On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. The CARES Act provides $349 billion in benefits for small businesses, including qualifying nonprofit organizations.
Specifically, certain nonprofits are eligible for the Paycheck Protection Program and the expanded Economic Impact Disaster Loan program (EIDL). The CARES Act also provides payroll tax relief and provides incentives to expand charitable giving.
I. Paycheck Protection Program (PPP)
Who is Eligible? The PPP makes small business loans available to nonprofits, veterans organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees. Eligibility is currently only available to nonprofits classified as tax-exempt under Code Section 501(c)(3) and 501(c)(19).
Available Loan Amounts. The maximum principal amount for a PPP Loan is the lesser of: (i) $10 million; or (ii) 2.5 times the borrower’s average monthly payroll costs for the previous one-year period. Payroll costs include: compensation; payments for vacation, parental, family, or medical or sick leave; severance payments; fees for group healthcare benefits; retirement benefits; and state and local employment taxes.
Allowable Uses. Qualified borrowers can obtain a loan to cover the following expenses:
- 2.5 times average monthly payroll costs up to $10 million;
- Two months of rent or mortgage payment; and
- Two months of utilities; and
- Payments for interest on other pre-existing debts.
Loan Forgiveness. The loan may be fully or partially forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. The SBA has stated that at least 75% of the forgiven amount must have been used for payroll, so borrowers should prioritize paying payroll costs over other eligible expenses.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining their pre-crisis salary levels. The amount of the loan eligible for forgiveness will be reduced if the borrower’s full-time headcount declines, or if the borrower reduces salaries and wages by more than 25%. The rules for calculating forgiveness are complicated, mainly if a borrower has laid off and then rehires employees. Borrowers should discuss how these calculations will be made upfront to ensure they understand how much of the loan may be forgiven.
It is important to note that the loan-forgiveness provisions of the Act look only at the first eight weeks of the loan period. Borrowers are not required to use all of the loan funds during these eight weeks, but loan amounts spent outside of the period will not be eligible for forgiveness.
Favorable Terms. To the extent PPP loans do not qualify for forgiveness, the SBA has stated that PPP loans will have a 2-year term, a fixed interest rate of 0.5%, and no prepayment fees. Further, loan payments are deferred for the first six months of the loan. No collateral or personal guarantees will be required, and neither the government nor the lenders will charge small businesses any fees.
Borrower Certification. Borrowers will be required to certify to the lender that:
- the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19;
- loan proceeds will be used to retain workers and maintain payroll, and make the lease, mortgage, and utility payments; and
- it is not receiving duplicative funds for the same uses from another SBA program.
Borrowers will also need to document their payroll expenses over the prior year, which the lender will use to calculate the loan amount.
Timing. If you think your nonprofit may be eligible for one of the SBA loan programs, time is of the essence. Applications are expected to be available on Friday, April 3rd. Interested nonprofits should contact their bankers as soon as possible.
Potential Loans for Larger Nonprofits on the Horizon. The CARES Act directs the Federal Reserve to develop a program to provide loans to larger businesses, including 501(c)(3)s, with between 500 and 10,000 employees. The Act requires that, like the PPP, the loans will have an interest rate of no more than 2% and no payments due for the first six months. Larger nonprofits are anxiously awaiting guidance from Treasury on this opportunity.
II. Economic Impact Disaster Loan (EIDL) Program
The CARES Act injects an additional $10 billion into the SBA’s existing EIDL program. The CARES Act also expands eligibility for EIDL loans and waives certain requirements for applicants.
Who is Eligible? Nonprofits that are ineligible for the PPP loans may still qualify for the SBA’s EIDL program. The EIDL more broadly available to all non-governmental nonprofits regardless of their size, including nonprofits exempt under sections 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6). Applicants must have suffered demonstrable and substantial economic injury as a result of a declared disaster.
Available Loan Amounts and Terms. The EIDL program provides nonprofits up to $2 million for working capital at an annualized interest rate of 2.75%. The CARES Act makes EIDL loans easier to access by waiving several of the usual EIDL application requirements for 2020. These include the requirement (i) of a personal guarantee; (ii) that an applicant has been in operation for one year before the disaster; and (iii) that the applicant is unable to access credit elsewhere.
$10,000 Emergency Advance. Nonprofits seeking immediate funds may receive a $10,000 advance within three days of their applications. The increase is essentially a cash grant because borrowers are not required to repay it even if their EIDL application is
Borrowers Pursuing Both PPP and EIDL. Eligible borrowers are permitted to borrow funds under both the PPP and EIDL programs if the EIDL loan is for a purpose other than paying the PPP allowable expenses (payroll costs, rent, mortgage interest, and utilities). However, PPP borrowers that receive the $10,000 EIDL advance will have the forgivable portion of their PPP loan reduced by that amount to prevent double-dipping.
III. Payroll Tax Relief
Nonprofits are eligible for both the CARE Act’s payroll tax credit and payroll tax deferral programs.
Employee Retention Payroll Tax Credits. The CARES Act creates a refundable employer payroll tax credit of up to $5,000 for each employee on the payroll when the following actions occurred:
- Their operations were fully or partially suspended because of orders from a government authority limiting commerce, travel, or group meetings due to COVID-19; or,
- They have a decline in revenue of at least 50% in the first quarter of 2020 compared to the first quarter of 2019.
Nonprofits, other than those who have borrowed money under the PPP, are eligible to participate. This credit may be applied to the employer’s portion of Social Security payroll taxes incurred from March 13, 2020, through December 31, 2020.
Employer Payroll Tax Deferral. 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 half of the deferred payroll taxes must be paid by December 31, 2021; the other half must be paid by December 31, 2022.
IV. Charitable Giving Incentives
The CARES Act makes charitable gifts deductible for everyone by creating an above-the-line deduction for non-itemizers for contributions up to $300. The CARES Act also raises the deductibility threshold on annual contributions for donors who itemize. Individuals may now deduct charitable gifts up to 100% of adjusted gross income instead of 60%, making this the perfect year to make a major gift. For corporations, the threshold is raised from 10% to 25% of adjusted gross income. The CARES Act increased the cap for food donations from corporations from 15% to 25% of adjusted gross income. These incentives are only for gifts made during the 2020 tax year.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.