CARES Act: What Not-for-Profits Need to Know
On Friday, March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. It provides valuable assistance to all areas of the United States economy, including the charitable sector.
The following is a summary of key provisions of the CARES Act that apply to the nonprofit sector. Note: This is a current interpretation of the Act, and organizations should seek their own professional counsel with questions before making decisions on whether to take advantage of these programs as the DuPage Foundation does not provide legal or tax advice.
Paycheck Protection Program
Through the Paycheck Protection Program (PPP), organizations with less than 500 employees may apply for low-interest Small Business Administration (SBA) loans. The attractiveness of these loans is that a portion of the loan may be forgiven! Note: If an organization takes advantage of the PPP, it is not eligible to take advantage of the Employee Retention Payroll Tax Credit.
Congress has appropriated $349 billion for PPP with the overall purpose of avoiding millions of people making new unemployment compensation claims and losing their health benefits during the COVID-19 pandemic. The loan is intended to cover payroll expenses during the eight-week period after an organization has received the loan.
What is the eligibility criteria?
- Organization has either 501(c)(3) or 501(c)(19) status.
- Organization was operating on March 1, 2020.
- Organization has fewer than 500 full and/or part-time employees.
What are the parameters regarding the size of a loan?
- Loan size is based on the nonprofit organization’s payroll costs but is capped at $10 million.
- If the organization was in business from 2/15/19 to 6/30/19, the maximum loan is equal to 2.5 times the average monthly payroll costs during the one-year period before the date of the loan.
- Payroll costs include any compensation, including benefits, to employees but do not include compensation of individual employees in excess of an annual salary of $100K.
- Further details and examples are available in this article from Seyfarth.
What are permitted uses of the loan?
- Expenses associated with payroll, group health insurance, interest on mortgage, rent, utilities, and debt incurred prior to 2/15/2020.
How does an organization apply for a loan?
- Time is of the essence in submitting an application as loan applications will be funded on a first-come, first-served basis until funds run out! We have heard that applications may be submitted beginning Friday, April 3.
- The first step is to contact the bank with which you are already doing business to begin the process.
- It is estimated that a determination of each application will be made within two to three weeks after application is submitted.
What are the terms for repayment and potential forgiveness of this loan?
- Organizations that use the funds borrowed for permitted uses (see above) during the eight-week period after receiving the loan may be eligible for full loan forgiveness. Otherwise, the loan must be repaid within ten years. The interest rate on these loans may not exceed a maximum rate of 4%.
- Potential forgiveness is also dependent on the organization incurring no reduction in work force during the eight-week period. For example, if you have 10 employees at the start of the loan period, you must have 10 at the end to receive maximum loan forgiveness. If there is a reduction in work force, the loan forgiveness amount is reduced.
Employee Retention Payroll Tax Credit
Through the Employee Retention Payroll Tax Credit (ERPTC), employers, including nonprofits, in operation at any time during 2020, may take a payroll tax credit. However, if an organization receives a Payroll Protection Program loan, they may not take advantage of this credit.
What is the criteria for eligibility?
- Tax exempt 501(c) organizations are eligible if:
- Operations were suspended in full or part due to the COVID-19 shutdown order.
- Gross receipts declined by more than 50% when compared to the same quarter in the previous year.
- The organization has not received a PPP.
What is the credit amount?
- A refundable payroll tax credit equal to 50% of qualified wages up to $5,000 per employee. (The maximum qualified wage for each employee is $10,000 so with the 50% credit, the credit is $5,000).
- For employers with more than 100 employees, qualified wages are those paid to an employee even if the employee is unable to work due to the “shelter in place” order.
- For employers with 100 or less employees, qualified wages are those paid whether the employer is open for business or subject to a shutdown.
Emergency Economic Injury Disaster Loans and Grants
For 2020 the CARES Act expands the availability of Economic Injury Disaster Loans (EIDLs) to include 501(c)(3) nonprofits that were in operation on January 31, 2020. The loan may be used for expenses such as payroll and other operating expenses that would have been met had the COVID-19 pandemic not occurred. The maximum amount for which an organization may apply is $2 million. EIDL applications are available here.
What are the general terms of EIDL?
- Loans are given for up to 30 years and are not eligible for forgiveness.
- Interest rate for nonprofit organizations is 2.75%.
- Payment of principal and interest may be deferred for up to four years.
Are there any grants associated with this provision of the CARES Act?
- Yes, a nonprofit EIDL applicant may request that up to $10,000 of the loan amount requested be given as a grant that does not have to be repaid.
For more information about the implications of the CARES Act on charitable giving, please see the following links:
- Arts for Illinois (COVID-19 Relief for Arts Organizations)
- Illinois Partners for Human Service (Resource Document on Aid for Not-for-Profit Employers and Workers)
- National Council of Nonprofits (Loan Options Chart)
- Nonprofit Guide to the CARES Act: Including Those Loans You've Been Hearing About to Cover Payroll and that Don't need to Be Paid Back (from Seyfarth)
- Nonprofit Quarterly (How Not-for-Profits Can Utilize the New Federal Laws Dealing with COVID-19)