The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on Friday, offers several opportunities for nonprofit organizations to obtain financial relief in the face of the COVID-19 crisis, particularly relief intended to make it easier for an employer to retain its workforce at or close to its normal level during the crisis. This post summarizes the new programs and opportunities the CARES Act makes available to nonprofits.
“Paycheck Protection Program” Makes Small Business Loans Available to 501(c)(3) Organizations with 500 or Fewer Employees
The Paycheck Protection Program (PPP) makes small business loans available to 501(c)(3)s with 500 or fewer employees. Qualifying 501(c)(3)s will be eligible to receive a loan of up to 2.5-times their average monthly payroll costs over a one-year look-back period, up to a cap of $10 million. That loan can become forgivable in part or in full if used to maintain the organization’s workforce at or near its normal levels. The PPP will be administered by the Small Business Administration (SBA), which began issuing guidance on the program on Wednesday. Here are the basic features of the program that are set out in the statute and in that initial SBA guidance:
Amount of Loan: Qualifying 501(c)(3)s will be eligible to receive a loan of up to 2.5-times the average of their monthly payroll costs over the full year prior to the date on which the loan is originated, up to a cap of $10 million.
Permitted Uses: PPP loan funds can be used to cover the organization’s:
- payroll costs (see definition below);
- rent payments;
- mortgage interest payments;
- payments for interest on other pre-existing debts; and
- utility costs.
Covered “Payroll Costs”: For all purposes of this program, “payroll costs” include:
- Payments for salary, wages, commissions, net earnings from self-employment, or similar compensation to an employee, sole proprietor, or individual independent contractor ( excluding any portion of compensation that exceeds $100,000 when annualized or compensation of an employee or contractor whose principal place of residence is outside the United States);
- payments for vacation, family, medical, or sick leave (excluding leave for which a credit is allowed under the Families First Coronavirus Response Act);
- allowances for dismissal or separation;
- payments for the provisions of group healthcare benefits, including insurance premiums;
- payments of retirement benefits;
- payments of State or local taxes on employee compensation; and
- payments of compensation to a sole proprietor or individual independent contractor.
Timing: The SBA has announced that organizations can begin applying on Friday, April 3, and has provided a sample application form. PPP loans are slated to be available through June 30, 2020, although the SBA has encouraged interested parties to apply as quickly as they can, implying that the SBA anticipates the program will run out of funding prior to that date.
Forgiveness of the Loan: One of the significant features of the program is that PPP loans may be partially or even fully forgiven and effectively turned into grants if the borrower is able to demonstrate it met certain conditions. In general, loan forgiveness will be available if, over the first 8 weeks of the loan, the employer:
- Incurred costs for payroll, rent, mortgage, and utilities equal to the amount of the loan (though the SBA has indicated that due to limited funding it may require 75% of the forgiven amount to be for payroll costs);
- Maintained its normal level of employment, measured in terms of average monthly full-time equivalent (FTEs) (or the amount of the loan eligible for forgiveness will be reduced by the percentage in which the organization’s average monthly FTE rate is less than the baseline rate); and
- Did not lower the salary or wages of any employee earning less than $100,000 per year by more than 25% (or the amount of the loan eligible for forgiveness will be reduced by the amount of any reduction by more than 25% of the total salary or wages of any employee—not including reduction in pay to employees earning $100,000 or more per year).
To measure the extent of an organization’s reduction in average monthly FTEs, the organization can choose to apply the baseline of the period of January 1, 2020 through February 29, 2020, or the baseline period of February 15, 2019 through June 30, 2019. The assessment of whether any employee’s salary or wages was reduced by more than 25% will be compared with the employee’s salary or wages earned in the last full calendar quarter prior to the loan period. However, for purposes of calculating an organization’s eligibility for loan forgiveness, reductions in workforce or employee salaries or wages occurring between February 15, 2020 and April 26, 2020 will be disregarded if they are restored to their previous levels no later than June 30, 2020.
It will be critical for organizations receiving the loans to maintain and be prepared to submit documentation verifying the number of FTEs and employee compensation rates for both the period of the loan and the baseline periods, as well as documentation of payment of the allowable expenses.
Remember that the loan forgiveness provisions of the Act look only at the first 8 weeks of the loan period. PPP-eligible organizations are not required to use all of the loan funds during this 8-week period, but loan amounts spent outside of the time period will not be eligible for forgiveness.
Application Process: The Act aims to streamline processing of PPP loans by delegating all authority to make and approve the loans to SBA-qualified lenders, whose evaluation of an application will be limited to whether the applicant was in operation as of February 15, 2020, and had one or more employees or contractors. The SBA suggests that those interested should consult with their local lender to see if it will be participating and promises to post a list of participating lenders on SBA.gov. Applicants will be required to certify that the uncertainty of the current economic conditions makes the loan necessary to support the organization’s ongoing operations and that the funds will be used to retain workers and maintain payroll or for the other permitted expenses, and will need to provide documentation of their payroll expenses over the prior year, which the lender will use to calculate the loan amount.
Payment Terms: The SBA has announced that all PPP loans will have a 2-year length of maturity, with no prepayment fees and a fixed rate of interest of 0.5%. All payments on the loans (including interest, principal, and fees) will be deferred for the first 6 months.
