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 fluid with the SBA and Treasury Department issuing updated guidance on a regular basis and the subsequent passage of the Paycheck Protection Program Flexibility Act.
This summary is only intended to give a basic understanding of these programs and not an in-depth analysis and is not intended to act as legal, tax or any other type of advice and you should consult your attorney or other professionals before making decisions, including a determination if you are considering the most recent updated guidance. It's based on our current understanding and interpretations of the initial legislation and subsequent legislation and guidance. This is a dynamic and fluid situation subject to change and the issuance of additional guidelines at any time. We will be providing updates as guidance is made available and our understanding of the legislation matures.
CARES Act relief and grant funding
Word of caution for grant recipients: If you have payroll and other costs that are eligible costs under one or more provisions of the CARES Act, and those costs are grant funded, check with your funders to ensure obtaining PPP loan forgiveness, the EIDL advance or the Employee Retention Payroll Tax Credit will not impact that funding.
Payroll Protection Program or PPP
What is the PPP loan
The PPP is an emergency loan program available through August 8th, 2020 for charitable organizations who are eligible employers exempt under 501(C)(3) or organizations exempt under (C)(19) of the IRC, having fewer than 500 employees and in existence before February 16, 2020. Loan proceeds can be used to cover payroll costs (compensation, employer provided health benefits, retirement benefits and Ohio unemployment tax), rent, mortgage interest payments, health benefits, and utilities that were in place on or before February 15, 2020. Utilities were defined in the instructions to the PPP Loan Forgiveness Application as electric, water, gas, telephone, internet access and transportation. At least 60% of the loan funds must be used for payroll costs and the remainder on other eligible costs during the 8 or 24 week period following loan funding, or at the borrower's election the 8 or 24 week period beginning on the first day of the pay period following loan funding (the "alternative covered period"). Borrowers who obtained loans prior to June 5th can use either the 8 or 24 week period. Borrowers who obtained loans on or after June 5th must use the 24 week period. The loan amount is 2.5 times the average payroll costs of the organization over a prior 12 month period before the loan is made (a different formula is used for seasonal employers).
Wages utilized for any tax credits obtained under the Families First Coronavirus Response Act are not eligible for inclusion in the PPP. Independent contractors may not be used in the computation.
The interest rate is 1%, loan payments can be deferred until the earlier of the time the SBA informs the lender of the amount forgiven or 10 months from the end of the 24 week period, and any loan amounts not forgiven are eligible to be repaid up to 2 years for loans originated prior to June 5th and 5 years for the remainder, with no pre-payment penalties. These loans are supposed to be unsecured, require no guarantee, and have no loan fees.
The loan program comes with a loan forgiveness provision that could partially or entirely turn the loan into a grant. Loan forgiveness is initially determined by the lender and then approved by the SBA. Interest begins accruing on the date of the loan, but any interest associated with amounts forgiven is also forgiven.
Prior to June 12, 2020, PPP loans required 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. On May 13, 2020, the SBA provided a safe harbor (see FAQ dated May 13th, question 46) that all loans less than $2,000,000 will be deemed to have met the requirements of that certification.
Word of caution: Non-profit organizations should consider the impact loan forgiveness will have on their 2020 financial statements with regard to the recognition of additional grant revenues and net profit and their impact on the statement of activities and/or additional debt on the statement of financial position.
Faith Based Organizations should review additional content about this program under our Faith Based Organizations section.
Loan forgiveness provisions -
The loan can be fully or partially forgiven based on how the loan funds are spent over the 8 or 24 week covered period following loan origination or at the election of the borrower, the alternative covered period (only applies to payroll costs and borrowers that have bi-weekly payroll or more frequent and begins on the first day of the pay period following loan funding). The forgiveness application is filed with the lender along with all required supporting documentation, and the lender will ultimately determine the forgiveness amount and once approved by the SBA, notify the borrower.
