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The CARES Act and Nonprofit Organizations

Nonprofit organizations are included among the several different types of beneficiaries under the CARES Act $2.2 trillion economic relief passed by Congress in response to the COVID-19 pandemic.  That said, not all types of nonprofits are eligible under the different programs created by the CARES Act.  The general overview that follows specifies the eligibility requirements among the different programs available to nonprofits under the CARES Act.

Paycheck Protection Program (“PPP”) Loan

Eligibility: 501(c)3 nonprofits with fewer than 500 employees and some 501(c)(19) veterans’ organizations that were in operation as of February 15, 2020 and had employees for whom it paid salaries and payroll taxes are eligible to apply for a PPP Loan.  These nonprofits may not hire new employees now to justify the need for a PPP Loan.  These loans are offered by private lenders and backed by the U.S. Small Business Administration (“SBA”).  Additionally, these nonprofits must certify that “the current economic uncertainty makes this loan request necessary to support the ongoing operations” of the nonprofit applicate.  As with all loans through SBA, the nonprofit applicant must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

Maximum Loan Amount: Loan amounts are up to the lesser of $10 million or 2.5 times the average monthly payroll costs (capped at $100,000 annualized basis for each employee) during the one-year period before the date on which the loan is made.  Payroll costs include: (a) salary, wages, commissions or tips; (b) employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits and payment of any retirement benefits; and (c) state and local taxes assessed on compensation.

Repayment Terms: Two-year term with payments deferred for six months. There are no prepayment penalties or fees.

Interest Rate: Currently the interest rate is set at 1%. No personal guarantees or collateral are required.

Loan Uses: Loan Proceeds may be used for (a) payroll costs, including employee benefits and state and local taxes assessed on compensation; (b) rent, (lease must have been in force before February 15, 2020); (c) interest on mortgage obligations (mortgage must have been in force before February 15, 2020); (d) utilities (service must have begun before February 15, 2020; (e) interest payments on any other debt obligations that were incurred before February 15, 2020.

Loan Forgiveness: A portion of the loan may be forgiven and not be counted as income to the borrower if it is spent on the loan uses detailed above in the first 8 weeks after the loan is received.  The borrower must maintain the same average number of employees for this same 8 week period as it did from February 15, 2019 to June 30, 2019 or from January 1, 2020 to February 15, 2020.  If it does not, the loan forgiveness is reduced proportionally to the reduction of full time employees.  Additionally, loan forgiveness will be reduced if decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. The borrower has until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.  No more than 25% of the forgiven amount may be for non-payroll costs.

Requesting Loan Forgiveness: Loan forgiveness is not automatic; it must be requested.  The borrower must send a request to their lender that includes documents that verify the number of fulltime-equivalent employees and pay rates (including employee healthcare costs and state and local taxes on compensation), as well as the payments on eligible mortgage interest, lease and utility obligations. The borrower must certify that the documents are true and accurate and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments. The lender must decide on the forgiveness within 60 days.  The SBA will audit any borrower that receives a PPP loan of $2 million or more to ensure that all requirements have been satisfied before any loan forgiveness will be approved.

Application: The borrower must apply though lenders that already offer SBA loans. Applicants can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating in the PPP. Other regulated lenders will be available to make PPP loans once they are approved and enrolled in the program. The application period opened on April 3, 2020 and is open until June 30, 2020.

Economic Injury Disaster Loans (“EIDL”)

Eligibility: Open to small business owners, including private nonprofit organizations that are non-governmental organizations (‘NGOs”) or entities that currently have an effective ruling letter from the IRS recognizing federal tax exemption under sections 501(c),(d), or (e) of the Internal Revenue Code (including 501(c)(6) and (c)(4) organizations), or satisfactory evidence from a state that the non-revenue producing organization or entity is a nonprofit one organized or doing business under state law, or a faith-based organization.

Application Requirements: The EIDL application asks if the organization is engaged in “the business of lobbying,” which means specifically whether the organization is “primarily engaged in political or lobbying activities.” For IRS and other purposes, this “primary” purpose test generally means spending more than 50% of your activities or expenses on lobbying activities or political campaign activities. If so, the organization would not be eligible for an EIDL.

