*The original article was updated on April 13 to reflect the SBA's release of a religious exemption to the affiliation rules and again on April 16, April 27 and May 7 to reflect the SBA's release of new guidance.
Federal loans from the Small Business Administration (SBA) were not an option for nonprofit organizations before the CARES Act. Under the CARES Act, however, 501(c)(3) and 501(c)(19) nonprofits (as well as certain nonprofit hospitals) are eligible to obtain Paycheck Protection Program (PPP) loans. These low-interest SBA loans, generally for two and a half months of payroll costs, may can help nonprofits remain operational during the coronavirus pandemic. Importantly, the loan principal can be forgiven entirely if borrowers meet certain conditions.
A nonprofit organization generally may obtain a PPP loan if it:
- Was in existence on Feb. 15, 2020.
- Is either (a) exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code or (b) a war veterans’ organization exempt under section 501(c)(19) of the code.
- Has 500 or fewer full and/or part-time employees (subject to the SBA’s affiliation rules, described below).
- Provides a good faith certification that the loan is necessary to support ongoing operations of the applicant due to current economic uncertainty brought about because of COVID-191 and that the borrower will use 75% of the loan funds to retain workers and maintain payroll with the remaining 25% being used for qualifying expenses. More specifically, loan funds must be used for: (i) payroll support (wages, insurance premiums, payroll taxes, etc.); (ii) utility payments; (iii) mortgage interest payments or vehicle (strict business use only), (iv) rent and (v) interest on other business debt payments.
On May 3, 2020, the SBA expanded the eligibility criteria to include certain nonprofit hospitals that are tax-exempt but have not been recognized as exempt under Section 501(c)(3) of the Internal Revenue Code. The SBA noted that this approach helps accomplish the statutory purpose of ensuring that a broad range of borrowers, including entities that are helping to lead the medical response to the ongoing pandemic, can benefit from the loans provided under the PPP. Many nonprofit hospitals may meet the description set forth in section 501(c)(3) of the Internal Revenue Code to qualify for tax exemption under section 501(a), but have not sought to be recognized by the IRS as such because they are otherwise fully tax-exempt under a different provision of the Internal Revenue Code. Therefore, the SBA will treat a nonprofit hospital exempt from taxation under section 115 of the Internal Revenue Code as meeting the definition of “nonprofit organization” under section 1102 of the CARES Act if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code and is therefore within a category of organization that is exempt from taxation under section 501(a).16. However, an important caveat is that a hospital that is owned by a state or local government is only eligible for a PPP loan if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
A nonprofit organization may generally apply for PPP loan forgiveness in an amount equal to eight weeks of the following permitted loan fund uses:
- 75% of the loan funds must be used for Payroll Costs even if forgiveness is not requested. “Payroll Costs” include:
- Wages/salaries (up to $100k/employee on an annualized basis; non-US employees excluded).
- Paid leave.
- Separation/dismissal payments.
- Health care plan costs.
- Retiree benefits.
- Payroll taxes (state and local only - employer federal taxes are not included).
- Bonuses paid in the normal course of business (i.e. should not be used to meet the 75% use of proceeds requirement).
- The remaining 25% of loan funds may be used to pay utilities, gas for business vehicles, transportation, lease and/or interest on mortgage payments and auto loans for a vehicle used to perform the company’s business prior to Feb. 12, 2020 (no principal payments).
The loan term is two years, with an interest rate of 1%. The lender will determine the loan amount based upon a multiplier of 2.5 times the applicant’s average monthly payroll costs based upon the trailing 12-month period ending prior to the date of the loan, with a maximum loan amount of $10 million. Payroll costs are limited to compensation for a single employee to be no more than $100,000 in annual pay.
Loan payments are deferred for six months, and the principal of the loan (to the extent used to pay payroll costs, mortgage interest, rent or utilities of the nonprofit) and accrued interest within the six month payment deferral period can be forgiven if the borrower limits salary reductions to no more than 25% and maintains staffing levels for eight weeks after getting the loan. The amount of forgiveness cannot exceed the principal loan amount plus interest within the six month payment deferral period. The amount of loan forgiveness will be reduced proportionally by any reduction in the borrower’s workforce and will be reduced dollar for dollar by a reduction of more than 25% of any employee’s prior quarter’s compensation. If a borrower has already furloughed employees due to COVID-19, employers are encouraged to rehire them by not being penalized for having a reduced payroll at the beginning of the initial eight-week period after the loan’s origination date.
Under SBA’s regulations, entities that are “affiliated” must include all employees in determining whether they have 500 or fewer employees for loan eligibility purposes. An affiliation may arise among entities in various ways, including from common ownership, common management or identity of interest. However, on April 4, 2020, the SBA released a religious exemption to the affiliation rules. The exemption states that the relationship of a faith-based organization to another organization is not considered an affiliation with the other organization if the relationship is based on religious teaching or belief or otherwise constitutes a part of the exercise of religion. For example, if a faith-based organization is affiliated with another organization because of religious beliefs about church authority or internal constitution, or because the legal, financial or other structural relationships between the organizations reflect an expression of such beliefs, the faith-based organization would qualify for the exemption. If, however, a faith-based organization is affiliated with other organizations solely for non-religious reasons, such as administrative convenience, then the organization would be subject to the affiliation rules.
In order to take advantage of the exemption in applying for a PPP loan, all that is required is that the organization attach an addendum to the application claiming the exemption. The SBA has provided sample language for such an addendum:
The Applicant claims an exemption from all SBA affiliation rules applicable to Paycheck Protection Program loan eligibility because the Applicant has made a reasonable, good faith determination that the Applicant qualifies for a religious exemption under 13 C.F.R. 121.103(b)(10), which says that “[t]he relationship of a faith-based organization to another organization is not considered an affiliation with the other organization . . . if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.”
The SBA will not assess, and will not permit participating lenders to assess, the reasonableness of the faith-based organization’s good-faith determination that the exemption applies.
In addition, the SBA clarified that for purposes of the PPP, nonprofits must continue to meet their nondiscrimination obligations under existing federal laws and executive orders, but they may continue to rely on federal statutory and regulatory exemptions that are generally applicable to nonprofits. For example, exemptions applicable to schools’ sex-specific admissions practices, for sex-specific emergency shelters and coreligionist housing, and for adoption or foster care practices giving child placement preferences to Indian tribes, continue to be applicable under the PPP. The federal exemption to discrimination laws permits a religious nonprofit entity to make decisions with respect to the membership or the employment of individuals of a particular religion for work and activities performed by such nonprofit continues to apply.
For more detail on the PPP loan program, see Part Three, Part Four, Part Six, Part Eight, Part Nine and Part Ten.
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1Additional guidance has additional heightened scrutiny to the certification. This certification must be made in good faith, taking into account applicant’s current business activity and ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.