Friday September 18, 2020
Article of the Month
CARES Act Saves 100,000 Nonprofits
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On March 27, 2020, Congress and the President enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H. R. 748). The $2 trillion CARES Act provides massive relief for individuals, businesses, medical centers and nonprofits. The "Paycheck Protection Program Loans" (PPP Loans) are potentially able to save over 100,000 nonprofits from closing their doors. On April 2, 2020, the Small Business Administration (SBA) posted an "Interim Final Rule" for PPP Loans.
Nonprofits at Risk
This is a challenging time for all Americans. Millions are under lockdown orders to reduce the risk of community spread of the virus. Over 10 million Americans filed unemployment claims the last half of March. With restaurants, hotels, airlines, cruise ships and thousands of other businesses reducing operations or closing, there will be many more unemployed during the next months.
The National Council of Nonprofits reports that our nation has over 1.3 million nonprofits. Over half of the nonprofits have just one month of cash reserves. While the largest universities have substantial endowments, most midsized and small nonprofits do not have large reserves. Over 88% of nonprofits operate with less than $500,000 in annual gift revenue.
Fortunately, the PPP Loans will provide these nonprofits with loans to cover eight weeks of payroll, benefits, rent or mortgage interest and utilities. Best of all, qualifying nonprofits may receive up to eight weeks of loan forgiveness. In essence, the federal government will make a grant for the eight weeks of nonprofit overhead expenses. The eight week payroll and expense grants are likely to save at least 100,000 nonprofits who would otherwise close their doors.
Qualifications for a Nonprofit Loan-Grant
The U.S. Senate Committee on Small Business and Entrepreneurship published an explanation of the CARES Act with specifics applicable for nonprofits. Loans are issued under the Small Business Administration (SBA) Sec. 7(a) program. Sec. 501(c)(3) organizations generally qualify if they have 500 or fewer employees (full and part time, not full time equivalents) and had paid employees on Feb. 15, 2020. Sec. 1102(a)(2)(D)(v).
Some nonprofits with multiple related organizations may be subject to the SBA affiliation standards under 13 C.F.R. § 121.103. If a parent nonprofit controls a subsidiary, the SBA may aggregate the employees of both entities. Sec. 1102(a)(2)(D)(iii).
The nonprofit "shall make a good faith certification—(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; (II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (III) that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and (IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan." Sec. 1102(a)(2)(G)(i).
While there will be some level of subjective judgment on the "necessary" standard, a nonprofit with substantial endowment or reserves is not likely to qualify for an SBA Sec. 7(a) loan. The intent of the PPP Loans is to assist nonprofits who need funds to avoid employee layoffs.
PPP Loan Terms
For most nonprofits in existence on Feb. 15, 2019, the loan amount is a maximum of "2.5 times the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made," with a maximum loan value of $10,000,000. Nonprofits not in existence on Feb. 15, 2019, may use a reference period of Jan. 1, 2020 to Feb. 29, 2020 to calculate payroll costs.
Payroll costs include salary, vacation, parental, family, medical, or sick leave, separation payments, group health care insurance and benefits, retirement benefits and state or local tax on employee compensation. Sec. 1102(a)(2)(A)(viii). Payroll costs exclude salaries over $100,000, FICA, payroll taxes, compensation of staff with principal residence outside the U.S. and sick and family leave covered under the Families First Coronavirus Response Act. The American Institute of CPAs (AICPA) has posted a helpful PPP Loan Calculator on its website. Search for "AICPA Paycheck Protection Loan Calculator."
PPP Loans are nonrecourse and there is no personal guarantee and no collateral. Sec. 1102(a)(2)(F)(v) and (J). The nonprofit does not need to show it was unable to obtain credit from another lender. Sec. 1102(a)(2)(I).
The intention of the loan is to cover payroll and approved expenses for an eight week period between Feb. 15, 2020 and June 30, 2020. While the authorized loan purposes include rent, lease and utility payments, the loan formula is based only on payroll.
Loan payments will be deferred from six to twelve months. Sec. 1102(a)(2)(M)(iii). The SBA interest rate in the Interim Final Rule is 1%. The nonprofit will not pay a fee to the lender. Sec. 1102(a)(2)(H). The SBA will pay the lender a 5% fee for loans up to $350,000, a 3% fee for loans up to $2 million and a 1% fee for loans over $2 million. Sec. 1102(a)(2)(P)(i). A qualified nonprofit is "presumed to have been adversely impacted by COVID-19." Sec. 1102(a)(2)(M)(i).
