The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (S. 748) became law on March 27, 2020, providing significant funding for businesses, hospitals, schools, and nonprofit organizations, among many other things. The programs discussed in this article are all open and available right now. The following content highlights the key sections for tax-exempt organizations, both small and large, to consider:
Payroll Protection Program (PPP) – provides loans to 501(c)(3) and 501(c)(19) tax-exempt organizations with up to 500 employees. PPP is an Emergency Loan Program to secure funds to pay staff and certain operating costs for two months and may qualify for up to full loan forgiveness under certain circumstances. On April 2, 2020, the Small Business Administration (SBA) issued formal guidance for implementing PPP loans by releasing its Interim Final Rule. Summarized below are a few key features for tax-exempt organizations to consider:
- Eligibility: Available to 501(c)(3) and 501(c)(19) organizations that were in existence on February 15, 2020
- Size: Must have 500 or fewer employees (counting each employee – full time or part time and not FYTEs). Requires that employees of affiliated nonprofits may be counted toward the 500 employee limit depending on the control of the parent.
- Loan Processor: Check with local banks and financial institutions. All current SBA 7(a) lenders are eligible to issue PPP loans. Organizations can only submit one application.
- Loan Amount: The loan amount is the lesser of 2.5 times the monthly average payroll costs of the nonprofit or $10,000,000. For non-seasonal employers, the average monthly payroll costs for payroll in 2019.
- Loan Uses: Proceeds of PPP loans are to be used for payroll costs, employer group health care benefits, mortgage interest payments (not mortgage principal payments or prepayments), rent, utility, interest on other debt obligations that were incurred prior to February 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020, under certain circumstances.
- Loan Terms: Check with your local bank and financial institutions. The SBA Interim Final Rule states the interest rate is 1%. The maturity date is two years, however the CARES Act provides for a maximum maturity of up to ten years. Interest and principal payments will not need to be made for six months following the disbursement date of the loan. Interest will continue to accrue on PPP loans during the six month deferment.
- Loan Forgiveness Amount: The amount of the loan forgiveness can be up to the full principal amount and any accrued interest. The actual amount of the loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgages, rent payments and utility payments over the eight-week period following the date of the loan. The amount of the loan forgiveness will be reduced if the non-payroll costs exceed 25% of the total amount. SBA will issue additional guidance on loan forgiveness.
- Certification: Good faith certification
- The organization was in operation on February 15, 2020, having employees who were paid salaries or independent contractors that were reported on a 1099-MISC;
- Current economic uncertainty makes the loan request necessary; and
- Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
In addition, the applicant understands if the funds are knowingly used for unauthorized purposes, the federal government may hold the individual legally liable for fraud or related charges.
- Other Terms: No collateral or Personal Guarantees
Economic Injury Disaster Loans (EIDL): The CARES Act expands the availability of Economic Injury Disaster Loans to “private nonprofit organizations” and to other for-profit businesses. EIDL’s are intended to pay for expenses that could have been met had COVID-19 not occurred. Eliminates creditworthiness requirements and allows eligible nonprofits and other applicants to receive a check for $10,000 within three days. The following are key features for tax-exempt organizations to consider:
- Eligibility: Available to Employee Stock Ownership Plans and for 2020 only, “private nonprofit organizations.” All “Private nonprofit organizations” includes most nonprofit organizations. Below is part of the application form:
Is the applicant…“a private non-profit organization that is a non-governmental agency or entity that currently has an effective ruling letter from the IRS granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954, or satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law, or a faith-based organization.”
Recently, SBA issued an FAQ regarding the eligibility of a faith-based organization participation in the PPP and EIDL programs. See https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl
- Size: All other types of organizations eligible for the EIDL must have 500 or fewer employees (counting each employee – full time or part time and not FYTEs). However, there does seem to be an employee limit for a private nonprofit organization.
- Loan Processor: Small Business Administration. Applications are online at https://disasterloan.sba.gov/ela/.
- Loan Amount: The loan amount is generally up to $2,000,000.
- Loan Uses: Proceeds of EIDL must be used for working capital necessary to carry on the organization’s business. EIDL proceeds are intended to pay for expenses that could have been met had COVID-19 not occurred such as payroll, fixed debts, accounts payable and other operating expenses. Proceeds cannot be used to refinance debt incurred prior to COVID-19, to pay tax penalties or fines, make payments owed to another federal agency and certain other expenses.
