UPDATE: As of April 24, 2020, the federal government approved replenishment funding for the PPP by way of the Paycheck Protection Program and Health Care Enhancement Act. Learn more.
On Friday, March 27, in response to the devastating impact of the COVID-19 pandemic on the U.S. economy, Congress passed, and President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“Act”). Included in the Act was an appropriation of $349 billion for the Paycheck Protection Program (“PPP”). The PPP component of the Act contains long-term loans with debt forgiveness provisions. PPP loans should not be confused with Small Business Association (SBA) Economic Injury Disaster Loan (“EIDL”) program loans, which have a $10,000 non-repayable advance but do not include a debt forgiveness component equivalent to the PPP loan. A summary of both loan programs is noted below and how they relate to nonprofits.
Paycheck Protection Program and Loan Forgiveness for Nonprofits
- Loans are available for small nonprofit employers under section 501(c)(3) organizations and tax-exempt veterans’ organizations under section 501(c)19, with 500 employees or fewer, or if applicable meet the “size standard in number of employees established by the Administration for the industry in which the” nonprofit organization operates. The Interim Rule the SBA issued to banks late on 4/2/2020 also includes a requirement to be a small business concern as defined in section 3 of the Small Business Act (15 USC 632); however, the latest version of the application issued 4/2/2020 does not ask for industry classification or size of revenue.
- The loan is for expenses incurred between February 15, 2020, and June 30, 2020, for payroll costs, including group health insurance, retirement plan funding, salaries or commissions, interest on mortgage, rent, and utilities. The covered period for expenses according to the Act are expenditures incurred between February 15, 2020, and June 30, 2020. The SBA interim rules issued April 2, 2020, state covered period begins with the date of funding and continues for eight weeks. These rules are under review by the House and Senate.
- Loans equal to 2.5 times the average monthly payroll cost up to $10 million. The full amount is eligible for forgiveness. The average monthly payroll cost is the average of the twelve months payroll prior to the loan, including payroll taxes, employer-funded health insurance, and retirement benefits, and state taxes paid by the employer. Seasonal employers will be allowed to utilize a 12 week period starting February 15, 2019, to June 20, 2019. Eligible payroll costs include compensation to all employees but exclude compensation to an employee compensated above $100,000. New entities not in operation for the full year of 2019 can use the period January 1, 2020, to February 29, 2020.
- Loans are 100% guaranteed by the SBA with maximum terms of 2 years and 1% interest. Payments are deferred for six months but will accrue interest during the deferral period.
- Loans are administered by an SBA approved bank, and all requirements for personal guarantees and collateral will be waived.
- Eligible Nonprofits are eligible to have these loans forgiven.
- Amount of Loan forgiveness will be equal to the amount spent by the borrower during an 8-week period. That period starts the day after the loan proceeds are received. The amounts eligible for forgiveness include payroll costs as defined above, and interest payment on any mortgage or other obligation incurred before February 15, 2020, payment of rent on any lease in force before February 15, 2020, and payment on any utility for which service began before February 15, 2020. 75% of the loan forgiveness amount must be for payroll costs as defined above, with no more than 25% of other categories eligible for inclusion.
- The SBA will issue further guidance on specifics for the loan forgiveness. Changes to amounts eligible for inclusion may occur.
- The amount forgiven will be reduced proportionally by any reduction in full-time equivalent employees retained compared to the prior year beyond a 25% reduction in full-time equivalents as compared to the prior year.
- Borrowers that re-hire workers previously laid off will help the calculation of the amount to be forgiven.
- Loan amounts not forgiven after the review of qualified covered expenses can be either returned to the SBA or carried forward as an ongoing loan with terms of a maximum of 2 years at 1% interest. The 100% loan guarantee remains intact.
In summary, the debt forgiveness is intended to reimburse an employer for the cost of retaining their existing workforce for eight weeks, plus provide an additional 25% of their labor cost to pay interest, rent, and utilities during the recovery period. That is if the employer maintains their current labor force from February 15, 2020, to June 15, 2020.
SBA Economic Injury Disaster Loan (EIDL)
Though much in the vein of the traditional disaster assistance loan, the Act did make some modifications to EIDL loans, including a grant provision not requiring repayment. Significant elements of the EIDL loans are as follows, and only “private nonprofits” (a 501(c)3 which does not qualify as a public charity) are eligible:
- Maximum loan amount of $2 million, an interest rate of 2.75% for nonprofits, and a maximum of 30 years to repay.
- First payment deferred for one year.
- Will not decline a loan for lack of collateral but requires borrowers to pledge what is available, including real estate and residences.
- Loans greater than $200,000 require personal guarantees (not for loans less than $200,000).
- Must have been in business on January 31, 2020
- The Act removed the traditional SBA requirement that the borrower is not able to secure credit from another lender.
- The Act added an emergency grant provision that allows a non-repayable advance of $10,000. The advance should be paid within three days of the request and must be used for authorized costs. Repayment of the grant is not required if the EIDL loan is not approved.
- This loan is not forgivable.
It should be noted that duplicate loans from each program cannot be used for the same expenses.
Both the PPP and EIDL loan programs offer significant opportunities to help small nonprofit organizations to continue to operate, retain employees, and hopefully reduce the financial burden due to the COVID-19 crisis. Every small nonprofit organization should evaluate and consider whether their organizations should participate in one or both of these opportunities.
The professionals at CRI are here to help you navigate the application process and to assist you in gathering the required information. We will keep monitoring updates as they occur and posting them to our COVID-19 Resource Page.
For additional questions on how to apply, whether your small nonprofit qualifies, or any other concern, please contact your CRI Advisor.