Client Alert: CARES Act Loans and Grants Available to Nonprofits Now
Date: April 2, 2020
- Review the summaries below to determine which loan, grant or credit program(s) may be right for it,
- Confirm that its preferred bank is participating in these programs and inquire about any policies and procedures the bank may already have established,
- Review application forms and SBA guidance to see what information the nonprofit must furnish,
- Compile details of the past year’s expenditures for compensation and related benefits, rent, utilities, and interest, and
- Take steps to protect application data and other financial information from the scammers who are already beginning to appear.
Nonprofits exempt under Section 501(c)(3) of the Internal Revenue Code are eligible for the full range of CARES Act programs, while nonprofits exempt under other sections have a more limited – but still helpful – range of choices.
Please note that requirements for each available opportunity are extensive and the summaries below may not provide all the information your nonprofit may need to know before applying. Please contact us if you have questions about the various loans, grants and credits available to your nonprofit. We also will be glad to help with CARES Act applications and negotiations as needed.
The CARES Act added a Paycheck Protection Program (PPP) to offer loans of up to $10,000,000 to organizations described in Sections 501(c)(3) or 501(c)(19) that have no more than 500 employees and do not receive Medicaid payments. Most loans are limited to 2.5 times the nonprofit’s average monthly payroll costs for the year before the loan. Proceeds may be used for payroll (not exceeding $100,000 per employee), group health care, mortgage interest, rent, utilities, and interest on other pre-existing debt.
PPP loan interest cannot exceed 4%, and the loan term cannot exceed 10 years. The program does not charge loan fees; no collateral is required; and the loan is non-recourse so long as the proceeds are used for the stated purposes. No repayment is required for at least six months.
The loan principal may be forgiven to the extent that the nonprofit uses it to pay permitted expenses. Forgiveness generally is not available if the nonprofit reduces its total workforce or if it reduces the compensation of any employee by more than 25% through June 30, 2020. If the nonprofit restores its workforce and ends salary reductions by June 30, however, its loan will remain eligible for forgiveness. Loan forgiveness does not generate unrelated business taxable income for the nonprofit.
Application forms for PPP loans are now available, and many – but not all -- SBA-approved and federally chartered banks can start accepting them on Friday, April 3.
The CARES Act expanded the SBA’s Economic Injury Disaster Loan (EIDL) program to offer loans to “private nonprofit organizations” exempt from tax under other sections of the Internal Revenue Code. This would appear to encompass social welfare organizations (section 501(c)(4)), agricultural associations (501(c)(5)), trade and professional associations (501(c)(6)), and more than 25 other categories, although secondary authority suggests that a nonprofit may be ineligible for the EIDL program if its primary purpose is lobbying or political activity.
EIDLs provide up to $2,000,000 to pay operating expenses that the applicant could have paid if the disaster had not occurred. They may extend for up to 30 years with interest at 2.75%. Payments may be deferred for up to four years; but unlike PPP loans, EIDLs cannot be forgiven. Nonprofits described in section 501(c)(3) may apply for EIDL aid in addition to PPP loans, but the proceeds may not be used to pay the same expenses.
EIDL applicants no longer must show that they cannot obtain loans elsewhere or even that they are currently able to repay the loans. Personal guarantees are no longer required for loans of less than $200,000, nor collateral for loans of less than $25,000. Nonprofits may apply for EIDLs at SBA offices or online here.
A nonprofit can ask for up to $10,000 of its requested loan amount to be paid as a grant within three days after it applies for an EIDL. The grant does not have to be repaid even if the EIDL application ultimately is rejected.
Nonprofits of all types and sizes that do not receive PPP loans may also receive Employee Retention Payroll Tax Credits if their operations were fully or partially suspended due to a government order and their gross quarterly receipts declined by more than 50% from the prior year. The credit is equal to 50% of certain wages paid.
The CARES Act also created an Industry Stabilization Fund for loans to entities, including nonprofits such as hospitals and universities, that have between 500 and 10,000 employees. Rates cannot exceed 2%, and payments are deferred for at least six months. Applicants must certify that they intend to retain at least 90% of their workforce through September 30, 2020; that they intend to restore the workforce and payroll to at least 90% of prior levels within four months after the official end of the COVID-19 public health emergency; and that they will maintain significant domestic operations and not engage in certain anti-union activities.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.