by Kristina Raattama, Esq., MK Consulting, LLC

Paycheck Protection Program

No doubt you have heard by now that nonprofits, as well as other organizations and small businesses, are eligible to participate in the Paycheck Protection Program (PPP). The PPP is a loan program to help organizations keep staff employed during the coronavirus shutdown period. Each PPP loan will have a term of 2 years and an interest rate of 1%. The maximum amount of the loan is described in detail below.  Only 1 loan can be obtained by an organization. And, while there are few details available about the loan forgiveness process, the CARES Act and related Small Business Administration (SBA) rule provide for the PPP loans be forgiven, provided staffing and compensation levels are maintained and the loan proceeds are used for permitted purposes as further explained below.

Deadline for Applying and Receiving A Loan

Under the existing PPP, the last day to apply for and receive a loan is June 30, 2020. The funds are being distributed on a first come, first serve basis.

 Criteria for Eligibility

If a nonprofit organization pays salaries and other compensation, it may be eligible for a PPP Loan. Key things to know about eligibility:

• All Section 501(c)(3) nonprofits, including public charities, private foundations and private operating foundations, meeting the other requirements of the PPP are eligible.
• The organization must certify that current economic uncertainty makes the loan request necessary to support the ongoing operations of the organization.
• The organization must have no more than 500 employees and the organization’s employees’ principal place of residence must be in the United States.

1. 1. 1. Count part-time and full-time employees towards this 500 headcount number.
      2. If the organization has affiliates, employees of those affiliates must also be counted. Specific guidance on what “affiliates” means for nonprofits had not been provided as of the date of this writing.  However, based on the SBA’s Interim Final Rule on Affiliates which generally addresses affiliates, it will mean organizations under common control, which may mean common management, identity of interest or a totality of the circumstances. Most South Florida nonprofits should not have a problem with this requirement as they will not have affiliates, or, if they do have affiliates, the combined employee headcount will not exceed 500 employees. You will need to provide information in the PPP loan application about affiliates. It is a good idea to consider disclosing any entity you think might be affiliated so that the lender has notice of these relationships should be considered for purposes of calculating the headcount.

• The organization must have been in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes. (While the CARES Act does reference payments to independent contractors as making organizations eligible, this appears to be a glitch in the law. The organization may not factor payments to independent contractors in its requested loan amount. This is because independent contractors themselves are eligible for a PPP loan and it would be double-dipping for the organization and independent contractor to both be paid under the PPP.)

Amount of the PPP Loan

Loans under the PPP may be up to 2.5 times the organization’s average monthly payroll cost, with a maximum upper limit of $10 million. However, salary amounts paid to any employee in excess of $100,000 are excluded. This $100,000 upper limit does not apply to non-cash benefits. The CARES Act includes different methodologies for calculating the amount an organization is able borrow.

In its PPP Interim Final Rule, the SBA suggests using the following methodology will work best for most applicants:

Step 1. Add up all of the organization’s payroll costs[1] from the last 12 months or from the calendar year 2019 for employees whose principal place of residence is in the United States.

Step 2. Subtract any compensation paid to any employee in excess of an annual salary of $100,000. The Treasury Department has clarified that this upper limit applies only to cash compensation, not to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on the compensation of employees.

Step 3. Calculate the organization’s average monthly payroll costs by dividing the amount in Step 2 by 12.

Step 4. Multiply the amount in Step 3 by 2.5.

Step 5. If the organization received an Economic Injury Disaster Loan between 1/31/2020 and 3/3/2020, add that outstanding loan amount less the amount of any advance under an EIDL COVID-19 loan.

Deferral of Payment

Payments under a PPP loan are automatically deferred for 6 months from the disbursement of the loan although interest continues to accrue during this 6 month deferral period.

Forgiveness of Payment

The full principal amount of the loan and any accrued interest may be forgiven. The loan amount is forgiven so long as:

• Employee and compensation levels are maintained; and
• Loan proceeds are used for payroll, rent, interest on mortgages, utilities and certain other specified expenses over the 8 week period following the date the first disbursement is made under the loan. However, not more than 25% of the forgiven amount may be attributable to non-payroll costs.

Practical Pointer: The SBA has indicated it will be providing additional guidance about loan forgiveness but that was not available as of the date of this writing. At this point what is known is that organizations will be required to provide documentation to verify employee headcounts and permissibility of expenses.

Making a Loan Application

Many banks are authorized to process these loans. Many, if not most banks, are taking applications for the loans through on-line portals and the process is very simple. The organization will be required to provide some supporting documentation so make sure to pull that information together before filing.

