OMH Memorandum: Reporting PPP Loan Forgiveness within the CFR

The United States federal government established several programs in 2020, through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), to provide fiscal support to businesses that were negatively impacted by the COVID-19 pandemic. One such program, the Paycheck Protection Program (PPP), administered by the United States Small Business Administration (SBA), provided low-interest loans to cover payroll, rent, interest, utilities, and other qualified expenditures over a period subsequent to loan funding. The loan may be partially or fully forgiven, pursuant to certain spending and program requirements.

While this program has been a boon to many businesses, the forgiveness mechanism raised concerns for not-for-profit (NFP) organizations that have local/direct State Aid contracts and receive net deficit-funding. The SBA’s guidance on forgiveness and tax treatment of PPP loan forgiveness income was notably tailored to for-profit business concerns and concepts rather than those of most NFPs. Additionally, the Financial Accounting Standards Board (FASB) took time to advise how PPP loan forgiveness income should be recognized in accordance with generally accepted accounting principles (GAAP). So, while many organizations felt saved from the immediate negative fiscal impact of the pandemic, in the wake of receiving PPP loans, NFPs became anxious to receive further guidance from the federal and state governments, the FASB, and their funders. Unfortunately, clear guidance was not immediately forthcoming, and the uncertainty and anxiety mounted.

The FASB has since clarified that NFPs may recognize PPP loan forgiveness income in one of two ways:

• Recognize PPP loan forgiveness income at the time the SBA formally grants forgiveness; or
• Recognize PPP loan forgiveness income in the period when qualifying expenditures are incurred, and up to levels of qualifying expenditures incurred in that period (similar, in essence, to a deficit-funded government grant).

It took even more time for state agencies to weigh in. However, the New York State Office of Mental Health (OMH) issued guidance this month that should allay some remaining concerns.

The fundamental concerns over PPP funding stem from how NFPs who receive OMH local/direct State Aid operate and report fiscal operations to OMH. Organizations that receive local/direct State Aid from OMH are reimbursed for costs incurred to run their OMH contracted programs. Such organizations are required to report the fiscal activities of all OMH-contracted programs on an annual basis via the Consolidated Fiscal Report (CFR), within the Department of Mental Hygiene (DMH) claiming schedules, which OMH, in turn, uses to reconcile its contracts on an annual basis. Since these deficit-funded contracts are intended to reimburse only for costs incurred (net of any offsetting revenues), such contracts are meant to operate at a “break-even,” and not meant to generate profits. Historically, should an organization report profit within its DMH claiming schedules for CFR programs that receive local/direct State Aid, OMH may, in its discretion, recoup excess deficit-funding received but not expended during the reporting period.

The receipt of PPP loan funds now came with the risk that, if not used, accounted for, and reported correctly, PPP loan funds could spell trouble for NFPs. Notably, PPP loan funds could be used to reimburse certain costs that were already reimbursed by OMH local/direct State Aid (a situation referred to as “double dipping”). In such cases, an organization could turn a profit on a deficit-funded program that is meant to operate break-even, and face funding recoupments. Organizations were cautioned to avoid such double dipping.

Even if an organization carefully avoided double dipping, a lack of clarity remained regarding when PPP loan forgiveness income should be reported in the CFR, and how such reporting could impact NFPs in the long run. For example, if an organization reported PPP forgiveness income in the period forgiven (which is usually months to a year after the receipt of funding), the forgiveness income would be reported in an entirely different fiscal year than the underlying qualified loan expenditures. In such cases, reporting forgiveness income in a subsequent year’s CFR claiming schedules could give the appearance that an organization generated profits from its deficit-funded contracts, when in reality, that may not be the case. This again exposed organizations to risk of possible funding recoupment.

The recent guidance issued by OMH has confirmed that, while organizations must report PPP forgiveness income in the CFR DMH claiming schedules, it should not have a negative impact on an organization’s OMH local/direct State Aid deficit-funded contracts. Pursuant to the guidance issued by OMH, PPP loan forgiveness income is required to be reported as a federal grant within the CFR DMH-2 schedule, on line 24 – Federal Grants. Reporting income on this line will include forgiveness income as part of the organization’s total GAAP basis income. However, the organization will offset this income by reporting the PPP loan forgiveness income as a non-GAAP adjustment to revenue on DMH-2, line 39 – Other. Offsetting the income on DMH-2, line 39 – Other, reduces the organization’s revenues, thereby neutralizing the impact that forgiveness income recognition would have had on an organization’s reported net operating cost. In effect, this reporting prevents forgiveness income from generating a false profit within the DMH claiming schedules of CFR programs, and likely means that OMH will not recoup funding from providers who received and reported PPP forgiveness income within its CFRs in the prescribed manner. OMH is permitting organizations to revise and resubmit CFRs previously filed for fiscal years July 1, 2019 to June 30, 2020, July 1, 2020 to June 30, 2021, and/or calendar year January 1, 2020 to December 31, 2020. Organizations have until December 30, 2022 to submit revised CFR filings.

Additionally, OMH will be implementing a two-year closeout of direct/local State Aid contracts to help mitigate the financial impact of the COVID-19 pandemic. The two-year close-out is intended to mitigate the impact that variations in revenue and expenses may have had on local/direct State Aid contracts during the COVID-19 pandemic. For fiscal year-end CFR filers, the two-year close-out period is from July 1, 2019 through June 30, 2021, while for calendar year-end filers, it is January 1, 2020 through December 31, 2021. OMH will compare total claimable expenditures over the two-year close-out period, net of any offsetting revenues, in determining total net operating costs, and this figure will be compared to total local/direct State Aid received. Any unspent direct/local State Aid that is identified in the two-year close-out period is subject to recoupment by OMH.

Click here for a link to the February 2022 OMH memorandum regarding reporting PPP loan forgiveness income within the CFR. As always, if you have any questions about how this impacts your NFP, reach out to your friends at Cerini & Associates. We’ll make sure you’re handling this properly on your CFR.