Loan forgiveness will be reduced if the borrower does not spend all loan proceeds during the covered period, does not use at least 60% of those proceeds on payroll costs, does not maintain headcount or reduces salary or hourly wage rates by more than 25% on any employees employed during the covered period. In addition, loan forgiveness will be further reduced by any EIDL advance funds received.
For payroll, borrowers can use payroll costs paid during the covered period or incurred, meaning earned by the employee, as long as those wages are paid on time or schedule (up to $100,000 per employee of annual compensation, prorated at 15,385 for the covered period). For non-payroll costs, borrowers can utilize amounts payed or incurred during the covered period as long as paid during the next regular billing date.
The full PPP loan forgiveness application computes three numbers 1) the loan amount; 2) the amount of loan funds used on eligible expenses during the covered period, reduced by a salary/wage reduction computation, then further reduced by an FTE reduction quotient and 3) payroll costs expended during the covered period divided by .60. Loan forgiveness is determined based on the lower of the three numbers. Loan forgiveness cannot be greater than the loan amount.
Salary or hourly rate reduction
The borrower must evaluate all employees that were paid or earned wages during the covered period or alternate covered period and identify those that had a greater than 25% reduction in average annual salary or hourly wage compared to the same average for the period January 1, 2020 through March 31, 2020. For each identified employee, loan forgiveness is reduced by the amount in excess of 25% factored over the 8 week period. For example, if an employee had an average annual salary of $50,000 during the period January 1, 2020 through March 31, 2020 and then had their salary reduced to an average annual salary of $35,000 over the 8 week period (a 30% reduction), the impact to loan forgiveness would be $50,000 x 75% = $37,500 less $35,000 or $2,500 x 8 divided by 52 or $385 (8 weeks of the $2,500). This calculation is done for each employee with the sum reducing total eligible costs expended during the covered period.
There is a safe harbor provision that if you restore those salary levels or hourly rates by December 31, 2020 you can eliminate the reduction, but this is an all or nothing provision and if you restore only 99% you will fail the safe harbor. For each employee determine the average annual salary or hourly wage on February 15th , 2020 and for the period February 15, 2020 through March 31, 2020. If the computation from February 15th is higher, then compute the average annual salary or hourly wage on December 31, 2020. If you have restored ALL average annual salaries and hourly rates, you will qualify for the safe harbor and considered not to have reduced annual average salary and wages by more than 25%.
FTE (Full Time Equivalent) reduction
Borrowers must determine if their total average FTE's over the 8 or 24 week period were reduced compared to the same computation from one of two prior periods, with the end result being a fraction that will be applied to the sum of total eligible loan proceeds spent during the covered period, less any amounts computed under the salary and hourly rate reduction. The fraction is comprised of the following:
• The numerator is the average number of FTE’s per standard pay week during the 8 week covered period.
• The denominator is the same computation during the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, at the borrower's option.
Note - if you are a seasonal employer, you can use either of the above periods or any consecutive 12 week period from May 1, 2019 to September 15, 2019.
Borrowers will want to select the lowest of the two numbers and 1 FTE is defined as 40 hours per week or more per paid employee. The instructions to the loan forgiveness application provide for a simplified method to compute FTE's in which the borrower can assign 1 FTE to alll employees that work 40 hours or more and .5 FTE's to employees that work less than 40 hours. Employers who have more part-time employees that work less than 20 hours per week may be better off using the simplified method versus employers with more part time employees that work more than 20 hours per week.
There is a safe harbor provision similar to that for average annual salary and hourly rate reductions and a number of exemptions that can minimize the impact of those reductions. if between February 15, 2020 and April 26th, 2020 you reduced your total average FTE's compared to FTE's on February 15, 2020 and then restored those reduced FTE's by December 31, 2020 then those reductions will not penalize your forgiveness determination. The safe harbor is an all or nothing provision in which you must restore ALL FTE's by December 31, not just 99%. We believe the computation of FTE's will be subject to further guidance and clarification. If the employer meets the safe harbor, there will be no reduction for FTE's. In addition, there are exemptions for a qualifying inability to rehire an employee and an inability to find a suitable replacement.
