result in an issue upon further scrutiny or audit.
- An organization receives a $1 million deficit-funded grant from a governmental agency. That $1 million grant has a budget that provides for $600,000 of salaries to be paid for under the grant and allows for a 10% administrative overhead charge. Any of the costs covered under the grant, the direct salaries and any salaries, utilities, or rents included in the overhead charge funded by the grant would not be forgivable. The concept is that these costs have already been funded by a governmental agency, so to ask for forgiveness of these amounts would have nullified these expenses, thus making them not chargeable to the grant.
- An organization files an annual Consolidated Fiscal Report under a cost-based system, whereby the expenses incurred will drive the rate used to fund the organization. Once again, any cost used to develop the rate should not be included in the costs you are seeking forgiveness for as those costs are funded within the cost-based rate. To the extent that your costs exceed the funded rate, and you can substantiate that all or part of that loss was incurred during the 8-week forgiveness period, it would seem reasonable that you could seek forgiveness for any costs included in the 8-week period which were not funded as part of your rate.
- An organization provides fee for services that are funded by a governmental agency (e.g. Medicaid). The cost of the direct time incurred in providing that service has been funded in conjunction with the rate you are being paid and therefore, the underlying salary of the staff member providing that direct service should not be included in your request for forgiveness.
These are just several examples, with many more funding mechanisms and nuances that could change the fact pattern. The key is you need to consider the make-up of each payment you receive from a governmental source to ensure that you are not seeking forgiveness for a cost for which you were reimbursed.
The forgiveness rules are not yet out. When they do come out, we are unsure if there will be a lot of discussion regarding the treatment of government reimbursement on forgiveness. Even so, with the understanding that the loan proceeds are earmarked for those companies and organizations that have been impacted and have an economic need, it is logical to assume that the same thought process will carry through to the forgiveness component too. If your organization has been directly reimbursed for certain costs, how can you claim your organization was impacted with respect to these costs and thus qualifies for forgiveness? Any costs incurred during the 8-week forgiveness period that are not reimbursed should be evaluated for potential forgiveness.
While we realize that this will require a significant level of time for organizations to go through the process of determining what is and isn’t reimbursed, it is important to ensure that they comply with the regulations, either what is documented or their intent, to ensure that they do not run into trouble down the road, should they be audited.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.