Beginning today, small businesses and 501(c)(3) nonprofits with fewer than 500 employees can begin applying for a new forgivable loan to help maintain operations during the COVID-19 crisis. Earlier this week, the U.S. Treasury Department published an information sheet on the new Paycheck Protection Program. This loan program, also known as the emergency SBA 7(a) loan program, was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law last Friday.
Last night, the Small Business Administration (SBA) issued interim regulations on how the program will work. The rule includes a five-step process (see page 8) for calculating payroll costs for the purpose of the loan. It also requires that, for the loans to be forgivable, at least 75% of each loan must be used to cover payroll expenses. The rule defines payroll costs as: “compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.” Notably, compensation in excess of $100,000, federal payroll taxes, and qualified paid leave under the Families First Coronavirus Response Act do not count as payroll costs for purposes of the loan.
The SBA also has released the application form that borrowers must use for the Paycheck Protection Program (SBA Form 2483). Note that the application form asks for the name of the business “owner.” Since nobody “owns” a nonprofit, 501(c)(3) organizations can leave this line blank or write “N/A” or “nonprofit.”
Paycheck Protection Program loans, which are fully forgivable for organizations that maintain staff on payroll through June 30 (or rehire staff who have been furloughed or laid-off), can be used to cover up to 2 ½ months of payroll, rent, mortgage, or utilities. Loans must be made through private financial institutions, not directly through the SBA.
Nonprofits are encouraged to apply for emergency 7(a) loans as soon as possible. Although the deadline is June 30, the CARES Act only authorized a total of $349 billion in Payroll Protection Act loans, and many nonprofits and small businesses are interested in seeking these forgivable loans. It is possible, but not guaranteed, that Congress could appropriate additional funding if demand for these forgivable loans quickly exceeds the current cap of $349 billion.
Charitable nonprofits with fewer than 500 employees that are struggling to maintain operations during the COVID-19 pandemic also can apply for the low-interest emergency SBA Economic Injury Disaster Loan (EIDL), which is not forgivable but carries a 2.75% interest rate and long-term financing options. Nonprofits can apply for EIDL loans directly through the SBA. As part of the applications, nonprofits also may request an Emergency Economic Injury Grant of up to $10,000 that can be paid within three days (even if the organization ultimately does not qualify for an EIDL loan). Nonprofits may apply for both Paycheck Protection Act and EIDL loans (and are encouraged to apply for both as soon as possible) but may not use both loans to cover the same expenses.
To help your nonprofit understand which of these loan programs is the best option to help maintain your operations and payroll during the COVID-19 crisis, check out the comparison chart from the National Council of Nonprofits.
NAO has compiled are some Frequently Asked Questions on the Small Business Administration’s Payroll Protection Program. |