Permitted Expenses Under PPP Loans
The PPP Loan may be used for "(I) payroll costs; (II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (III) employee salaries, commissions, or similar compensations; (IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (V) rent (including rent under a lease agreement); (VI) utilities; and (VII) interest on any other debt obligations that were incurred before the covered period." Sec. 1102(a)(2)(F)(i). The rental agreement, lease or mortgage must have been in place by Feb. 15, 2020.
Most nonprofits will use the PPP Loan to cover salaries, medical benefits, rent or interest on a mortgage and utilities. If payroll is low and building costs are high, the 2.5 times payroll formula for the loan may not fully cover all facility costs.
PPP Loan Forgiveness Amounts
The nonprofit may qualify for forgiveness for an eight week period, starting on the date of the loan origination. Sec. 1106(a)(3). The "forgiveness amount" is the payments during the eight week period for "(1) Payroll costs, (2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (3) Any payment on any covered rent obligation, (4) Any covered utility payment." Sec. 1106(b). The forgiven loan amount may not exceed the loan principal.
Under the SBA Interim Final Rule, the forgiveness of loan amounts other than payroll must be 25% or less. Payroll expense forgiveness may be 75% or more of the loan.
Because the nonprofit must substantiate all of these qualified expenses, it may be helpful to set up an accounting system to track them or a separate bank account for all of these payments. The loan forgiveness also includes forgiveness of interest for the eight week period.
Documentation for PPP Loan Forgiveness
The nonprofit must submit specific documentation to the lender at the end of the eight week period to qualify for loan forgiveness. Sec. 1106(f). The documentation must verify "the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including—(A) payroll tax filings reported to the Internal Revenue Service; and (B) State income, payroll, and unemployment insurance filings; (2) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; (3) a certification from a representative of the eligible recipient authorized to make such certifications that—(A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments." Sec. 1106(e).
Nonprofits should set up their accounting systems to ensure this documentation is available for the lender. If the nonprofit elects to delay payment of the employer portion of March 27 to Dec. 31, 2020 Social Security tax until Dec. 31, 2021 and 2022, it will not qualify for the PPP Loan forgiveness.
Employee Limitation for PPP Loan Forgiveness
The goal of the PPP Loans is to enable employers to avoid laying off employees during the eight week period. If the payroll expenses for employees earning less than $100,000 decrease by 25% or there is a reduction in the number of employees, there is a reduction in the loan forgiveness amount. Sec. 1106(d)(3). The employee count formula is generally the average number of full-time equivalent employees (the Sec. 4980H(c) method may apply to calculate FTEs) per month employed by the eligible recipient during the covered period divided by the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019 or, at the election of the nonprofit, the average number of full-time equivalent employees per month employed during January 1, 2020 to February 29, 2020. Sec. 1106(d)(2). The formula count is completed first. The excess over 25% of an employee salary reduction for the covered period compared with the most recent quarter is subtracted from that formula number to determine the loan forgiveness amount. Employees earning over $100,000 are excluded from the 25% reduction calculation. Sec. 1106(d)(3)(E).
Nonprofits who have laid off employees may rehire them after the PPP Loan disbursement (before June 30, 2020) and will still qualify for the loan forgiveness provisions. Sec. 1106(d)(5).
Faith Based Organization FAQ
In response to questions about government funding for the payrolls of religious entities, the SBA published a Faith-Based Organizations FAQ. Faith-based organizations are included in the PPP Loan program. They must be a Sec. 501(c)(3) organization, but do not require a specific IRS exempt determination letter. The PPP Loan does not waive any religious rights, but only requires compliance with nondiscrimination rules if goods or services are offered to the public. Affiliation with other entities of similar faith is permitted and does not violate the SBA affiliation rules.
A specimen religious organization statement is included. "The Applicant claims an exemption from all SBA affiliation rules applicable to Paycheck Protection Program loan eligibility because the Applicant has made a reasonable, good faith determination that the Applicant qualifies for a religious exemption under 13 C.F.R. 121.103(b)(10), which says that "[t]he relationship of a faith-based organization to another organization is not considered an affiliation with the other organization . . . if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion."
When and How to Apply for a PPP Loan
Congress allocated $349 billion to the Paycheck Protection Program. It is potentially the largest grant program in history. Nonprofits will be very interested in the Paycheck Protection Program. With over 10 million nonprofit employees in potentially eligible Sec. 501(c)(3) organizations, nonprofits could receive $10 billion to $21 billion in loan-grants. Because the SBA stated the PPP Loans will be "first-come, first-served," nonprofits must proceed to file applications as soon as possible.