Personal Guarantees: EIDLs of up to $200,000 can be approved without a personal guarantee. Any amount over $200,00 will require a personal guarantee.

Collateral: No collateral is required for loans of $25,000 or less. For loans over $25,000, a general security interest in the organization’s assets can be used for collateral instead of real estate.

Loan Uses and Restrictions: These funds are intended to cover payroll and other operating expenses that the organization could have otherwise met in a non-disaster economy. The loans are not intended to replace lost sales or profits or to pay for expansion. Funds cannot be used for refinancing, making loan payments on other federal debts, to repair physical damages, to pay IRS tax penalties, or to pay out dividends.

Maximum Loan Amount: While loans up to $2 million are authorized, it appears that loans have been limited to a maximum of $25,000.

Repayment Terms: Initial payments can be deferred for one year from the date of the promissory note and are repayable over a 30 year term. EIDLs are not forgivable.

Interest Rate: 2.75% for nonprofits.

Other EIDL Requirements: Normally the SBA has a borrower certify that they (i) are “unable to meet obligations as they mature or to pay ordinary and necessary operating expenses,” and (ii) “have used all reasonably available funds.”  The SBA has not addressed how these requirements should be interpreted under the EIDL.

Economic Injury Disaster Advance Loan (Part of the EIDL)

Eligibility: Same requirements as the EIDL.

Maximum Loan Amount: $1,000 for each employee, up to $10,000 maximum.

Repayment Terms: Does not have to be repaid if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments, or repaying obligations that cannot be met due to revenue loss.

Employee Retention Payroll Tax Credit

Eligibility: Available to small businesses and nonprofit organizations, including Section 501(c)(3), (c)(4) and (c)(6) organizations.

Program and Eligibility Terms: Employers fully or partially shut down or with 50% drop in gross receipts in a quarter compared to the same quarter in the prior year (until a return to 80%).  Fully or partially suspended operations in any 2020 quarter due to COVID-19 governmental orders (“partially suspended” means operations continue but not at a “normal capacity”); it is a quarter-by-quarter determination.

Payroll tax credit of up to 50% of the qualified wages (salaries plus allocated health plan expenses) paid by the employer in a covered quarter, up to $10,000 in wages per employee; maximum $5,000 tax credit per employee for 2020 for the period of March 13, 2020 until December 31, 2020.  The tax credit is refundable if credit exceeds payroll taxes due that quarter.  If 100 or more employees, the tax credit covers wages only for employees not providing services to the employer during that quarter (e.g., those on paid leave); if less than 100 employees, the tax credit covers the qualified wages of all employees that quarter.

Wages for Families First Coronavirus Response Act tax credits are excluded.  If an employer received a PPP loan, they are not eligible for this tax credit.

Delay of Payroll Tax Remittance

Amounts of the employer portion of the Social Security payroll tax that would normally be due for the period from March 27 to December 31, 2020 may be delayed. If an employer chooses to delay the payment of the employer portion of the Social Security payroll tax that would be due during this period, it would follow the below payment schedule for the payment to be considered timely:  50% due 12/31/2021 and 50% due 12/31/2022.  This payment does not apply to the employer’s share of the Medicare payroll tax. Those payments, as well as depositing the employee’s withholdings, must still be made on time.  If an employer received a PPP loan, they are not eligible for this delay.

The SBA has a checklist available at https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources as well as the U.S. Chamber of Commerce at https://www.uschamberfoundation.org/reports/coronavirus-emergency-loans-guide-and-checklist-small-businesses-and-nonprofits.

Main Street Lending Program

The Federal Reserve announced on April 30, 2020 that it was expanding its Main Street Lending Program by establishing three facilities: (a) the Main Street New Loan Facility, (b) the Main Street Priority Loan Facility, and (c) the Main Street Expanded Loan Facility.  These facilities are to support lending to small and medium-sized businesses that were in sound financial condition before the onset of COVID-19.  This program is not yet operational, but once it is, businesses interested in any one of the three facilities should seek to apply for a loan from an eligible lender. Nonprofit organization are not eligible businesses under the current Main Street Lending Program, however, the Federal Reserve also announced on April 30, 2019 that it is evaluating a separate approach for nonprofit organizations to meet their needs.  Once the Feder Reserve has announced its separate approach for nonprofit organizations we will update this post.