Practical Pointer: A good way to understand whether your organization is eligible and to understand what you will be required to submit is to review the questions you need to answer, and certifications you must give, on the SBA PPP Application Form.

One final note. The State of Florida, through the Governor’s Executive Order, EO 2020-95, has suspended the taxes that would otherwise be under Chapter 201, Florida Statutes on PPP loans.

Important Compliance Considerations

• Take care in making calculations of payroll expenses.
• Review the loan application certifications and terms carefully to make sure the organization is eligible.
• Keep good payroll records for the eligible period.
• Keep good records of other permissible expenses.
• Stay in communication with your lender and be on the look for additional guidance on loan forgiveness paperwork requirements, particularly if the loan forgiveness is an important part of why the organization applied for the PPP loan. Check for updates at the SBA Covid19 Website and in the S. Treasury Department FAQ document.
• If your organization already has other loans, make sure taking on this additional PPP loan will not cause your organization to be in breach of any other loan covenants, or, if so, consider whether it makes sense to seek a waiver from the lender.
• Special guidance has been issued by the SBA for faith-based organizations.

Economic Injury Disaster Loan With Emergency Advance

Private non-profit organizations are also eligible for Emergency Injury Disaster Assistance Loans. These loans are for the period January 31, 2020, through December 31, 2020. A number of standard requirements that apply to these loans are waived, including the personal guarantee requirement. The SBA is required to provide an advance automatically in an amount of up to $10,000. Any advance is not required to be repaid. All loan proceeds must be used for allowable purposes, including paid sick leave, payroll expense, and rent and mortgage payments. As with the PPP loan, if the organization has other loans, make sure to evaluate the impact on the other loans and also take care to keep good records of uses for allowable purposes. 

New Grant Funding Appropriated

In addition to providing temporary support through the PPP and EDIL COVID19 loan programs, significant new appropriations, primarily to prevent, prepare for, and respond to coronavirus, domestically and internationally, are included in the CARES Act. Most of these additional funds are available through September 30, 2021. These additional appropriations include:

• Legal Services Corporation. Additional appropriation in the amount of $50 million.
• National Endowment for the Arts. An additional appropriation in the amount of $75 million. 
• National Endowment for the Humanities. An additional appropriation in the amount of $75 million.
• Emergency Food-Assistance.  An additional appropriation in the amount of $450 million.
• Child Nutrition Programs. An additional appropriation in the amount of $8.8 billion.

Practical Pointer: If you have not already reviewed these appropriations in the CARES Act, at minimum, it would be well worth your time to review the websites of granting agencies with whom you usually work for new grant announcements.

Tax Law Changes to Encourage Charitable Giving

Finally, the CARES Act also expands the favorable tax treatment provided to charitable contributions under federal tax law. Of course, each taxpayer’s situation is different and there are some nuances in the rules. As always, if donors have specific questions about how these changes may affect them, advice should be sought from the donor’s accountant or tax advisor.

Changes to Charitable Deduction Rules for Individuals

AGI Limit on Cash Contributions Suspended in CY 2020: The 60% of adjusted gross income (AGI) limitation on cash contributions by individuals to public charities has been lifted in calendar year 2020. Therefore, for calendar year 2020, individual taxpayers can deduct cash charitable contributions of up to 100% of their AGI. Because this only applies to donations to public charities, the change does not apply to contributions to donor-advised funds (DAFs) and supporting organizations.

New Charitable Deduction for Individuals Who Don’t Currently Itemize: Starting in calendar year 2020, cash contributions of up to $300, made by individuals to public charities may now be deducted from federal taxes even though the taxpayer does not itemize. Currently, only itemizing taxpayers can deduct charitable contributions; therefore, this new legislation would allow all non-itemizing taxpayers to benefit from a modest charitable deduction.  Because this only applies to donations to public charities, the change does not apply to contributions to donor-advised funds (DAFs) and supporting organizations.

Change to Charitable Deduction Rules for Corporations

Corporations can deduct cash contributions made to public charities during calendar year 2020, up to 25% of their taxable income (up from 10% of taxable income). Because this only applies to donations to public charities, the change does not apply to contributions to donor-advised funds (DAFs) and supporting organizations.

If you are not certain of whether your organization is a public charity, check your IRS determination letter. If you do not have the determination letter, you may be able to find it on the IRS Website.  Scroll down to the button “Tax Exempt Organization Search” to perform the search. 

[1] Payroll costs are defined in the PPP Interim Final Rule. Generally, this is salaries, wages, commissions, or similar compensation; vacation, parental, family, medical, or sick leave; employee health benefits; and state and local payroll taxes. Additionally, according to the Treasury Department, it includes the employee’s share of federal employment taxes but does not include the employer’s share.