On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a $2.2 trillion Phase 3 COVID-19 emergency relief bill aimed at providing much-needed relief to the American people and businesses in response to the coronavirus outbreak. The CARES Act, which was passed unanimously by the U.S. Senate late on March 25 and by the U.S. House by voice vote on the morning of March 27, is the largest federal relief package in history and provides direct financial help to individuals and families; immediate assistance for hospitals, healthcare first responders, and patients; financial support and tax incentives for small businesses and nonprofit organizations; and assistance for distressed industries.
The CARES Act contains several provisions applicable to nonprofit organizations, but the available relief and the process for obtaining it depend largely on an organization's tax classification under Section 501(a) of the Internal Revenue Code (the "Code").
501(c)(3) and 501(c)(19) Organizations with 500 or Fewer Employees
One of the core pieces of the CARES Act is the provision of $349 billion for small businesses through federally backed loans under a modified and expanded Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and nonbank lenders. The CARES Act also provides charitable giving incentives to donors to 501(c)(3) organizations by expanding the charitable deduction to all taxpayers for a year.
Paycheck Protection Program Eligibility
Unlike other SBA programs that are limited to for-profit businesses, the Paycheck Protection Program measure, codified at Section 1102 of the CARES Act, defines eligible businesses to include nonprofit organizations, but only those organized under Section 501(c)(3) of the Code. "Veteran organizations," as defined in section 501(c)(19) of the Code, are separately referenced outside the definition of "nonprofit organization," but are also considered eligible under the Paycheck Protection Program.
Available Loan Amounts
Under the Paycheck Protection Program, 501(c)(3) and 501(c)(19) nonprofit organizations with 500 or fewer employees, which includes full-time and part-time employees, will be eligible for SBA loans of up to $10 million and expedited loans of up to $1 million. Specifically, these types of nonprofit organizations can receive the lesser of $10 million or 2.5 times the average total monthly payroll costs from the prior year.
Permissible Use of Paycheck Protection Program Loans
The loans, which will be available through SBA- and Treasury-approved banks, credit unions, and some nonbank lenders, must be used for the following types of expenses:
- Payroll costs, including compensation to employees; payments for vacation, parental, family, or medical or sick leave; severance payments; payments required for group healthcare benefits (including insurance premiums), retirement benefits, and state and local employment taxes
- Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal)
Importantly, the loans cannot be used for compensation of individual employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
Required Certifications and Loan Repayment
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds, and no collateral needs to be pledged. A 501(c)(3) or 501(c)(19) nonprofit would also not be required to show that it cannot obtain credit elsewhere. Rather, such organizations must certify that the loan is necessary because of the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses. Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year, and interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
In addition, the SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
Loan Forgiveness Under Paycheck Protection Program
Under Section 1106 of the CARES Act, 501(c)(3) and 501(c)(19) nonprofit organizations are eligible for loan forgiveness for 8 weeks, commencing from the origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.
The amount of loan forgiveness may be reduced if the organization reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Organizations that re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.
Organizations must apply for loan forgiveness to their lenders by submitting required documentation and will receive a decision within 60 days. If a balance remains after the organization receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
SBA Guidance and Application Process
SBA is directed to issue regulations to carry out all of the CARES Act provisions described above within 15 days of enactment of the law and waive the notice requirements under the Administrative Procedures Act for such rulemakings.
We expect additional guidance from the SBA regarding how to apply for Paycheck Protection Program loans in the coming days, including additional resources on the SBA website about how to find a qualified lender.
Charitable Giving Incentives for Donors to 501(c)(3) Nonprofit Organizations
In addition to facilitating direct financial relief to affected nonprofit organizations, the CARES Act also creates charitable giving incentives for donors to 501(c)(3) nonprofit organizations. Section 2204 of the CARES Act includes a new above-the-line deduction (universal or non-itemized deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to contributions made in 2020 and would be claimed on tax forms next year.
Section 2205 of the CARES Act lifts the existing cap on annual contributions for those who itemize, raising it from 60 percent of adjusted gross income to 100 percent. For corporations, the legislation raises the annual limit from 10 percent to 25 percent. Food donations from corporations would be available to 25 percent, up from the current 15 percent cap.
All Other Types of Nonprofit Organizations with 500 or Fewer Employees
Despite calls by nonprofit and trade association leaders to include all types of nonprofit organizations as eligible loan recipients under the Paycheck Protection Program, the final version of that section of the CARES Act only includes entities organized under sections 501(c)(3) and 501(c)(19) of the Code. With that said, emergency financial relief for other types of nonprofits, such as 501(c)(4) social welfare organizations and 501(c)(6) trade and professional associations, is available under a separate section of the legislation addressing emergency Economic Injury Disaster Loan (EIDL) grants. In addition, nonprofit organizations of all types that do not receive SBA Paycheck Protection Program 7(a) loans are also eligible for Employee Retention Payroll Tax Credits under Section 2301 of the CARES Act.
Eligibility and Requirements for Emergency EIDL Grants
Section 1110 of the CARES Act injects an additional $10 billion into SBA's existing EIDL program, expands eligibility for EIDL loans, and waives certain requirements for all applicants, which include private nonprofit organizations with 500 or fewer employees. The covered period for this section is January 31, 2020 through December 31, 2020.
Section 1110 waives the standard EIDL program requirements that (1) the borrower provide a personal guarantee for loans up to $200,000; (2) that the eligible nonprofit be in operation for one year prior to the disaster (except that the nonprofit must have been in operation on January 31, 2020); and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or "alternative appropriate methods to determine an applicant's ability to repay."
In addition, unlike other types of nonprofit organizations, entities organized under section 501(c)(3) or 501(c)(19) may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose.
$10,000 Emergency Advance under Emergency EIDL Grant Program
Most significantly for nonprofit organizations seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or repaying obligations that cannot be met because of revenue losses.
Employee Retention Payroll Tax Credits
Section 2301 of the CARES Act creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met. To be eligible, an entity must have carried on a trade or business during calendar year 2020, and satisfy one of the following two tests:
- Have business operations fully or partially suspended during the calendar quarter because of orders from a government authority limiting commerce, travel, or group meetings due to COVID-19; or,
- Have a reduction in revenue of at least 50 percent in the first quarter of 2020 compared to the first quarter of 2019.
For nonprofit organizations, the entity's whole operations must be taken into account when determining the decline in revenues.
Importantly, 501(c)(3) and 501(c)(19) organizations receiving emergency SBA Paycheck Protection Program 7(a) loans would not be eligible for these payroll tax credits.
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We are closely monitoring legislative and regulatory developments, including a potential Phase 4 congressional relief package, and will provide updates as more guidance is released. For some answers to commonly asked questions regarding how to communicate with staff about COVID-19 challenges, click here. For additional information regarding COVID-19 legal issues, please visit Venable's COVID-19 legal resources page.