- Loan Terms: Amounts are determined on a case by case basis. The maximum loan is $2,000,000. Loans are up to 30 years with an interest rate of 2.75% for private nonprofit organizations. Interest and principal payments will not need to be made for 12 months following the disbursement date of the loan. Interest will continue to accrue during the 12 month deferment.
- Loan Forgiveness Amount: There is no loan forgiveness, with one exception. The $10,000 advance is forgiven even if the tax-exempt organization is denied the EIDL loan.
- Certification: Self Certification that the borrower is eligible to apply for an EIDL under a Penalties of Perjury Statement.
- Other Terms: Waives personal guarantee up to $200,000. The applicant is not required to show that it cannot obtain credit elsewhere or that it has the ability to repay the loan. If available, collateral may be taken on loans greater than $25,000.
PLEASE NOTE any expense being reimbursed or provided for under a respective loan program does not qualify for another program.
Industry Stabilization Fund: The CARES Act creates an Industry Stabilization Fund which is for “nonprofit organizations” and certain businesses that have between 500 and 10,000 employees. The law directs the Treasury Secretary to issue initial guidance by April 6, 2020. Listed below are some of the key considerations known about the plan.
- Eligibility: A “Nonprofit organization” that is a US entity with significant operations in the US and a majority of its employees are located in the US. (See Certification below). “Nonprofit organization” is not defined by the statute and hopefully will be addressed by the additional guidance.
- Size: Between 500 and 10,000 employees.
- Loan Processor: Local banks and financial institutions.
- Loan Amount: Not provided for in the Statute.
- Loan Uses: Retain 90% of the workforce at full wages and benefits through September 30, 2020, and intention to restore 90% of the workforce that was in place on February 1, 2020.
- Loan Terms: Interest rate is capped at 2%. No principal or interest is due on the loans for at least six months after the loan is made.
- Loan Forgiveness Amount: Statute expressly prohibits loan forgiveness.
- Certification: Good faith certification with respect to several items, among others:
- Economic conditions made the loan necessary,
- Loan proceeds will be used to retain 90% of the workforce at full compensation until September 30, 2020;
- Organization will restore not less than 90% of workforce as of February 1, 2020, and restore all compensation and benefits to workers no later than four months after the termination of the disaster;
- Organization is domiciled in the US with significant operations and employees in the US;
- Organization will not outsource or offshore jobs for the term of the loan plus two years;
- Organization is not a debtor in a bankruptcy proceeding;
- Organization will remain neutral in any union-organizing effort for the term of the loan.
- Other Terms: Personal guarantees and collateral not provided for in the statute.
Employee Retention Payroll Tax Credit: The CARES Act is designed to encourage Eligible Employers to keep employees on their payroll during economic hardships related to COVID-19 with an Employee Retention Payroll Tax Credit.
The Families First Coronavirus Relief Act provides for a payroll tax credit for small and medium size employers required to pay sick or expanded family and medical leave wages to employees who were are unable to work due to certain circumstances related to COVID-19. The same wages cannot be counted for both credits.
- Eligibility: All of the tax-exempt 501(c) are eligible if (1) its operations were fully or partially suspended due to a governmental order that limited commerce, travel or group meetings due to COVID-19, or (2) whose gross receipts declined by more than 50% when compared to the same quarter in the prior year.
- Credit Amount: The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for each calendar quarter is $10,000, so the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
- Consequences: Eligible tax-exempt employers participating in the PPP are not eligible for the Employee Retention Credit. Also tax-exempt employers participating in the Employee Retention Credit cannot participate in the PPP.
On March 31, the IRS released IR 2020-62 which included its FAQ: Employee Retention Credit under the CARES Act. The FAQ’s provides valuable insight as to how the credit works. Stay tuned for an additional communication providing more detail on this program.
Self-Funded Nonprofits and Unemployment: 501(c)(3) organizations have the option of paying unemployment insurance tax as a regular or self-insuring employer. If the nonprofit organization self-insures, it is required to repay its state unemployment insurance trust fund for the amount of unemployment benefits paid to the laid-off employees. The CARES Act provides that nonprofit organizations that have chosen to self-insure may be reimbursed for one-half of the amounts paid to the state unemployment trust fund between March 13, 2020, and December 31, 2020.
Choices or Decisions to Make
The CARES Act provides numerous opportunities for nonprofits and tax-exempt organizations to reduce the financial distress caused by COVID-19. Determining which program(s) is best for you can be a difficult decision. At VonLehman, we have subject matter experts in each of these programs who can assist you in selecting the program(s) with the greatest benefit to your organization. Please contact your VonLehman representative or Bryan Pautsch at firstname.lastname@example.org or 800.887.0437, with any questions.