Paycheck Protection Act Updates and Top Ten Questions Answered For Non-Profits
With additional funding provided by the new COVID-19 relief package (CARES Act 3.5), the Small Business Administration (SBA) has resumed accepting Paycheck Protection Program (PPP) applications from participating lenders on Monday, April 27th. As a reminder, this program provides loans of equal to the lesser of 2 and ½ months of average payroll or $10 million for eligible nonprofits. Although 13 C.F.R. § 120.110(a) states that nonprofit entities are ineligible for SBA business loans (which includes the PPP program), the CARES Act explicitly makes nonprofit entities eligible for the PPP program.
To be eligible, non-profits must be designated as 501(c)(3) or 501(c)(19) entities only. The loans will cover costs of payroll, interest on mortgage obligation incurred in normal course of business, rent on a leasing agreement, payment on utilities (electricity, gas, water, transportation, telephone or internet) and will be forgiven in whole or in part under certain circumstances. PPP loan terms have been further clarified:
-1% Interest Rate
-2 Year Term
-The first payment can be deferred for 6 months (interest will accrue).
-The loan portion spent on payroll and other allowable expenses will potentially be forgiven. The new loan amount will be re-amortized by the lender once forgiveness has been confirmed (your remaining loan will be smaller if you were eligible for forgiveness). The mechanism for reporting loan forgiveness has yet to be introduced.
It is important to note that nonprofits participating in the PPP are not eligible for the Employee Retention Tax credit. This is a credit provided by the CARES Act, which provides for a refundable payroll tax credit up to a $5,000 per employee for nonprofits where operations were fully or partially suspended due to a COVID-19 shutdown order or whose gross receipts declined by more than 50% when compared to the same quarter in the prior year. This credit is available for wages paid or incurred from March 13, 2020 through December 31, 2020.
Also, take note that employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer's share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer's share of social security tax due after that date. Also, the amount of the deposit and payment of the employer's share of social security tax that was deferred through the date that the PPP loan is forgiven and continues to be deferred, will be due for payment as follows: December 31, 2021, 50 percent of the deferred amount; December 31, 2022, the remaining amount.
There have been a number of questions regarding PPP, and the SBA has published a FAQ to address the most pressing topics. Below is a summary of some key question areas impacting non-profits.
1. Are non-profits required to have 500 or fewer employees to be eligible borrowers in the PPP?
No. Non-Profits are eligible to borrow even if they have more than 500 employees, as long as they meet the required definition of a “small business concern” under Section 3 of the Small Business Act, 15 U.S.C. 632. This means a non-profit can qualify if it meets the SBA employee-based or revenue-based sized standard corresponding to its primary industry. Refer to the size standards online, to determine your eligibility.
Additionally, a non-profit can qualify if it meets both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth is not more than $15 million; and (2) the average net income after federal income taxes (excluding any carry-over losses) of the organization for the two full fiscal years before the date of the application is not more than $5 million.
2. Are faith-based organizations, including houses of worship, eligible to receive SBA loans under the PPP and EIDL programs?
Yes, and additionally faith-based organizations are eligible to receive SBA loans regardless of whether they provide secular social services. That is, no otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity, or religious speech of the organization. For additional information, please refer to this FAQ.
3. The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?
No. This exclusion 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 compensation of employees.
4. Do PPP loans cover paid sick leave?
Yes. The loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the Paid Sick Leave Refundable Credit here.
5. What if my non-profit contracts with a third-party payer such as a payroll provider or Professional Employer organization to process payroll and report payroll taxes?
Payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, you should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes.
6. What time period should non-profits use to determine their number of employees and payroll costs to calculate their maximum loan amounts?
It is recommended you calculate aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.
7. If my non-profit has made payments to independent contractors or sole proprietors, should these payments be included in calculations of the payroll costs?
No. Any amounts paid to an independent contractor or sole proprietor should be excluded from the payroll costs.
8. How should my non-profit account for federal taxes when determining payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan and the amount of a loan that may be forgiven?
Payroll costs should be calculated on a gross basis without regard to federal taxes imposed or withheld and income taxes required to be withheld from employees. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
9. The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?
The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
10. How is the maximum PPP loan amount calculated for eligible nonprofit organizations (up to $10 million), eligible nonprofit religious institutions and veterans’ organizations? (Note that PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week period following the first disbursement of the PPP loan.)
For nonprofit organizations, refer to question #6 in this U.S. Treasury guidance.
For eligible nonprofit religious institutions and veterans’ organizations, refer to question #7 in this U.S. Treasury Guidance.
We recognize that these guidelines provided by the SBA may spur additional questions and that there are issues raised by this program that do not always provide black and white answers. If you have any questions regarding your organization and the PPP program, we are here for you. Please contact your auditor with any questions as guidance from the federal government changes daily.
- Non-Profit Tax
- Non-Profit Management
- Non-Profit Regulatory Update
- Government Regulatory Update
- IRS Regulations
- Information Technology
- Department of Labor Regulations
- Uniform Guidance/Single Audit Compliance
- Higher Education
- Human Resources Compliance
- Employee Benefit Plans
- Auditing Standards Board Update
- Government Reporting
- Firm News