Notes on Eligibility: The PPP is not available to nonprofit organizations other than those described in section 501(c)(3) (so-called charitable and educational organizations) and those organized under section 501(c)(19) (so-called veterans organizations). The 500-employee limit for eligibility includes each full-time and part-time employee (not FTEs). Because the program is administered by the SBA, the SBA’s rules regarding “affiliation” will determine whether a 501(c)(3) has 500 or fewer employees for purposes of eligibility for this program.
Disqualification from Other Stimulus Programs: Organizations receiving PPP loans will be ineligible for certain other (generally less generous) programs provided for in the CARES Act and other stimulus packages, including the Employment Retention Credit described below. However, organizations can receive loans under both the PPP and the EIDL program, as described immediately described below.
Expansion to the Eligibility for Economic Impact Disaster Loan (EIDL) Program
Nonprofit organizations may also be able to obtain economic relief under the SBA’s Economic Impact Disaster Loan (EIDL) program, which is available to all non-governmental nonprofits—including most 501(c)(3)s, 501(c)(4)s, 501(c)(5)s, and 501(c)(6)s—regardless of their size. The EIDL program existed prior to the COVID-19 crisis and was available to private nonprofit organizations who could demonstrate they suffered substantial economic injury as a result of a disaster that was declared by state or local officials. The CARES Act did not change the basic EIDL program, which provides up to $2 million for working capital to eligible entities at an annualized interest rate of 2.75% for nonprofits. However, the CARES Act made important temporary changes to the program:
Waiver of Statutory Requirements: The Act waives several of the usual statutory requirements requirement applicable to EIDL applications through December 31, 2020, including the requirement for a personal guarantee on certain EIDLs, the requirement that an applicant be in business for at least one year before the disaster, and the requirement that credit not be available elsewhere.
Emergency Grants of $10,000: The Act provides $10 billion for the SBA to provide emergency grants of $10,000 to EIDL applicants within three days of their applications. (Technically this is a $10,000 “advance,” but the applicant is excused from repayment regardless of whether their EIDL application is approved or denied, making it—effectively—a cash grant.)
Note on Interaction with the PPP Program: 501(c)(3)s eligible for loans under the PPP (those with 500 or fewer employees) are permitted to seek and obtain loans under both the PPP and EIDL programs, so long as the EIDL is for a purpose other than paying the allowable expenses (namely covered “payroll costs,” rent, mortgage interest, and utilities)—for example, the EIDL could be used to provide working capital to support the organization’s activities to account for lost revenue. However, 501(c)(3)s that receive a $10,000 advance under the EIDL program will have the amount of their PPP loan eligible for forgiveness reduced by that amount. PPP-qualifying organizations who received an EIDL before the PPP became available may refinance their EIDL loan under the PPP terms.
New Funding for Loans to Larger Nonprofits Impacted by COVID-19
Larger 501(c)(3)s and other nonprofit organizations with more than 500 employees may be eligible for a loan under a separate program provided for under the CARES Act. The Federal Reserve is tasked with developing a “program or facility” to provide loans to “Mid-Sized Businesses” (including, “to the extent practicable, nonprofit organizations” with more than 500 and less than 10,000 employees). Much about this program is not yet known, including what program or facility will be used to provide these loans. The Act does provide the loans will have an interest rate of no higher than 2% annualized and will have no payments on principal or interest due for at least the first 6 months.
An organization applying for a loan under this program will need to certify in good faith that:
- the loan is necessary to support the organization’s ongoing operations as a result of the uncertainty of economic conditions as of the date of the application;
- the organization will use the loan to retain 90% of its workforce at “full”* compensation and benefit levels until September 30, 2020; and
- the organization intends, no later than 4 months after termination of the COVID-19 public health emergency, to restore its workforce to at least 90% of its level as of February 1, 2020 and to restore all compensation and benefits within that same timeframe.
*The statute does not clearly state what baseline should be used for this 90% measurement, but it appears from other provisions of the Act that it likely intends to apply a March 24, 2020 baseline. This will hopefully be clarified in implementing regulations or guidance.
Employee Retention Credit for Nonprofit Organizations Forced to Limit Business Activity Due to COVID-19
All 501(c) organizations — other than 501(c)(3)s receiving a loan under the PPP — are eligible for a new “Employment Retention” tax credit if either (i) their operations are fully or partially suspended due to a federal, state, or local government order limiting business activity due to the COVID-19 crisis, or (ii) their gross receipts for a calendar quarter decline by more than 50% when compared to the same quarter in the prior year. This credit may be applied to the employer’s portion of Social Security payroll taxes, in an amount equal to 50% of compensation paid or incurred from March 13, 2020 through December 31, 2020, with the credit effectively capped at $5,000 per employee per calendar year. The credit is refundable, meaning that organizations can receive cash payments from the Treasury Department if the amount of the credit exceeds the amount of employment and payroll taxes they would otherwise owe.
Organizations that receive a loan under the PPP are ineligible for the Employment Retention Credit.
Delay of Payment of Employer Payroll Tax
Employers with short-term cash flow issues can delay payment of payroll taxes that would ordinarily be due between now and January 31, 2020. The CARES Act provides that 50% of such deferred payroll taxes must be paid by December 31, 2021 and the remainder by December 31, 2022.