In response to the COVID-19 crisis, loans are now flowing from the federal Paycheck Protection Program (PPP) to nonprofits across the country. The goal of most of these loan recipients will be to achieve maximum loan forgiveness, which is based on amounts incurred for allowable payroll costs, mortgage interest, rent and utilities.
For nonprofits that already receive government funding to cover many of these expenses, this additional revenue stream from the government could be complicated by the concept of “double-dipping.” An important question that should be considered by these nonprofits is: Can my organization receive reimbursement or loan forgiveness from the government for expenses that are already being paid for by the government or related third parties?
Since the CARES Act was signed, the SBA, Treasury and banking community have not provided guidance in this area, so we are left to theorize on what they will expect in this area.
For nonprofit organizations that have expense/cost-reimbursed contracts, expenses covered under these contracts would be difficult, in our opinion, to include in the accumulation of expenses being used to calculate loan forgiveness. These expenses are clearly identified as reimbursed by government funds through the process of claiming expenses under these contracts.
Fee-Based Revenue Programs
Certain expenses incurred through fee-based revenue programs may also be difficult to justify in the expense accumulation for PPP loan forgiveness. For example, consider a nonprofit organization that provides residential and day program services to an intellectual and developmental-disabled population and is being paid a Medicaid rate for delivery of service. That Medicaid rate is based on a methodology that typically uses expenses such as salaries, fringe benefits, non-salary costs, property and equipment costs and other types of items that are driven through a cost report to help establish that Medicaid reimbursement rate.
Determining which current-period expenses are paid through that rate and which expenses are not (and therefore might qualify for loan forgiveness) will be complicated. After all, a commercial business that has revenues coming in will not use those revenues to offset allowable expenses in the forgiveness calculation – that is clear in Treasury and SBA guidance. How government funds will be treated is not.
When planning for maximum loan forgiveness, you want to accumulate as many expenses as you can. With government-reimbursed expenses unlikely to be deemed eligible, you will want to consider other uncovered expenses or gaps in funding that might be utilized as part of the allowable expense pool, such as:
- Programs that have lost funding
- Salaries to staff for services unable to be provided due to social distancing mandates
- Salaries for staff whose programs have been canceled or lost their funding and who have been repurposed for other programs
- Programs for which the government has determined there is no methodology to pay for services
- Programs that cost above what is reimbursed under the rate methodology (i.e. program losses)
- Expenses related to overtime or hazard pay
- Increased staffing for additional time and services being provided for those in need due to COVID-19
- Unfunded costs
We believe the above expenses may be allowable under the accumulation of expenses for purposes of loan forgiveness. As we await more guidance from the SBA and Treasury, monitor and track your expenses carefully, especially the ones that you believe are outside your rate-reimbursement or expense/cost-reimbursement contract methodologies. It will be particularly important to keep these expenses separate if government guidance is unclear and you need to determine the most practical, logical and theoretical way to approach loan forgiveness, utilizing past experiences with government reimbursement methodologies.
One final consideration to keep in mind as your nonprofit seeks, and hopefully secures, loan forgiveness are your cost reports that are filed with federal and state governments. It is important that you work with your CPA to determine how to accurately report the loan amount that is forgiven in the cost report. You must also consider how to report those expenses forgiven under the PPP program, within your cost report. Not doing so could have an impact on your future rate setting and reimbursement for your organization.