COVID-19 Update #5 - The Paycheck Protection Program - SBA Loans Available to Nonprofit Organizations

Special Note:  Guidance and information has been issued from several sources over the past week.  In an attempt to provide accurate information, this blog post is updated as guidance is issued.  This blog was last updated on 4/7/2020 and includes information contained in the SBA Frequently Asked Questions (FAQs) issued on April 6, 2020 . 

On March 27, 2020, President Trump signed a second piece of legislation, the Corona Aid, Relief, and Economic Security Act (the  CARES Act) geared to keep the economy running during the COVID-19 pandemic.  One of the most popular provisions in the legislation is the provision to provide businesses and nonprofits operational loans to assist during this time in keeping employees gainfully employed until the crisis has passed. This provision is known as the paycheck protection program.

Source of the Loan

The loans are financed through the U.S. Small Business Administration (SBA).  While typically nonprofit organizations and churches are not eligible for SBA loans, the CARES Act allows 501(c)(3) organizations, including churches, to apply for this program.  Congress has allocated $349,000,000,000 for the program.

Eligible Organizations

Virtually any small business and/or nonprofit organization with less than 500 employees will qualify or that meet one of the other definitions of a "small business enterprise" as defined by the SBA.  However, for nonprofit organizations this appears to be a straight up count of employees, both full-time or part-time.  Also, business operations that are independent contractors or sole proprietors may qualify for the loan. Nonprofit organizations may require an organization's determination letter as proof of exemption under 501(c)(3).  A determination letter is issued to each nonprofit entity when the IRS approves its exempt status.

The organization must have been in operation on February 15, 2020 and had employees at that date. Additionally, the organization must be prepared to state the loan request is due to economic uncertainty due to the current COVID-19 pandemic.

Special Note for Churches:  Churches exempt under a group ruling issued to a denomination should obtain a letter verifying they are a part of the group ruling and the determination letter issued to the group verifying its exempt status.  Churches that have never officially requested IRS recognition of their exempt status and do not belong to a group, may encounter hurdles in verifying their status as a 501(c)(3) organization.  However in a set of "frequently asked questions" issued on April 3, 2020, the SBA clarified that churches do not have to formally apply for exempt status.  Additionally, after much confusion occurred in the lending community, the SBA clarified that churches do qualify for the PPP assistance and the SBA's nondiscrimination requirements cannot be applied to a church's religious activities.  

Loan Availability

Loans will be available through this program until the earlier of June 30, 2020 or the funds allocated by Congress are utilized.  Therefore, early application will assist an organization in securing the loan.  The loans may bear an interest rate not to exceed 4%.  The SBA has announced that the loan's rate of interest will be 1%.  Additionally, lenders are instructed to defer any required loan payments for six months to one year with a potential for all or most of the loan to be forgiven.   

Potential Funds Available

The maximum loan available through this program is 2.5 times the amount of the organization's average monthly payroll costs for the one-year period preceding the date of the loan not to exceed $10 million.  (Special rules may apply for organizations in existence for less than 1 year or with seasonal employees.)  The SBA has clarified that an employer may use the past 12 months or the calendar year 2019 for determining the potential loan amount.  If the 2019 calendar year is used to determine the amount, the employer must also confirm that it had employees at 2/15/20. Therefore, a payroll run covering that time period may also be requested. 

Payroll costs include:

• Salaries and other wages

• Employer-paid health care benefits

• Employer-paid retirement benefits

• Employer-paid state and local payroll taxes

Payroll costs do not include: 

• The amount of cash compensation exceeding $100,000 per any employee (clarified by the SBA FAQs issued 4/6/20.)
• Compensation paid to an employee residing outside the U.S.

• Federal payroll taxes - While the law indicates this includes any taxes withheld from the employee for FICA/Medicare and Federal Income Tax as well as the employer portion of the FICA/Medicare taxes assessed and withheld for the period 2/15/20 to 6/30/20, the SBA states in its FAQs that there would not be a reduction in payroll costs for any taxes withheld from the employee, but the employer share of FICA/Medicare should never be included in the calculation.  

• Any compensation paid under the Families First Coronavirus Response Act for sick leave or family leave (see other related blog posts.)
• For an employer, payroll costs do not include amounts paid to independent contractors reported on Forms 1099-Misc.  This is excluded because these individuals/businesses may apply for the loan on their own. (Clarified by the SBA in FAQs issued on 4/2/20.)

Potential Use of Funds

Funds from the loan may be used for: 

• Payroll Costs as previously defined

• Mortgage interest

• Interest on other debt obligations incurred before February 15, 2020

• Rent

• Utilities

Potential Loan Forgiveness

Entities receiving these loans may qualify for all or a portion of the loan to be forgiven.  The amount to be forgiven is based on the amount spent on the following expenses for the period of eight weeks beginning with the date of the loan. 

• Payroll costs

• Mortgage interest payments for loans incurred before February 15, 2020

• Rent for lease agreements in force at February 15, 2020

• Utilities that were obligations as of February 15, 2020

Since the purpose of the provision is to keep people working, the amount of the loan forgiven is directly tied to the accomplishment of this purpose.  Therefore, the amount of the loan forgiveness is reduced if the recipient reduces its workforce either in numbers of employees or in the amount of salaries paid is significantly reduced.  

The amount forgiven is limited to the principal of the loan and accrued interest.  Additionally, only 25% of the amount of the loan can be justified with non-payroll costs; i.e., rent, utilities, etc.  The forgiven portion of the loan is not  taxable.  

Any portion of the loan that is not forgiven must be repaid within 2 years (the Act states up to 10, but the guidance indicates the loans are 2 year loans.)

SBA Guidance

Guidance from the SBA was issued on 4/2/2020 and can be located at https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf.

Application can be located at https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

Frequently Asked Questions (FAQs) related to faith-based organizations applying for the PPP and the EIDL can be located at https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl

Alternate Loan Program

Secular nonprofit organizations may also explore the Economic Injury Disaster Loan (EIDL) provided for in earlier legislation.  This program may also provide funding for operations but it does not include any loan forgiveness provisions.  However, once an organization has applied for this program, it may be eligible for an immediate grant of up to $10,000 in addition to its loan.  Organizations who have previously received an EIDL may be eligible to roll it into the Paycheck Protection Loan.