Charitable Organizations May Apply for Forgivable Loans Under the CARES Act

Written by David Wheeler Newman and Jean Nogues

As part of the unprecedented $2 Trillion stimulus package (the CARES Act), charitable organizations exempt under Internal Revenue Code section 501(c)(3) with 500 or fewer employees may apply for loans under the Paycheck Protection Program (PPP) provision of the Act.

All loans to qualifying charities will have the same terms:

1. The interest rate is 1%
2. The term is 2 years
3. The amount of the loan is the lesser of $10 million or 2.5 times the organization’s average payroll expense for the prior year
4. At least a portion of the loan may be forgiven (see below)

These loans may only be used for the following types of expenses incurred by the nonprofit:

• Payroll costs, including vacation, family, medical and severance pay, healthcare benefits, retirement benefits an payroll taxes;
• Interest paid on other obligations of the organization;
• Rent; and
• Utilities

Loan proceeds may not be used to pay compensation to employees residing outside the country or to pay compensation to employees (or independent contractors) in excess of $100,000 annualized.

The amount of the loan that qualifies for forgiveness is loan proceeds used for eight weeks of the allowable expenses summarized above.  Only 25% of total amount forgiven may be used to pay interest, rent and utilities; 75% must be used to pay payroll costs.  The amount of the loan that may be forgiven is reduced if the organization has reduced its payroll costs (by employing fewer workers or paying employees less) as compared with the prior year.

Loan forgiveness may be requested from the SBA lender that is servicing the loan, and the request must be supported with documentation of the qualifying costs paid with loan proceeds. The Act requires lenders to make a decision on loan forgiveness within 60 days of the request.

This loan program is administered by the Small Business Administration, through SBA lenders. To qualify, in addition to having no more than 500 employees, an organization must certify to the lender that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” that it will use the loan funds to retain workers, or to make lease, interest and utility payments, and that it is not receiving other funding for the same expenses.

This stimulus provision is extremely attractive for charitable organizations with 500 or fewer employees, and should be promptly explored by charities that qualify.  The short and simple application form is here.  Organizations should check with their regular bank to see if it is a qualified SBA lender, since it may speed the process to use your regular bank. If not, a list of qualified lenders may be found on the SBA website.

If you have any questions, regarding the Paycheck Protection Program or other aspects the economic stimulus mad available by the government, contact any member of the MSK Covid-19 team.