April 3, 2020
The CARES Act for Nonprofits – what’s in it for you?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020 to provide funding and financial support for non-profit organizations during this national emergency. The legislation is complex and there are many important clarifications and implementation details that will be emerging in the coming days and weeks ahead. First, I want you to know that we are here for you as a resource as you try and navigate not just this $2 trillion economic stimulus package and how it may provide needed support for your organization, but also in the many other ways this crisis is impacting your organization. With each passing day our understanding, perspective and experience grows of how the non-profit industry in Northeast Ohio is rising to meet the challenges of the times and utilizing this Act. Second, I have put together a very high-level summary of the various provisions of the CARES Act that may benefit non-profit organizations. This summary is only intended to give you a basic understanding of these programs, so together, we can explore the details of those programs that may be advantageous for you and make informed decisions on which provisions are right for you. You can view the entire piece of legislation at https://www.congress.gov/bill/116th-congress/house-bill/748/text. Certain provisions of the original legislation have been modified or enhanced with the issuance of the Interim Final Rule.
This summary is based on our current understanding and interpretations of this legislation. This is a dynamic and fluid situation and provision are changing by the day. We will be providing updates on our website and in our conversations as guidance is made available and our understanding of the legislation matures. Please make sure you check with funders, especially those that fund payroll costs, to ensure obtaining the PPP or EIDL will not impact that funding and review our final thoughts at the conclusion of this summary.
Payroll Protection Program (PPP)
The PPP is an emergency loan program available through June 30, 2020 on a first come first serve basis for charitable organizations exempt under 501(C)(3) of the IRC, having fewer than 500 employees and in existence before February 16, 2020. Loan proceeds can be used to cover costs such as payroll and payroll taxes, rent, mortgage interest payments, health benefits, and certain other specified costs. The Interim Final Rule added a requirement to use at least 75% of the funds for payroll costs. The loan amount is 2.5 times the average payroll costs of the organization over the prior 12 months (a different formula is used for seasonal employers). Update: with the issuance of the interim final rule, independent contractors may not be used in the computation.
You apply for the federally guaranteed loan through a participating bank and banks started processing applications on April 3rd. Your bank should be able to provide you with the latest updates on the program, the application process, documents needed and the forgiveness provisions.
The interest rate has been reduced to approximately 1%, loan payments can be deferred for 6 months, and any loan amounts not forgiven are eligible to be repaid up to 2 years (update – the issuance of the interim final rule lowered the interest rate and the loan term from the original terms) with no pre-payment penalties.
These loans are unsecured, require no guarantee, and have no loan fees. You can view a sample loan application and find additional information at https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp. The loan application from your lender could be substantially different.
The loan program comes with a loan forgiveness provision that could turn this partially or entirely into a grant. The loan forgiveness provisions are complex and subject to further guidance. Loan forgiveness is determined by the lender through an application process which can take 60 days.
A word of caution; this program is still a loan program and the amount of forgiveness, because it depends on future events and circumstances, including the ability to provide sufficient documentation, is not certain.
Loan forgiveness provisions - The loan can be fully forgiven, if over the 8 week period following loan origination, the funds are used for the costs noted above and the employer maintains employee headcounts with regard to full-time equivalents (the definition of which may be subject to further guidelines) and does not reduce salary levels in excess of 25%.
Loan forgiveness cannot be greater than the loan amount and will be calculated by taking the amount of the loan used for stipulated costs over the 8 week period, multiplied by a fraction:
• The numerator is the average number of FTE’s per month during the 8 week period.
• The denominator is the average number of FTE’s per month during a period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, at your option.
Tip: if you have or will reduce the number of FTE’s between February 15, 2020 and April 27, 2020 compared to your FTE’s on February 15, 2020, and you rehire those FTE’s by June 30, 2020, that reduction will not be considered in the equation.
A similar reduction of loan forgiveness can result if you reduce employee wages more than 25% from February 15, 2020 through April 27, 2020 as compared to February 15, 2020. However, like with the FTE equation, if you restore those wages by June 30, 2020, the reduction will not count in the equation.
The PPP cannot be used to cover the same costs as the EIDL emergency grant or the expanded EIDL loan program described below. (Update – EIDL Emergency Grant funds will now reduce the amount of of the PPP you are otherwise eligible for)
Word of caution: We have had many conversations lately with organizations that are unaware of the FTE computations and believed that the only requirement for forgiveness was spending the funds on the specified expenses in the required proportions.
Another word of caution: All PPP loans will require the borrower to certify, in good faith, that the funds are necessary to support the organization’s ongoing operations due to uncertain economic conditions, funds will be used for the specified purposes and that the organization will not apply for other SBA funding programs and use the funds for the same purpose. This last part is where more guidance is needed as it seems to me, that given the purpose of these programs, it may be difficult to ensure funds from more than one program are not used for the same “purpose”. I hope the term “purpose” will be clarified in the very near term. In the interim
Update: effective with the issuance of the interim final rule, it looks like any amounts you received in EIDL Emergency Grant Funds will reduce the amount of PPP you are otherwise eligle for.
Another tip: You can apply for this loan now with only an investment of time. If accepted, which may take 2-3 weeks (2 weeks is supposed to be the goal but we’ll have to see as some banks seem to be struggling to get this program up and running), our understanding is you can decline the loan at that point should other options become more plausible at that point. You should discuss this with your bank prior to loan application.
