In the wake of the novel coronavirus disease outbreak, more formally known as COVID-19, businesses and other entities have found it increasingly difficult to continue operating in an uncertain environment. Nonprofits in particular are struggling to maintain mounting costs, employee headcounts and relationships with donors in their efforts to continue their missions. The Coronavirus Aid, Relief, and Economic Security (CARES) Act creates new programs and modifies existing ones to provide direct relief to nonprofit organizations. The most immediate of these programs – the Paycheck Protection Program (PPP), administered through the Small Business Administration (SBA) – provides qualifying 501(c)(3) nonprofits with access to loans of up to 2.5 times the average total monthly payroll costs from the prior year, with a $10 million cap. The application can be found here and the SBA Interim Final Rule can be found here. SBA lenders are accepting applications starting April 3, 2020. Although SBA lenders will be accepting applications until June 30, 2020, the loans will be disbursed on a first-come, first-served basis. This article provides a summary of the various financial relief programs available to nonprofits under the CARES Act and includes a chart summarizing each loan program and its terms.[1]
Executive Summary Chart of Loan Programs*
Relief for Small 501(c)(3) and 501(c)(19) Nonprofits – Paycheck Protection Program
The CARES Act provides emergency relief to 501(c)(3) charitable organizations and 501(c)(19) veterans’ organizations during this national emergency.[2] Section 1102 of the CARES Act amends the Small Business Act, making charitable nonprofits with 500 or fewer employees[3] eligible to receive loans of up to $10 million or 2.5 times the average total of monthly payroll costs for the prior year, whichever is less. Loans must be used for enumerated purposes through June 30, 2020. Purposes include payroll costs; costs related to continuation of group healthcare benefits; and interest payments on mortgage; rent; utility payments; and interest payments on other debt obligations incurred before February 15, 2020.[4] Importantly, the loan proceeds cannot be used to cover annual compensation in excess of $100,000 for any individual employee, or for any compensation paid to employees located outside the U.S.
The emergency nature of these loans dictates their unusual characteristics. For example there is no cost to submit an application, there is no prepayment penalty and the SBA has guaranteed 100% of the loans through December 31, 2020. The usual requirements of personal guarantees and the pledging of collateral are waived. In lieu of this security, each eligible charitable nonprofit must instead certify that:
- The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the nonprofit.
- The funds will be used to retain workers and maintain payroll, or to make mortgage interest payments, rent, and utility payments.
- During the period beginning February 15, 2020, and ending December 31, 2020, the nonprofit has not received and will not receive another loan under this program.
While the emergency relief is characterized as a loan, charitable nonprofits are eligible for loan forgiveness for eight weeks from when they receive the loan under Section 1106.[5] Forgiveness is not automatic; charitable nonprofits must submit an application to their loan servicer with additional certifications. Charitable nonprofits may request forgiveness up to the full amount of the principal of the loan and any accrued interest; however, the SBA’s Interim Final Rule provides that no more than 25% of the forgiven amount may be used for non-payroll costs. Reductions will be made to the amount of the loan forgiven for any nonprofit that reduced employees’ salaries by more than 25% from the quarter preceding the covered period or that reduced its number of full-time employees.[6] An entity that reinstates employees or restores wages by June 30, 2020, will not have the amount of loan forgiveness reduced. Any remaining balance of the loan after the application of forgiven portions will be payable over two years with an interest rate of 1%.
Relief for Midsize Nonprofits – Industry Stabilization Fund
While not eligible for an SBA loan, all nonprofit organizations with between 500 and 10,000 employees can obtain loans to cover losses incurred as a result of COVID-19 under Section 4003 as part of the Industry Stabilization Fund.[7] Nonprofits are eligible for a loan with a capped 2% interest rate, but payments are deferred for the first six months of the loan. The terms of the loan will also require the nonprofit to maintain 90% of its employment levels as of March 24, 2020, until September 30, 2020. There is no loan forgiveness provision for midsize nonprofits. The CARES Act directs the Department of the Treasury to issue additional regulations and guidance on how this fund will work.