In addition, exemptions for FTE reduction exist if an employee was terminated for cause, voluntarily resigned or requested a reduction in hours or was offered in writing to be rehired during the covered period and rejected that offer. For these circumstances, you would count these employees as an FTE in order for their circumstances to not negatively impact the fraction.
Note - if you use the alternative covered period, you must use that period for all computations.
A common approach to tracking PPP funds: We are seeing many organizations placing the PPP loan funds in a separate bank account and only transferring loan proceeds from that account into operating when PPP eligible costs are spent. The reasoning being that any amounts still left in the separate account will be the minimum loan payback and those funds will be available for payback.
PPP loan and forgiveness trap: The calculation is a multi-step process first reducing the loan amount by amounts not spent on eligible costs, then applying the salary reduction and FTE reduction computations to that remaining balance. As a result, even if an organization spends loan proceeds only on eligible costs, unless their FTE and salary reduction computations provide for 100% forgiveness, they will have a loan payback from non-loan funds.
The PPP cannot be used to cover the same costs as the EIDL emergency grant or the expanded EIDL loan program described below. Also, just to repeat, any EIDL Emergency Grant funds will reduce the amount of the PPP loan forgiveness you are otherwise eligible for
AFFILIATION RULES: For organization's that are affiliated with other organizations, for example faith based organizations that are members of a diocese, there are affiliation rules that must be considered that will determine if you individual affiliated organizations can apply or if all affiliated organizations have to apply under one 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. The program has been updated by the SBA to provide grant funds of $1,000 per employee with a cap of $10,000. The application to funding process was originally supposed to take only 3 days, but so far has taken much longer. These grants are available to organization's that have suffered economic injury due to the crisis and 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 most organizations tax-exempt under section 501(c) of the Internal Revenue Code can apply for these grants at https://covid19relief.sba.gov/#/. These funds are only available due to economic injury as a result of the COVID-19 emergency and require certification under penalty of perjury.
Reminder: As noted above, you cannot receive both the EIDL emergency grant and PPP loan, without the advance being subtracted from the amount of PPP loan forgiveness 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 most organizations tax-exempt under section 501 (c) of the Internal Revenue Service who have suffered an economic injury due to the crisis, with 500 or fewer employees and in operation before 1/31/20.
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. Proceeds cannot be used to make owner distributions, repay owner loans, refinance long-term debt, expand facilities or acquire fixed assets, among other restrictions.
A word of caution: As noted under the PPP, EIDL funds cannot be used for the same “purposes” as the PPP. We still expect further guidance on the concept of “purposes” in the 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.
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 for employers that averaged 100 or less FTE's in 2019. 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 a calendar quarter of 2020 compared to the same calendar quarter of 2019 and lasting until a quarter in which gross receipts are at least 80% compared to the same calendar quarter of 2019.
The Treasury Department recently issued updated guidance on this credit in the form of an FAQ, which you can find in the link at the top of this page.
ORGANIZATION'S THAT AVERAGED MORE THAN 100 FTE'S OR MORE IN 2019: For these organization's, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
As with the PPP, any wages utilized for tax credits under the Families First Coronavirus Response Act are not eligible for this credit (no double dipping).
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 quarterly 941 deposits. This credit is only against the employer portion of the FICA or Social Security Tax so we anticipate many organizations will be eligible for an advance and/or refund.
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.
The Act provides for an "above the line" $300 tax deduction for donations made to charitable organizations in 2020. Above the line is significant, although the amount is not, because you do not need to itemize to tale this tax deduction.
Other Important Provisions
There are numerous other provisions of the CARES Act 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 legal counsel or another advisor before making any decisions with regard to the CARES Act.