Navigating New Stimulus Laws: Part 1 – Financial Relief Options
Editor’s Note: The Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan’s (EIDL) initial appropriated funds were exhausted on April 16. On April 24, funds for both programs were replenished as a result of the passage of the Paycheck Protection Program and Health Care Enhancement Act. The SBA funding provides an additional $321 billion for the PPP, with $60 billion for community banks and smaller lenders, plus an additional $60 billion for the EIDL, to be granted to qualified entities on a first-come, first-served basis. The SBA, in consultation with the Department of the Treasury, issued additional guidance and rules to address questions concerning the implementation of the PPP.
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Congress recently passed one of the most sweeping economic relief packages in its history, yet most associations are left wondering where the third sector falls within the new laws. Following recent legislative developments can be an exhausting task for associations, as they are also currently balancing and managing this crisis for their memberships and larger industries. There are several provisions in the new laws that directly affect nonprofit organizations’ payroll and finances – all of which associations should become keenly aware of in order to increase organizational stability during this unprecedented time.
Government affairs policy professionals are assisting associations in sorting out the complexities of the new laws and offering their expertise and guidance to associations during this public health crisis. Here is an overview of some of the more important aspects of the new laws that will make sure associations can focus on supporting their memberships throughout the pandemic and continue performing their vital organizational functions.
Laws Enacted to Address the Economic Impact of the Pandemic
The $2 trillion stimulus package, the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), provides for $300 billion in cash payments to individuals, $260 billion in extra unemployment benefits, and $350 billion in new loans to small businesses, including nonprofit entities. The Paycheck Protection Program (PPP) is the forgivable loan program available for small businesses and 501(c)(3) and 501(c)(19) nonprofits, created under the CARES Act.
The PPP launched on April 3, providing for loans to be given to businesses, nonprofits and other qualified entities with under 500 employees to be used for their fixed costs, such as rent, mortgages and utilities over an eight-week period following submittal of the PPP application. What is most important for associations to know about the PPP is that the loan may be totally forgiven; organizations may not be required to pay back any portion of the loan amount granted or may only be required to pay back a portion of the loan amount.
Any business, nonprofit organization or qualified entity with fewer than 500 employees is eligible to apply. Some organizations with more than 500 employees may be considered if they meet the Small Business Administration (SBA) criteria. The PPP has a cap of $10 million per loan or 250% of the calculated average monthly payroll, whichever is less. There is a six-month forbearance on the loan with a two-year term at 1% simple interest accrual.
PPP Provides Direct Incentive to Keep Employees on Payroll
The SBA will forgive PPP loans when payroll and salaries do not decrease for the eight-week period following the loan initiation and if the money is used only for payroll, rent, mortgage interest or utilities. (It is important to note that the SBA requires at least 75% of the loan to be used for payroll in order to qualify for forgiveness.) Borrowers who do not meet the payroll threshold set for forgiveness or use the remaining funds for non-SBA-approved reasons can still be granted partial forgiveness on a sliding scale. Additionally, borrowers must initiate the loan forgiveness request and provide documented proof of the use of the funds. Unlike a regular SBA loan, no collateral or personal guarantees are required and there are no lender fees.
Despite the good intentions of the program, associations should know that the PPP loan implementation has not been off to a swift start. Many borrowers and lenders have been delayed in the process due to inconsistencies that exist within the SBA’s own regulation and guidance. For now, the SBA has issued two Interim Final Rules to guide organizations and lenders.
Organizations can apply for the PPP through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating in the PPP. Borrowers should consult with their local lender as to whether it is participating in the PPP and what information the lender requires to process the application, as this may vary by lender. Lenders reported that they have been inundated with processing applications, and many are only processing loans for their existing clients. Since applications are being processed on a first-come, first-served basis, employers interested in applying for the PPP should consider doing so before funds run out.
SBA’s EIDL Program Offers Financial Advance
The Coronavirus Preparedness and Response Supplemental Appropriations Act allocated $7 billion to the SBA to provide loans in response to the COVID-19 outbreak in early March.
The funds allowed for the SBA’s Economic Injury Disaster Loan (EIDL) Program to be expanded to provide aid to businesses, nonprofits and other qualified entities. The EIDL is meant to offer emergency assistance to qualified entities that cannot meet their obligations to pay ordinary and necessary operating expense during the emergency. Under the EIDL program, interest rates do not exceed 4% per year and loans have up to a 30-year term amortization.
The new EIDL loan program for employers with 500 employees or fewer is to be used for purposes such as payroll costs, employee payroll salaries and compensation, group health care benefits, mortgage, rent payments and utilities bills. Qualifying nonprofits organizations are entitled to an advance on their EIDL loan of up to $10,000 to help overcome temporary loss of revenue they are experiencing due to the COVID-19 declared emergency as long as the revenue loss meets the threshold set by the SBA. It is important to note that the $10K advance does not have to be repaid if it is used for SBA-specified operational costs.
The SBA is taking applications from nonprofit organizations that are non-governmental agencies or entities that currently have an effective ruling letter from the Internal Revenue Service (IRS) granting a tax exemption under sections 501(c),(d) or (e) of the Internal Revenue Code of 1954, or that hold satisfactory evidence from their state that the non-revenue producing organization is a nonprofit organized or doing business under state law.
Nonprofit organizations that are qualified entities must be able to show that a significant reduction in revenue has occurred as a result of the COVID-19 crisis. Associations should be made aware that the application process and the information required to be submitted for the EIDL is more extensive and complicated than the paperwork for the PPP. Additionally, loan funds that are requested under the EIDL cannot be used for the same purpose as the PPP. It also becomes particularly tricky if nonprofits decide to apply for the EIDL before the PPP because of the potential to refinance under the PPP loan at a lower interest rate. Additionally, the SBA will count the EIDL advance against any PPP loan forgiveness amount an employer may be granted.
For many nonprofits, the most important feature of the EIDL program is the $10K provided to applicants within days of the application approval. Struggling nonprofit organizations should consult with policy professionals to find out how they may qualify for the EIDL.
Disclaimer: The information included in this article is only for informational purposes and is only an interpretation made based on available information that is subject to change. The information should not be construed as legal or tax advice, nor does Naylor Government Affairs provide legal or tax advice in any context. Any action taken related to these matters should only be done in conjunction with the appropriate legal and/or other professional advice.