EIDL Emergency Grant
The EIDL loan process can take weeks with cash strapped organization’s needing immediate relief. As a result, the CARES Act provides for a cash advance of up to $10,000 within 3 days of submitting the application to the SBA. These grants do not need to be repaid, even if turned down for the EIDL, as long as the funds are used for paid sick leave, payroll costs, rent, mortgage payments and certain other obligations that cannot otherwise be met because of the disaster. All organizations with 500 or fewer employees and tax-exempt under section 501(c) of the Internal Revenue Code can apply for these grants at https://covid19relief.sba.gov/#/ and the SBA estimates the application will take 2 hours. These funds are only available due to economic injury as a result of the COVID-19 emergency and require certification under penalty of perjury.
Tip: If you receive an EIDL emergency grant and then subsequently obtain a PPP loan, the advance will be subtracted from the amount of PPP you are otherwise eligible for.
Expanded EIDL program
The existing EIDL loan program has been expanded and can offer loans up to $2,000,000 with loans of $200,000 requiring no personal guarantee, although loans greater than $25,000 may require some form of collateral, if available. The loan is available to organizations tax-exempt under section 501 (c) of the Internal Revenue Service with 500 or fewer employees and in operation before 1/31/20. The loan is credit or alternative criteria based and a streamlined application process which can be accessed at https://covid19relief.sba.gov/#/ .
The loan will has an interest rate of 2.75% and does not have a loan forgiveness feature, payments can be deferred up to 12 months and the loan can have a maximum maturity of 30 years with no prepayment penalty. Loan proceeds must be used to pay fixed debts, payroll, accounts payable, rent, utilities and other bills that cannot be paid because of the disaster’s impact during the covered period of the program. The loan process is expected to take 2-3 weeks.
Tip: You can apply for this loan now, and if approved, you do not have to accept the loan.
A word of caution: As noted under the PPP, EIDL funds cannot be used for the same “purposes” as the PPP. We expect further guidance on the concept of “purposes” in the near future and until then, if you apply for both and the EIDL and PPP, you may want to consider using EIDL loan proceeds for non-payroll purposes (Update: effective April 3rd, 2020 you might not be able to apply for both EIDL and PPP.
Deferral of Employer FICA Taxes
All non-profit organizations exempt under section 501(c) may elect to defer payment of the employer portion of FICA or Social Security Tax through the end of 2020. All deferred payroll taxes will be made in two equal installments at the end of 2021 and 2022. Contact your payroll provider ASAP to discuss their process for utilizing this program.
Word of caution: You cannot participate in this program if you utilize the PPP.
Employee Retention Payroll Tax Credit
This is a fully refundable tax credit for all employers exempt under section 501(c) and if you qualify is equal to 50 percent of 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 all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. To qualify you must have:
• Fully or partially suspended operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; OR
• Experienced at least a 50% decline in gross receipts during the first calendar quarter of 2020 compared to the first calendar quarter of 2019.
Tip: You can apply to the IRS for an advance on this credit and also perform a computation that will allow you to reduce your 941 deposits. This credit is only against your portion of the FICA or Social Security Tax so we anticipate many organizations will be eligible for an advance and/or refund.
Word of Caution: Any wages or paid leave that are utilized to obtain a credit through the Families First Coronavirus Response Act cannot be used to claim this credit.
Another word of Caution: The credit cannot be taken if you obtain a PPP. In addition, this is another area where we expect additional guidance and clarification in the near future, especially with regard to the qualification criteria (especially with regard to a full or partial suspension of operations here in Ohio given the Governor’s orders).
Another word of caution: We are aware that some people believe you can utilize this program UP UNTIL you obtain a PPP loan. Our position is that it’s either or and we are unaware of any authoritative guidance to the contrary.
Contact your payroll provider to discuss their processes for using this program.
Reimbursement of Unemployment Benefits for Self-insured or Reimbursing Employers
For those charitable organizations that have elected to self-insure for unemployment insurance tax purposes, the CARES Act will reimburse the organization for one half of all reimbursed unemployment benefits paid to the state between March 13, 2020 and December 31, 2020.
Each organization needs to evaluate the different options available by projecting out how each program will benefit you over the coming weeks and select the program or combination of programs that look to benefit you the most. For example, we anticipate there will be organization’s that will be better off taking the $10,000 EIDL grant coupled with the employee retention payroll credit and possibly deferring their portion of FICA and using the EIDL loan as a back-up, versus using the PPP. Other organizations will benefit from the PPP. Many organizations are submitting PPP loan applications which we encourage. However, our advice is to not accept them if you have that option until a full analysis has been done of the other available program combinations at that time. Times are changing rapidly as well as the nature of these programs and we encourage you to re-evaluate prior to making any commitments, if possible.
Other Important Provisions
There are numerous other provisions of the Stimulus legislation that will impact non-profit organizations and we encourage you to check our website as we provide further updates.
The content of this publication does not constitute tax or legal advice of any manner and is entirely based on our current understanding of the subject matter at the time of origination and may be outdated or ultimately determined to be inaccurate. Please confer with us or another advisor before making any decisions with regard to the CARES Act.
I hope you find this informative and useful and please contact with questions or to set up a time to review.
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