Relief for All Types of Private Nonprofits – Economic Injury Disaster Loan Program
While nonprofits that are not 501(c)(3)s are ineligible for the SBA loans, all types of private nonprofits[8] are eligible for grants under the Economic Injury Disaster Loan (EIDL) program.[9] Loans are available up to $2 million, with interest rates up to 2.75% for nonprofits, and repayment may be deferred up to six months. Under Section 1110, eligible entities can receive grants without providing a personal guarantee on loans of up to $200,000, proving that they were unable to obtain credit elsewhere, or being in operation for at least one year prior to the disaster.[10] An entity must still pledge collateral, however, for loans greater than $25,000. The covered period is twice as long as the period for the SBA loans, extending until December 31, 2020. Additionally, 501(c)(3) entities that receive SBA loans can also receive funding through the EIDL program as long as the loans are not used for the same purpose.
While no loan forgiveness provision applies to loans under the EIDL program, borrowers can receive up to a $10,000 advance within three days of applying for the loan. Even if the EIDL application is subsequently denied, a nonprofit is not required to repay the advance.[11] Emergency advances must be used for maintaining payroll to retain employees during the disruption, meeting increased costs to obtain materials unavailable from original sources due to interrupted supply chains, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. EIDLs can also be refinanced, subject to the guidelines set out under the PPP.
Relief for Nonprofits of All Types and Sizes – Payroll Tax Credit and Payment Deferral
Employee Retention Tax Credit
All tax-exempt nonprofit entities carrying on a trade or business, regardless of classification, are also eligible to claim an employee retention payroll tax credit against the employer’s share of Social Security taxes for disruptions caused by COVID-19.[12] Only a nonprofit that did not receive a loan under the SBA PPP can claim a refundable credit for 50% of up to $10,000[13] of wages paid between March 13, 2020, and December 31, 2020, to each employee during any quarter in which its operations were fully or partially suspended due to governmental orders related to COVID-19.
For nonprofits with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order. For nonprofits with more than 100 full-time employees, only wages paid to an employee who is not providing services due to a full or partial shutdown qualify for the credit.[14] The Department of the Treasury is directed to issue regulations that enable employers not engaged in a trade or business to claim the credit if revenue for a quarter was reduced by 50% relative to the same quarter of 2019.
Payroll Tax Payment Deferral
Employers, including nonprofit organizations, may also defer payment of the employer share of Social Security taxes deposited after March 27, 2020, through December 31, 2020. Such deferred taxes are due in two installments: 50% by December 31, 2021, and 50% by December 31, 2022. The payroll tax deferral is not available to any nonprofit that receives loan forgiveness under the PPP.
Practical Considerations for Clients
- Verify the IRS classification of your nonprofit and determine the number of employees in the operation.
- Contact your local SBA lender pursuant to the PPP, if eligible.
- Ensure the ability of the nonprofit to make the appropriate certifications as required by the specific loan program.
- Maintain and organize appropriate documentation relating to the uses of the proceeds of the loan.
- Consult your accountant or attorney to better understand your eligibility, the appropriate uses of the loan, how to efficiently structure your spending and how to maximize tax benefits.
[1] This article does not intend or purport to provide legal advice. Each entity should consult legal counsel regarding its individual eligibility and applicable loan terms. Additionally, we emphasize that since guidance is quickly evolving, the applicable rules may be subject to change. We will continue to keep apprised of important developments as they arise.
[2] CARES Act, H.R. 748, 116th Cong. § 1102 (2020).
[3] Including all full-time, part-time and other employees.
[4] Payroll costs include salaries, wages and commissions (capped at $100,000 on an annualized basis for each employee); parental/family leave; vacation; allowance for separation or dismissal; payment for any retirement benefit; and payment of state and local payroll taxes.
[5] CARES Act, H.R. 748, 116th Cong. § 1106 (2020).
[6] Note that the reduction in the amount forgiven does not apply to salary reductions to employees who received, during any single pay period in 2019, salaries at an annualized rate of more than $100,000. Thus, with respect to those six-figure salaries, wages may be cut by more than 25% without affecting the loan forgiveness amount.
[7] CARES Act, H.R. 748, 116th Cong. § 4003 (2020).
[8] “Private nonprofits” appears to include any tax-exempt nonprofit.
[9] CARES Act, H.R. 748, 116th Cong. § 1110 (2020).
[10] Except that it must have been in operation on January 31, 2020.
[11] If the entity later transfers into the PPP, the advance will be considered in determining the amount of forgiveness.
[12] CARES Act, H.R. 748, 116th Cong. § 2301 (2020).
[13] Qualified wages include certain employee health plan expenses.
[14] Please note, however, under amended guidelines expected to be issued by the IRS and Department of the Treasury, companies and nonprofits with 100 or more employees may be able to claim the credit for employees who are working only part time.