Most large banks are familiar with SBA loan forms and procedures. It is best to contact your bank to discuss the application. Because there is no collateral, no personal guarantee and the SBA pays the fee to the lender within five days of the loan disbursement, the loan process should be quite rapid. With most of the nation in lockdown, Congress desires these funds be transferred to small businesses and nonprofits as quickly as possible. If the loan application process is commenced in early April, many banks should be able to close the loan and make disbursements by the third week of April.
The SBA has posted the Paycheck Protection Program Application Form on www.sba.gov. The initial SBA Form 2483 (3/20) was updated to SBA Form 2483 (4/20) on April 3, 2020. The four-page form is straightforward — two pages for a nonprofit officer to complete and two pages of instructions. The expected nonprofit contact and ownership information is entered. The applicant must multiply average monthly payroll by 2.5 to determine the loan amount. Nonprofits will use the loan for payroll, rent or lease payments and utilities. Nonprofits will generally not have an EIDL and may disregard that addition to the PPP Loan.
There are eight qualification questions. For nonprofits, Question Three on affiliates may be important. The affiliates may be used under SBA guidelines to determine the 500 employee limit. Question seven will be yes if all employees in the payroll calculation reside in the USA. Because nonprofits generally have not had SBA loans or committed unlawful acts, the remaining six questions will be answered no.
The nonprofit officer must make specific affirmations. It was in operation on Feb. 15, 2020, will use the funds only for the specified purposes, not engage in illegal activities and provide documentation and accounting records to the lender for its payroll, rent or lease payments, mortgage interest and utilities. It must not have another SBA loan on this or another SBA program. Most important, the nonprofit officer makes a good faith certification that the loan is "necessary" to support the organization.
The nonprofit must submit IRS Form 990 (if it is required to file this form) to the lender. The lender may use the assets reported on IRS Form 990 to determine qualification for the PPP Loan. Finally, the nonprofit officer acknowledges that he or she is subject to criminal penalties if the submitted information is not true and accurate.
Lender Response to SBA Interim Final Rule SBA-2020-0015
Many banks received and began processing PPP Loan applications on Friday, April 3, 2020. Some large banks indicated they would not start to accept PPP Loans applications until Monday, April 6, 2020.
According to the SBA, there are 30 million small businesses in America. The National Council of Nonprofits reports there are 1.3 million Sec. 501(c)(3) organizations. Therefore, there could be over 10 million small businesses and nonprofits who apply for PPP Loans. Even with 1,800 banks authorized to issue SBA loans, the sheer number of applications will be a major challenge for both the banks and the SBA.
On April 2, 2020, the SBA published an "Interim Final Rule" to establish guidelines for the loan grant program. See SBA-2020-0015. The SBA Interim Final Rule clarifies several points.
- Lender Reliance – The lender may "rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness."
- Loan Amount – The loan is available for the average payroll cost over 12 months, less the compensation amounts for individuals paid over $100,000 per year. The loan amount will be 2.5 times average payroll cost.
- Loan Terms – The interest rate will be 1%. If the loan is forgiven for a period of eight weeks, the interest is also forgiven. The borrower will not pay the origination fee. The SBA will pay the applicable fee to the lender.
- Loan Duration – Loans have a maturity of 2 years. There is a six-month deferral of interest and principal payments.
- Loan Forgiveness – After eight weeks, the nonprofit may apply for loan forgiveness. Any portion of the loan not forgiven may be repaid over two years from date of origination. Loan forgiveness is limited to 75% or more payroll and a maximum of 25% for other qualified expenses.
- First Come, First Served – The loans are, first-come, first-served. The $349 billion will be distributed in the order of applications received by SBA. This "first-come, first-served" SBA provision created the loan-rush frenzy.
- Enforcement – The SBA and government will enforce the terms for the loan-grants. If the loan is not used properly, the SBA may refuse to grant forgiveness. The federal government may also seek penalties for fraud in appropriate cases.
- Lender Documentation – Lenders must receive and review tax returns and payroll documents. There is no requirement for collateral or a personal guarantee. Lenders may rely on the documents submitted by borrowers.
As a public service, author A. Charles Schultz, JD, AEP®, President of Crescendo Interactive, Inc. and Editor of GiftLaw Pro charitable tax service, grants permission to all professional advisors to post, copy and share this document with nonprofit leaders.
Enrolled CARES Act Sections 1102 and 1106 (PDF)
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Published April 1, 2020