On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law in response to the disturbing developments of Coronavirus (COVID-19) in the United States. Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Cong. (2020).
The CARES Act provides an amendment to the Small Business Act, 15 U.S.C. 636(a), known as the Paycheck Protection Program which authorizes the United States Small Business Administration (SBA) to provide up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The Paycheck Protection Program (PPP) can provide loans up to $10,000,000 for small businesses, including nonprofit organizations. Nonprofit organizations eligible under PPP are those exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC) and veterans organizations under section 501(c)(19) of the IRC. Loans administered through the PPP mainly pertain to nonprofit organizations with under 500 employees. Employers with more than 500 employees may still qualify for the Paycheck Protection Program if their business meets the SBA size standards.
A major concern midst this pandemic is whether a nonprofit organization can accept a PPP loan without affecting its nonprofit status.
The simple answer is yes; however, there are a few points to further explain to alleviate concerns with the rapid implementation of the CARES Act.
The Paycheck Protection Program provides loans for payroll costs and other business-related expenses incurred during February 15, 2020 through June 30, 2020. By statute, 15 U.S.C.A. 636(a)(36)(A)(viii), applicable payroll costs include:
1. Employee compensation such as salary, wage, commission, and cash tips, not in excess of $100,000;
2. Payment for vacation, parental, family, medial, or sick leave;
3. Allowance for dismissal or separation;
4. Payment required for group health care benefits, including insurance premiums;
5. Payment of any retirement benefit;
5. Payment of any retirement benefit;
6. Payment of State or local tax assessed on the compensation of employees;
7. The sum of payments to sole proprietors or independent contractors not in excess of $100,000.
The Paycheck Protection Program provides for 25% of the loan to cover additional business related expenses. By statute, 15 U.S.C.A. 636(a)(36)(F), additional business related costs include:
1. Payments of interest of any mortgage obligation, not including any payment of principal;
2. Rent, including rent under a lease agreement;
4. Interest on debt obligations that were incurred before the covered period.
The CARES Act provides that amounts forgiven under the Paycheck Protection Program are excluded from gross income. However, it is anticipated that additional business related expenses will only be entitled to forgiveness if it does not exceed 25% of the total loan. Therefore, it is imperative that applicants maintain staff and payroll documentation. Forgiveness will also be reduced if full-time headcount declines, or if salaries and wages decrease.
The following are a few guidelines for nonprofit organizations to be cognizant of when applying for the PPP:
1. Nonprofit organizations must maintain records that the loans are being used for an exempt purpose.
A 501(c)(3) organization’s activities must be directed towards some exempt purpose. Its activities cannot serve private interest, or private benefit, of any individual or organization more than insubstantially. The same applies to the allocation of PPP loan funds. IRC 503(b) provides prohibited transactions for nonprofits, which include:
(1) Lend any part of its income of corpus, without the receipt of adequate security and reasonable rate of interest, to;
(2) Pay any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;
(3) Make any part of its services available on a preferential basis to;
(4) Make any substantial purchases of securities or any other property, for more than adequate consideration in money or money’s worth, from;
(5) Sell any substantial part of its securities or other property, for less than an adequate consideration in money or money’s worth, to; or
(6) Engage in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly, of 50 percent of more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
The following documentation will be useful for nonprofit organizations to have when completing a PPP application:
a. 2019 Form 990 Tax Return (2018 if 2019 is not available)
b. 941 Tax Liability Detail 2019
c. 941 Tax Liability Detail 2020
d. Payroll Register 2019
e. Payroll Register 2020
f. Statement of Activity (P&L) 2019
g. Statement of Activity (P&L) 2020
h. Articles of Incorporation
i. Utility Bills 2020
j. Proof of Employees U.S. Citizenship
The PPP application, listed below, requires an applicant to certify certain conditions. This includes that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA has not provided a clear definition for the extent that operations need to be impacted to be “necessary to support ongoing operations.” It is near impossible to name a small business that is not facing a financial hardship during this pandemic. Most small businesses are completely closed, while others remain open with reduced staff. The first step to assessing whether a nonprofit organization should apply for a PPP loan is to evaluate the magnitude of their financial loss and where they plan to allocate PPP loan funds to.
2. Nonprofit organizations that expect to reap a windfall from the CARES Act may be taxed for Unrelated Business Income (UBI) or liable under the False Claims Act (FCA).
“Unrelated Business” is defined by the IRS as a trade or business that is regularly carried on, and not for the most part related to the exempt purpose of the organization. Organizations subject to the tax on unrelated business income, are taxed at corporate rates on that income.
Under the FCA, an entity or individual can be liable for their application with the PPP program if they (1) knowingly present, or cause to present, a false or fraudulent claim for payment or approval; or, (2) knowingly makes, uses, or causes to be made or used a false record or statement material to a false or fraudulent claim. 31 U.S.C. 3729.
It is important to note that if a nonprofit organization borrows more than they end up spending on permitted uses, they can repay the outstanding/unforgiven balance without prepayment penalties.
3. Nonprofit organizations, such as elementary schools, colleges, and universities, will remain eligible for State and Federal grants after receiving PPP loans and forgiveness.
There is nothing under 15 U.S.C. 636(a) that indicates that receiving PPP loan benefits could subsequently cause nonprofits to become ineligible for State and Federal grants. However, it is important to retain thorough documentation of expenses and allocation of PPP funds to ensure proper transparency. If a nonprofit has a concern with an existing grant, it is important to follow up with the grant provider to make sure that it is still compliant with grant requirements or conditions.
Below is the Paycheck Protection Program Loan application and corresponding Information Materials provided by the U.S. Treasury Department:
Paycheck Protection Program Loan Application released by the Treasury Department can be found here.
Payment Protection Program (PPP) Information Sheet for Borrowers can be found here.
If you have any questions or concerns about the Paycheck Protection Program, please reach out to the LCR COVID-19 Advisory Team at Laddey, Clark & Ryan, LLP:
- Thomas N. Ryan, Esq. (firstname.lastname@example.org)
- Angelo J. Bolcato, Esq. (email@example.com)
- Jonathan N. Frodella, Esq. (firstname.lastname@example.org)
- Shan H. Kadkoy, Esq. (email@example.com)
- Ursula H. Leo, Esq. (firstname.lastname@example.org)
- Renata A. Mizak, Esq. (email@example.com)
- Nicole C. Tracy, Esq. (firstname.lastname@example.org)
Our attorneys can also be reached at: 973-729-1880
Laddey, Clark, & Ryan, LLP, remains fully operational during the coronavirus (COVID-19) pandemic. Please rest assured that our attorneys, paralegals, and staff continues to be available to you and to fulfill your evolving legal, business, and personal needs. Throughout this difficult period, you can expect that the team at Laddey, Clark, & Ryan will continue to answer your emails and calls promptly and be completely available to you, exemplifying the client service and responsiveness we have always been committed to providing.
The information contained in this alert were created by Laddey, Clark & Ryan, LLP, for informational purposes only and are not intended and should not be construed as a substitute for legal advice.