The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 for purposes including the support of 501(c)(3) tax-exempt public charities. Title I of the CARES Act – “Keeping American Workers Paid and Employed Act” – contains the Paycheck Protection Program that provides emergency, government-backed loans for eligible 501(c)(3) organizations for the purpose of funding payroll and related expenses through mid to late June 2020.
The Paycheck Protection Program is administered by the federal Small Business Administration (“SBA”) under the SBA 7(a) Loan Program. Paycheck Protection Program loan applications are submitted to authorized lenders (i.e., banks or credit unions approved by the SBA) rather than to the SBA directly. To determine whether your organization would be eligible for the relief provided by this program, please read below.
Eligible 501(c)(3) Organizations (all of the following must apply)
Employ 500 or fewer employees or independent contractors
The term “employee” includes persons working full time, part time, or “other.”
In operation on February 15, 2020
Make a good faith certification regarding the need for and use of the funds
Covered expenses
Payroll costs, including:
Salary, wage, commission, and cash payments
Vacation, medical leave, and family leave
Dismissal or separation payments
Health and retirement benefits and insurance premiums
Taxes on employee compensation
Operations/facilities costs, including rent under a lease agreement and payment of utilities
Mortgage interest (excluding prepayment of interest or payment of mortgage principal)
Interest on pre-existing debt
Excluded expenses include:
Compensation to an individual in excess of $100,000
Certain taxes
Compensation to employees residing outside of the United States
Sick or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
Beneficial Aspects of the Loan
No personal guarantee or collateral required
The government has no recourse against the public charity’s individual directors or officers, unless the loan funds are used for an unauthorized purpose
There is no fee for the application
Eligible loans will be forgiven in whole or in part
BORROWERS MUST APPLY TO THEIR LENDER FOR LOAN FORGIVENESS
Lenders must make a determination within 60 days of the application
Loan principal can be forgiven; interest is likely not forgiven
This loan would essentially be turned into a grant, but note that action is required on the part of the borrower in the form of the loan forgiveness application
Conditions for loan forgiveness
Employer must maintain employment of staff for at least 8 weeks after origination of the loan or, under certain circumstances, rehire employees by June 30, 2020
Employers that reduce salary amounts or staff numbers during the applicable period would have their loan forgiveness total reduced correspondingly
At least 75% of the forgiven amount must have been used for payroll. (See US Treasury Guidance, PPP Overview, available on our website.)
Loan Terms
Amount: Eligible 501(c)(3) tax-exempt public charities can borrow the lesser of $10 million or 2.5 times the average total monthly payroll (the latter of which is determined by a formula set forth in the CARES Act).
Note: The US Treasury has issued this guidance: “Loans can be for up to two months [8 weeks] of your average monthly payroll costs from the last year plus an additional 25% of that amount.” (See US Treasury Guidance, Borrower Information, available on our website.)
Length: The portion of the loan that is not forgiven will mature up to 10 years from the date of submission of the application for forgiveness, depending upon the terms negotiated with the lender
Note: The Treasury’s guidance states that loans will be due in 2 years. (See US Treasury Guidance, Borrower Information, available on our website.)
Interest Rate: Between .5% - 4%. All or some principal can be forgiven, interest will likely still be paid.
Commencement of Repayment: Between 6 months to 1 year after the loan is secured
Prepayment Penalty: None
Where, When, and How to Apply
Application start date: April 3rd
The application form is available via the US Treasury’s website at https://home.treasury.gov (See US SBA, PPP Application, available on our website.)
Applications are submitted through SBA-approved lenders. The SBA has provided a list of its 100 most active lenders here: https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders
Applicants are also urged to contact their local SBA offices for assistance. A link to the Massachusetts SBA is found here: https://www.sba.gov/offices/district/ma/boston
Payroll documentation will need to be submitted with the application
Borrowers are encouraged to apply as soon as possible, as there is a funding cap for this legislation and many applicants are anticipated
Note: The information reflected in this memorandum is subject to change by the US Government, including the US Department of the Treasury and the Small Business Administration.